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CANADIAN SECURITIES ADMINISTRATORS

UNIFORM SECURITIES LEGISLATION PROJECT

BLUEPRINT FOR UNIFORM SECURITIES LAWS FOR CANADA

January 30, 2003

THE USL PROJECT STEERING COMMITTEE

CHAIR

Stephen Sibold, Q.C., Chair
Alberta Securities Commission

MEMBERS

Doug Hyndman, Chair
British Columbia Securities Commission 

Don Murray, Chair
Manitoba Securities Commission 

Paul Moore, Q.C., Vice-Chair
Ontario Securities Commission 

Claire Richer, Commissioner
Commission des valeurs mobilières du Québec 

Les O'Brien, Q.C., Acting Chair
Nova Scotia Securities Commission

STAFF

Jane Brindle, Legal Counsel
Alberta Securities Commission 

Reena Modha, Seconded Legal Counsel
Alberta Securities Commission

LETTER FROM THE USL PROJECT STEERING COMMITTEE

January 30, 2003

The Canadian Securities Administrators' ("CSA") Uniform Securities Legislation ("USL") Project Steering Committee is pleased to release this Concept Proposal for public comment. This Concept Proposal is the result of research and analysis of the securities laws in force in British Columbia, Alberta, Manitoba, Ontario and Québec. The decisions reflected in this Concept Proposal were made in many areas in which it has been previously difficult to reach consensus.

This Concept Proposal outlines proposals for the harmonization of securities laws across Canada. In some areas, substantive changes to current laws are proposed. For the most part, these proposed changes are either well-advanced CSA initiatives for which the USL Project presents an ideal opportunity to make necessary legislative amendments or the proposed changes would further the project's complementary goal of streamlining and harmonizing the system of securities regulation in Canada. The following are the most significant proposed policy changes:

• The ability of a securities regulatory authority to delegate decision-making across all regulatory functions to another securities regulatory authority. Please see our discussion at section II.2(d);
• A streamlined system for inter-jurisdictional registration of firms and individuals. Please see our discussion at section IV.5(b);
• A civil liability regime for secondary market participants. Please see our discussion at section XIV.2; and
• A streamlined securities act with details largely contained in rules to allow future changes to securities laws to be made in a timely and harmonized manner through the rule making process. Please see our discussion at section I.3 and XVII.1.

The USL Project presents a unique opportunity to shape Canada's securities laws to reflect the needs of industry participants. We invite you to participate by reading our Concept Proposal, considering its recommendations and providing your written comments. The comment period will run until April 30, 2003.

Please address comments to

Jane Brindle, Legal Counsel
Alberta Securities Commission
4^th Floor, 300 - 5^th Avenue S.W.
Calgary AB
T2P 3C4
jane.brindle@seccom.ab.ca

Unless confidentiality is requested, submissions will be made public and posted on CSA websites.

Sincerely,

The USL Project Steering Committee
Stephen Sibold, Q.C., Chair	Paul Moore, Q.C.
Doug Hyndman	Claire Richer
Don Murray	Les O' Brien, Q.C.

I. INTRODUCTION

1. The Importance of Harmonized Securities Laws

Efficient and effective securities regulation is a pressing issue. The CSA recognize that co-operation and co-ordination among Canada's provincial and territorial jurisdictions are essential to a streamlined, seamless system of securities regulation.

The CSA have worked together for many years to co-ordinate Canada's decentralized system of securities legislation. In the past decade, the CSA have significantly harmonized securities laws and the administration of those laws through the following initiatives:

• The development and implementation of 25 national instruments and 24 national policies covering key areas such as prospectus requirements, mutual fund regulation, rights offerings, take-over bids, registration issues and marketplace operations;
• The mutual reliance review systems ("MRRS") for prospectus vetting and exemptive relief applications; and
• The System for Electronic Document Analysis and Retrieval ("SEDAR"), a centralized, on-line document depository for reporting issuers.

2. The Goals of the USL Project

Though many improvements have been made through the CSA process, the next fundamental step towards a more efficient, effective and competitive system of securities regulation is harmonized laws. The goal of the USL Project is to develop a uniform securities act (the "Uniform Act") and rules ("Uniform Rules") for adoption by each jurisdiction of Canada on a fast-tracked basis. The Uniform Act and Uniform Rules would be word-for-word uniform in each jurisdiction. Since the USL Project is a harmonization initiative, the resulting Uniform Act and Uniform Rules would contain few substantive differences from current securities laws.

The USL Project is the top priority of the CSA and is part of a larger framework of regulatory reform. We recognize that harmonized laws are an important first step, but there are numerous other reforms that we must consider to ensure the continued fairness and efficiency of our capital markets. Other potential reform initiatives will come from a variety of sources, including:

• The proposals developed and published under the BCSC Deregulation Project;
• The Draft Report of the Ontario Five Year Review Committee; and
• Stand-alone projects that are either underway and worthy of completion or new initiatives arising out of market events.

3. The Structure of Uniform Securities Laws

The USL{1} would provide a national framework for securities regulation. The Uniform Act would be "platform" legislation that would set out fundamental rights, powers and obligations. The Uniform Rules would contain detailed requirements. This regulatory framework would facilitate future reforms through the rule making process. Currently, it can take several years to amend all of the securities acts of Canada due to different legislative timetables.{2} The capital markets are on a much faster timetable. We are regularly faced with new products, market structures, enforcement priorities and policy issues that require us to respond in a timely manner if we are to regulate effectively. Our rule making process generally allows us to react more quickly to such changes.

Securities laws also contain administrative and procedural provisions that reflect the laws of a particular jurisdiction and cannot easily be harmonized. Examples include provisions relating to penalties and other remedies, rule making procedures and the constitution of securities regulatory authorities ("SRAs"). These provisions would be harmonized to the greatest extent possible and included in a Securities Administration Act (an "Administration Act") that each jurisdiction of Canada would enact.{3} Each Administration Act would be based on a model Administration Act that would be developed under the USL Project. As a result, there would be uniformity of organization and presentation of these provisions.

The CSA recognize that there are local markets within Canada with their own policy imperatives. Where a harmonized approach may not be appropriate, the majority position would be set out in the Uniform Act or Uniform Rules. Local differences would be set out by way of exceptions in a local provincial or territorial rule ("Local Rule") or the relevant Administration Act. We anticipate that the use of Local Rules would be exceptional and infrequent. Local Rules would be reviewed regularly to ensure that they reflect obvious local needs rather than theoretical differences.

4. Methodology

During the past year, we have completed a detailed review of the securities laws of five jurisdictions of Canada: British Columbia, Alberta, Manitoba, Ontario and Québec. These jurisdictions were chosen because their securities laws are representative of the securities laws of the other jurisdictions of Canada. We have compared corresponding provisions and identified and analyzed differences. Where differences are not substantive, harmonization is merely a matter of redrafting the provision with uniform wording and harmonized definitions to ensure the clearest statement of the law. Therefore, these provisions are not discussed in detail in this Concept Proposal. Where differences between corresponding provisions are substantive, we have done one of two things:

1. Where the necessary policy debate has already been completed through other CSA initiatives, we have considered the advantages and disadvantages to the various jurisdictions' approaches and then made a decision as to which approach best reflects the goals of securities regulation and therefore should be included in the USL; or

2. Where the necessary policy debate has not been completed, we have recommended harmonizing existing provisions with a view to replacing them in the future with provisions that reflect the outcome of the ongoing policy development process.

The decisions in this Concept Proposal and the results of the public consultation process will form the basis for the Uniform Act, Uniform Rules and model Administration Act. All multilateral and national instruments would be reviewed and amended consequentially to achieve concordance with the Uniform Act.

We envision a Canadian securities law compendium that contains, in one easily referenced work, the Uniform Act, the Uniform Rules and each jurisdiction's Administration Act and Local Rules, with common section numbers and cross references.

5. Maintaining Uniformity

The CSA recognize that maintaining harmony is as important as achieving it. Currently, the CSA are making rules on a coordinated basis. We intend to strengthen the degree of cooperation and coordination between SRAs by introducing a more formal method of implementing policy initiatives. Although legislative sovereignty dictates that each jurisdiction must exercise its own discretion, CSA members would commit to bringing any contemplated amendments, Local Rules or new initiatives to the CSA table to canvass whether they can or should be developed on a uniform basis.

6. Measuring Success

Canadian securities laws should be comprehensive, comprehensible, harmonized and administered in an efficient manner, with a minimum of duplication and expense. They should respect provincial and territorial sovereignty, accommodate local needs and respond to necessary changes in a timely manner. Success should be measured not only by the degree of uniformity we may achieve but also by the degree to which concerns relating to complexity, duplication, costs, delays and conflicting policies have been alleviated and the degree to which we produce a system that better achieves the goals of protecting investors and market integrity without unduly burdening the market.

II. ADMINISTRATIVE PROVISIONS

1. Introduction

Currently, securities acts have both substantive and procedural components. Substantive laws apply to issuers, investors and intermediaries and are our top harmonization priority. Procedural laws are the laws that SRAs must follow in order to administer substantive laws. These are of more concern to SRAs themselves than to the regulated community. Procedural laws can differ without detracting from substantive uniformity. In some cases, procedural laws necessarily differ because they must fit within the legal framework that applies to regulatory agencies in each province or territory. The USL would accommodate this need for local differences by dividing substantive and procedural provisions into separate enactments. We propose that each province and territory enact an Administration Act which would contain procedural provisions.

2. Content of Administration Acts

(a) Administration of SRAs

Each SRA has administrative provisions that must continue to fit within the procedural framework that applies to regulatory agencies in each province or territory. These provisions include:

• the formation and continuation of an SRA;
• an SRA's legal relationship to its provincial or territorial government;
• the appointment of members of an SRA;
• the powers and duties of officers and employees of an SRA;
• delegation from an SRA to its staff;
• the financial administration of an SRA;
• the powers of an SRA;
• the rulemaking process;
• quorum requirements for SRA meetings and hearings;
• powers and procedures respecting hearings; and
• appeals of SRA and SRO decisions.

(b) Investigations

Each SRA has its own powers and procedures respecting investigations, hearings and prosecutions. These powers are integral to an SRA's ability to fulfill its investor protection mandate. These provisions include:

• the power of an SRA or its staff to conduct an investigation;
• powers of an investigator under an investigation order;
• the appointment of experts;
• the ability of an SRA or its staff to order production of documents from industry participants;
• the ability of an SRA to execute a warrant issued in another jurisdiction;
• the appointment of receivers;
• the ability of an SRA to make a freeze order;
• the ability of an SRA to apply to a court of competent jurisdiction to obtain an order that a person comply with securities laws;
• the ability of an SRA to file an SRA decision with a court of competent jurisdiction so the decision is enforceable as an order of that court;
• reports of investigations;
• the confidentiality of investigations; and
• the recovery of costs.

We have studied these provisions and identified non-substantive modifications that would harmonize and simplify our laws and could be made without policy debate. We have also identified provisions that cannot be harmonized because existing differences reflect the fact that an SRA's investigative and prosecutorial powers cannot conflict with the laws of the province or territory from which the SRA derives its authority. These proposals are discussed in detail in Appendix A. This appendix also identifies provisions that we would not carry forward into the USL.

(c) Penalties Available to a Provincial Court

The penalties available to a Provincial Court on finding that an offence has been committed should be increased.

Effective and meaningful enforcement powers are essential to an SRA's ability to achieve the goals of securities regulation. Generally, more serious breaches of securities laws are prosecuted in Provincial Court. Although courts can impose substantially higher monetary penalties than an SRA and can also sentence an offender to a term of imprisonment, the current maximum penalties are not of sufficient consequence to punish offenders and deter potential offenders. The USL would adopt the provisions contained in recently passed but unproclaimed amendments to the Ontario Securities Act{4} which would result in the following changes to the penalties available on conviction of an offence:

• the maximum fine would be increased to $5,000,000;
• the maximum imprisonment term would be increased to five years less one day; and
• the maximum fine on conviction of an insider trading offence would be increased to not more than the greater of $5,000,000 and an amount equal to triple the profit made or loss avoided by the offender.{5}

(d) New Administrative Powers

To enable greater co-operation among SRAs and make our system of regulation easier to navigate, the Administration Act should modify existing provisions on information sharing, delegation and immunity as discussed below.

(i) Delegation Between SRAs

The USL should allow SRAs to delegate all regulatory functions among themselves, subject to restrictions that would preserve each SRA's autonomy and jurisdiction.

The CSA have significantly streamlined the regulatory approval process through MRRS for prospectuses and exemptive relief applications. Under MRRS, each SRA reviews and issues a decision on the prospectus or exemptive relief application, but the principal regulator handles the review and comment process on behalf of all SRAs and acts as the issuer's or applicant's point of contact. It is optional for SRAs to participate in MRRS, but all have chosen to do so.

The USL would increase the potential for regulatory streamlining in two significant respects:

1. The USL would contemplate comprehensive inter-SRA delegated decision-making of all regulatory functions: prospectus and exemptive relief applications, registration, compliance and enforcement;

2. The USL would allow an SRA to delegate a particular function, duty or power to another SRA. The delegate SRA would essentially stand in the place of the delegating SRA.

The delegated decision making system could create a virtually seamless system of securities regulation which would allow "one stop shopping" by industry participants. For example, an applicant for exemptive relief or a prospectus receipt would deliver a multi-jurisdictional application and fees to the principal regulator only and would receive one decision from that regulator. The decision would be the decision of all SRAs named in the multi-jurisdictional application. Therefore, a delegated decision model combined with harmonized securities laws across the country would simplify approval processes and reduce processing costs for both SRAs and industry.

We recognize that each SRA is a creature of, and is ultimately answerable to, its provincial or territorial legislature. Therefore, the following safeguards would be built into the delegation provisions to ensure the preservation of each SRA's autonomy and jurisdiction:

1. Delegation would be optional. Any agreement to do so would be capable of revocation at any time at the option of either the delegating or the delegate SRA;

2. SRAs would not be able to delegate their power to delegate;

3. SRAs would not be able to delegate their ability to make rules; and

4. SRAs would not be able to delegate their corporate governance powers.

(ii) Immunity

The immunity provisions in the USL should ensure that members, officers and employees of an SRA, whether acting for itself or for another SRA, are immune from any actions or other proceedings for damages.

Currently, securities legislation contains immunity provisions that prevent proceedings for damages being instituted against an SRA, its members and its staff for actions done in good faith and in the performance of any function or duty, exercise of any power or any related neglect, omission or default. However, a provincial or territorial legislature may only immunize against liability in its own jurisdiction.

The Administration Acts would therefore contain an immunity provision that would be uniform across jurisdictions. Each jurisdiction's provision would expressly confer immunity in that jurisdiction on every SRA, whether acting for itself or on behalf of one or more other SRAs and whether acting under the laws of that jurisdiction or under the laws of one or more other jurisdictions.

(iii) Information Sharing

The USL should facilitate inter-jurisdictional investigations by providing SRAs with the authority to collect and use personal information and to disclose that information to other securities and financial regulators, stock exchanges, self-regulatory organizations, law enforcement agencies and third party service providers.

Every jurisdiction has freedom of information and protection of privacy ("FOIPP") legislation that governs the collection, use and disclosure of personal information by public bodies. The securities legislation of some jurisdictions allows SRAs to share information with other regulators. Other SRAs have either no ability or a limited ability to share information. The ability to co-operate with other regulators is essential given that capital markets activities often cross provincial or national borders. SRAs must also have the ability to provide personal information filed with them to the third party service providers who administer electronic filing systems such as the National Registration Database ("NRD") and the proposed System for Electronic Disclosure by Insiders ("SEDI").

The USL would contain a provision allowing each SRA to exchange information with other SRAs, stock exchanges, self-regulatory organizations, law enforcement agencies and third party service providers.{6} The provision would also allow SRAs to share information with analogous entities outside Canada.

It is critical that the USL information sharing provision be paramount to provincial or territorial FOIPP legislation.{7} If FOIPP legislation were to apply to an SRA's decision to share information with one of the enumerated entities, the decision could be reviewed and reversed by the provincial or territorial privacy commissioner. This may discourage SRAs from sharing information with other regulators. It would also be possible that sensitive information obtained by an SRA could be ordered disclosed to the public by the privacy commissioner. This could frustrate the investigative purpose for which it was obtained. Finally, our fast paced markets require expedited procedures for determining whether sharing information is in the public interest in any particular circumstance. Such determinations are generally outside standard FOIPP tribunal procedures and therefore it is preferable for SRAs to make such determinations.

III. SELF-REGULATION

1. Introduction

Many participants in the Canadian securities industry are regulated by self-regulatory organizations ("SROs"). Self-regulation is appropriate since SROs have the skill, expertise and ties to industry to regulate effectively. The functions of Canada's current SROs are, in broad terms, to regulate the activities of their members and to provide market regulation services.

Generally, each jurisdiction that regulates SROs does so in substantially the same way. Securities acts generally permit or require an SRA to recognize an SRO that is carrying on business in the SRA's jurisdiction.{8} Where that SRO is a stock exchange, recognition by an SRA is mandatory. Generally, securities acts also permit SRAs to exempt these entities from recognition. Once an SRO is recognized by an SRA, it must regulate the operations, standards of practice and business conduct of its members but is subject to oversight by that SRA. In addition, an SRA has the authority to review any direction, decision, order or ruling made by a recognized entity. An SRA's oversight of a recognized entity generally varies from its oversight of an exempted entity.

Under the USL, the basic framework for the regulation of SROs would remain substantially the same. However, there would be a few modifications to the current regime that are discussed below. In addition, new SROs are likely to emerge as the securities industry evolves. A flexible approach to regulation is therefore imperative.

2. Recognized Entities

The USL should recognize "marketplaces" rather than "stock exchanges" to reflect the diversity of ways in which securities are traded as well as to allow for flexibility.

Currently, securities acts require SRAs to recognize "stock exchanges" or "exchanges" that are carrying on business in the SRA's jurisdiction. However, these terms are dated and do not reflect current trading practices and products. "Marketplace" is a broader term which would include both securities and derivatives exchanges. This term would more accurately reflect current trading practices and provide flexibility for future trading systems.

The USL should specifically provide that entities recognized by an SRA are subject to that SRA's jurisdiction.

SRAs only have jurisdiction over entities that they recognize. The legislation in some jurisdictions provides that an SRA "may" recognize certain SROs. This language is unclear as it seems to give SROs the option of being subject to SRA oversight. The USL would specifically provide an SRA with the authority to require an SRO to be recognized if it is carrying on business in the jurisdiction.

The USL should define an SRO to mean a person or company whose objectives are related to, or consistent with, the purposes of securities legislation and that regulates the activities of its participants or participants of other recognized entities.

Currently, not all securities acts define the term "self-regulatory organization" and those that do have differing definitions. Under the USL, a "self-regulatory organization" would be defined to mean a person or company whose objectives are related to, or consistent with, the purposes of securities legislation and that regulates the activities of its participants or participants of other recognized entities. Reference to participants of other "recognized entities" would be necessary to enable an SRO to act as agent for another recognized entity.

The USL should include the concept of a "market participant". This concept should include, among other entities, a recognized entity.

In Ontario, "market participants" are required to comply with record-keeping and audit obligations contained in securities laws. This provides SRAs with jurisdiction to obtain information from entities that would otherwise not be subject to these obligations. This information is sometimes necessary to regulate effectively. "Market participants" include, in addition to a recognized entity:

• Reporting issuers;
• Directors, officers and promoters of reporting issuers;
• Mutual fund managers and custodians;
• Transfer agents;
• Control persons; and
• Entities exempted from recognition.

The USL definition of "market participant" would include these entities but may not be as broad as the current definition in the Ontario Securities Act.

3. Powers of Recognized Entities

The USL should grant recognized entities the power to regulate former members and the power to compel witnesses to attend and produce documents at a disciplinary hearing.

Securities acts require a recognized entity to regulate its participants and their employees or agents in accordance with its rules and policies. Currently, not all jurisdictions provide that recognized entities have jurisdiction over former members. It is important to ensure that members of a recognized entity are not able to avoid responsibility for breaches of its rules or policies by surrendering their membership in that recognized entity. The USL would provide that the authority of a recognized entity to regulate its members extends to former members and those acting on the former member's behalf.

The USL would also give recognized entities the power to compel witnesses to attend and produce documents at disciplinary hearings. Recognized entities need these powers to be able to properly regulate their members.

4. Voluntary Surrender of Recognition

The USL should authorize SRAs to accept a recognized entity's voluntary surrender of recognition.

Currently, some securities acts allow a recognized entity to voluntarily surrender its status as a recognized entity with approval from the relevant SRA. SRA approval is an appropriate condition of voluntary surrender in order to ensure that there is no adverse impact to the public. Under the USL, an SRA would have the ability to accept an application for voluntary surrender of recognized status provided that:

1. The SRA is satisfied that the surrender of recognition is not prejudicial to the public interest; and

2. The SRA's acceptance of the surrender of recognition is in writing and may be subject to such terms and conditions as the SRA may impose.

5. The Ability of SRAs to Enforce Rules of Recognized Entities

The USL should specifically authorize SRAs to enforce the rules and policies of recognized entities.

As part of their general oversight function, SRAs would continue to be able to enforce the rules, policies and other similar instruments of recognized entities. This would be accomplished by empowering SRAs to commence enforcement proceedings against the members of a recognized entity or issue compliance orders which require a person, company or the directors and senior officers of a company to comply with or cease contravening the requirements of a recognized entity.

IV. THE REGISTRATION REQUIREMENT

1. Introduction

Securities legislation generally requires both securities firms and the individuals working for them to be registered. There are a number of requirements that firms and individuals must meet to become and remain registered.

There are some inconsistencies among jurisdictions' registration systems. One of the most fundamental inconsistencies is the presence of the universal registration system in Ontario and Newfoundland & Labrador. The universal registration system requires a broader range of entities to register and is quite different from the registration systems in place in other Canadian jurisdictions. Upon implementation of the USL, Ontario and Newfoundland & Labrador would replace the universal registration system with the harmonized USL system. However, these jurisdictions may choose to enact local rules to continue some aspects of the universal registration system.

2. The Role of SRAs and SROs

The USL should incorporate the SRO model for the regulation of certain registrants.

The USL would continue the SRO model of regulation of registrants in those jurisdictions where it currently exists. Under the SRO model, dealers would meet requirements established and enforced by SRAs contained in the USL and additional requirements would be imposed at the SRO level based on the specific activities of SRO members. This model would enable SROs, subject to SRA oversight, to tailor their requirements to their members' activities. The CSA recognize that eliminating the overlap between SRA and SRO rules is an important objective and would continue to work with SROs to eliminate duplicative requirements.

Registrants such as advisers and restricted dealers who are not currently required to be members of an SRO would continue to be regulated by SRAs directly.

3. Triggering the Registration Requirement

The requirement to be registered should be triggered when a person or company trades in a security.

Under the USL, the requirement to be registered would arise when a person or company trades in a security (the "trade trigger"). This is the status quo in all jurisdictions except Québec. The Québec Securities Act requires registration when a person or company is carrying on business as a dealer or adviser (the "business trigger"), but the experience in Québec is that the business trigger is interpreted similarly to the trade trigger. Québec courts have held that the registration requirement applies to any activity that is part of a chain of events that could lead to a trade, whether or not the person or entity involved is running an ongoing trading business.

The trade trigger has been criticized as too broad, necessitating numerous registration exemptions for particular types of trades and particular individuals. However, to switch to a true business trigger, we would have to develop an appropriate definition of carrying on business that captures the appropriate range of activities and revise the existing exemption regime. The Ontario Five-Year Review Committee recommends the business trigger, but only if it can be adopted across Canada. More policy work and feedback from industry participants is required before we can determine whether this change would be appropriate.{9}

4. Categories of Registration

The USL should provide for one dealer category with three sub-categories (investment dealer, restricted dealer and mutual fund dealer) and one adviser category with two sub-categories (general adviser and restricted adviser).

The requirements that a registrant must satisfy depend on how its trading activities are categorized under securities laws. Currently, each jurisdiction has similar registration categories, but there are some differences. The USL would replace the categories in place in each jurisdiction with two general categories: dealer and adviser. Appendix B indicates how the proposed new categories of registration would affect the categories that currently exist in the comparator jurisdictions.

(a) The Dealer Category

The dealer category would be divided into three sub-categories: investment dealer, mutual fund dealer and restricted dealer. The individual registration requirement would continue to apply to trading representatives and trading partners and officers of dealers.

(i) Investment Dealer

Investment dealers are unrestricted in carrying out their trading activities and advising on the suitability of investments for their clients. The functions and characteristics of an investment dealer would be that it is:

• permitted to trade in all securities;
• permitted to provide advice concurrent with trading;
• permitted to act as an underwriter;
• permitted to exercise discretionary trading authority;
• required, where the requirement currently exists, to be a member of an SRO; and
• required to meet capital, supervisory, proficiency, sales conduct and other requirements established by SRAs and the applicable SRO.

(ii) Mutual Fund Dealer

The functions and characteristics of a mutual fund dealer would be that it is:

• permitted to trade only in mutual fund securities;
• permitted to provide advice concurrent with trading;
• not permitted to exercise discretionary trading authority;
• required, where the requirement currently exists, to be a member of an SRO; and
• required to be subject to capital, supervisory, proficiency, sales conduct and other requirements established by SRAs and the applicable SRO.

In some jurisdictions, mutual fund dealers are allowed to trade in certain exempt products. These exceptions are largely a function of local market conditions and would continue under Local Rules rather than being harmonized.

(iii) Restricted Dealer

The USL would provide that dealers that do not fit into either the investment dealer or mutual fund dealer categories would be required to register as restricted dealers (other than those listed in (iv) below). The activities of many of these registrants are local in nature and would be subject to Local Rules or locally imposed terms and conditions of registration. However, the activities of some restricted dealers are common to many jurisdictions. The USL would prescribe these registrants' obligations in specific sub-categories of the restricted dealer category. In general, however, the functions and characteristics of a restricted dealer would be that it is:

• permitted to trade only in certain products and/or to certain clients;
• required to meet capital, supervisory, proficiency and other requirements established by SRAs; and
• not required to be a member of an SRO.

(iv) Current Categories Which Would Not Be Included in the USL

The following registration categories would not be included in the USL:

• security issuer;
• financial intermediary dealer; and
• foreign dealer.

Currently, all jurisdictions have a registration category for security issuers. Under the USL, there would be a registration exemption for issuers distributing their own securities, subject to conditions. Therefore, the security issuer category would not be necessary under USL.

The financial intermediary and foreign dealer categories are not active categories in Ontario. It is not necessary to include them in the USL.

(b) Advisers

The current adviser categories are confusing and duplicative. There is a clear need for a simplified and harmonized system of adviser registration which is flexible enough to cover new activities in the market.

The USL would contain one adviser category that is divided into two sub-categories: a general adviser sub-category that merges the investment counsel and portfolio manager categories and a restricted adviser sub-category that would cover, securities advisers and international advisers. The USL provisions respecting international advisers would be similar to current OSC Rule 35-502 Non-Resident Advisers. The USL would continue to require advising representatives and advising partners and officers to register.

The functions and characteristics of a registrant in the general adviser category would be that it is:

• permitted to advise specific clients on investing, buying or selling specific securities;
• permitted to give continuous advice on investments based on a client's particular objectives;
• has discretionary authority to manage a client's investment portfolios; and
• required to meet qualification, proficiency and capital requirements.

Securities laws currently provide an exemption from the adviser registration requirement for certain persons or companies whose principal business is not the provision of advice. This exemption would be incorporated into the USL.

5. The Process for Registration, Renewal of Registration and De-registration

(a) Registration and De-registration

There are significant similarities between the procedures in place in most jurisdictions for the registration and de-registration of individuals and companies. The registration system in Québec is different but is based on substantially the same concepts as the registration systems in other jurisdictions. The goal under the USL is to harmonize the registration and de-registration regime.

(b) Streamlined National System for Registering Individuals

Currently, an individual that wishes to perform registerable activities must register in each province and territory where those activities would take place. This process can involve submitting up to 13 applications for registration to 13 SRAs. Harmonized registration categories and obligations as well as the ability of an SRA to delegate to another SRA proposed under USL would allow us to implement a national registration system whereby a registrant in one jurisdiction would become registered in another jurisdiction. Under this streamlined system, a registrant would simply be required to notify the SRA in its home jurisdiction that it wishes to do business in other jurisdictions and pay the appropriate fees for the other jurisdictions. NRD would provide a streamlined method of submitting an application for registration in multiple jurisdictions, thereby facilitating this system.

(c) Renewal of Registration

Most jurisdictions other than Québec require a registrant to renew its registration on an annual basis. In Québec, registrants are registered permanently but must supply specified information annually. Québec may consider adopting an annual renewal system, but there are many considerations that must be evaluated before such a decision can be made.

(d) Residency Requirements

Currently, some jurisdictions require certain dealers that are not individuals to be formed or created under the laws of Canada or a Canadian jurisdiction. This requirement would not be carried forward in the USL. Instead, non-resident registrants would be regulated through Local Rules or individual terms and conditions to ensure adequate investor protection. Some jurisdictions may require registrants to be residents of Canada. This result would be achieved through Local Rules or the requirement of membership in an SRO that in turn requires its members to be residents of Canada.

6. Obligations of Registrants

Registrants must meet a number of requirements that generally fall into one of four broad areas:

• Solvency;
• Integrity;
• Proficiency; and
• Regulatory oversight and enforcement.

(a) Solvency

(i) Capital Requirements

Under the USL, investment dealers and mutual fund dealers would be subject to the capital requirements of their governing SRO. The capital requirements applicable to non-SRO members (i.e., advisers and restricted dealers) would be prescribed in the USL.

(ii) Other Solvency Requirements

Other solvency requirements such as bonding and insurance requirements and margin requirements are substantively similar across jurisdictions and would be harmonized under the USL.

(b) Integrity

Registrants' obligations in this area include:

• know your client and suitability rules;
• rules respecting conflicts of interest between a registrant and its clients;
• record keeping;
• compliance systems and prudent business practices;
• segregation of assets; and
• client communications.

There are few substantive differences in the various jurisdictions' provisions. For SRO members, where appropriate, the SRA and SRO rules would be conformed. Integrity requirements for non-SRO members would be prescribed in the USL.

(c) Proficiency

The goal of the USL is to introduce harmonized proficiency requirements for all registrants and to conform them to SRO requirements where possible.

(d) Regulatory Oversight and Enforcement

The USL would incorporate the SRO model for regulating registrants who are members of an SRO. These registrants would be subject to SRA and SRO rules. Non-SRO members would be regulated directly by SRAs.

V. THE PROSPECTUS REQUIREMENT

1. Introduction

A fundamental characteristic of the current system of securities regulation is that issuers must qualify a distribution of securities with a prospectus unless an exemption is available. Under the USL, the existing prospectus trigger in most jurisdictions would be retained and no one would be permitted to distribute securities unless they:

1. File and obtain a receipt for a prospectus;

2. Comply with alternate requirements of an SRA; or

3. Have an exemption available.

The basic premise is that a prospectus provides sufficient information about an issuer and any offering of securities that it is making to allow a potential purchaser to make an investment decision. Therefore, it must contain full, true and plain disclosure.

The vast majority of trades occur in the secondary market rather than the primary market. Although there is a continuous disclosure record that a potential secondary market purchaser may review prior to making an investment decision, securities laws do not mandate that this disclosure be provided to the potential secondary market purchaser. The CSA is pursuing policy initiatives that would harmonize and strengthen rules for secondary market disclosure. In January 2000, the CSA published for comment a proposed integrated disclosure system ("IDS") that would provide investors with more comprehensive and timely continuous disclosure. The USL would be drafted flexibly so that the move to an integrated disclosure system can be accommodated.{10}

2. Triggering the Prospectus Requirement

The requirement to file a prospectus should be drafted broadly enough to accommodate an integrated disclosure system for corporate issuers and alternative disclosure systems for investment funds.

The prospectus requirement contained in the USL would be drafted to accommodate a continuous disclosure-based system. Under such a system, a participating reporting issuer would be able to make a public offering without filing and clearing a prospectus so long as its continuous disclosure record is current. The issuer would file an alternative form of offering document that discloses the terms of the offering.

3. Form and Content of a Prospectus

Under the USL, rules relating to the form and content of prospectuses would be harmonized.

Rules relating to form and content of short form and shelf prospectuses have already been harmonized and would be included in the USL.{11} In addition, there is a CSA initiative underway to harmonize long form prospectus rules. It is anticipated that these rules would be finalized in time for incorporation into the USL. In the meantime, the CSA has already achieved a substantial degree of harmonization of long form prospectus rules. All jurisdictions allow issuers to elect to make a long form offering under either local rules or in accordance with the Ontario long form rule.{12}

The USL should allow an SRA to accept a prospectus that is prepared in accordance with the laws of a foreign jurisdiction.

To allow for greater flexibility, the USL would authorize an SRA to accept a prospectus prepared in accordance with the laws of a foreign jurisdiction if the SRA determines that the foreign prospectus contains full, true and plain disclosure.

VI. TRADING IN DERIVATIVES

1. Introduction

There are differing approaches to how jurisdictions regulate trading in derivative contracts. In some jurisdictions, securities legislation defines the term "futures contract" to include over-the-counter derivatives and "exchange contract" for derivatives traded on an exchange. Other jurisdictions have separate commodity futures legislation. In Québec, the legislation specifically provides that certain requirements apply to specified derivative contracts.

2. The Regulation of Exchange Traded Derivatives

The USL should adopt the concept of "exchange contract" to regulate derivative securities that are traded on an exchange. The "exchange contract" concept should not apply in jurisdictions which regulate commodity futures contracts and commodity futures options under a separate enactment.

The USL would adopt the Alberta and BC concept of "exchange contract". Under the USL, exchange contracts would be excluded from the definition of "security" and would be subject to the following requirements:

1. The registration requirement; and

2. The requirement that a prospective purchaser be given a risk disclosure statement prior to opening an account for trading in exchange contracts or any other disclosure that an SRA may require.

However, the USL would contain a carve out for jurisdictions with separate commodity futures legislation thereby preserving the status quo in Ontario and Manitoba.

3. Registration Exemptions for Exchange Contracts

The USL should provide certain registration exemptions for trades in exchange contracts.

Alberta and BC have comparable exemptions from the registration requirement for the following trades in exchange contracts that would be incorporated into the USL:

1. A trade made through a registered dealer;

2. A trade resulting from an unsolicited order placed with an individual who is not resident in the jurisdiction and carries on business outside the jurisdiction; and

3. A trade designated by regulation.

4. The Regulation of OTC Derivatives

The USL should exempt trades in over-the-counter derivatives from the registration and prospectus requirements where the transaction occurs between qualified parties.

In Alberta and BC, over-the-counter derivatives ("OTC derivatives") fall within the definition of "security". Both jurisdictions have exemptions from the registration and prospectus requirements for trades in OTC derivatives between "qualified parties". "Qualified parties" are generally institutional investors that use derivatives for commercial hedging purposes. In Ontario, Manitoba and Québec, certain OTC derivatives are governed by securities legislation and there are specific exemptions for these products. The USL would follow the Alberta and BC approach{13} and exempt trades in OTC derivatives between qualified parties from the registration and prospectus requirements.

VII. REGISTRATION AND PROSPECTUS EXEMPTIONS

1. Introduction

Securities laws provide exemptions from the prospectus and registration requirements where the goals of securities regulation can be accomplished without compliance with these requirements. There are a number of exemptions that are substantively similar in most jurisdictions which would be included in the USL. They are listed in Appendix C. Some jurisdictions have exemptions which are local in nature and scope and would be adopted as Local Rules. There are also a number of exemptions that would not be retained in the USL exempt market regime because they have been replaced by other exemptions or no longer reflect the needs of the exempt market. Finally, we have made certain recommendations which would substantially change the exemptions regime in some jurisdictions. They are discussed below.

2. Capital Raising Exemptions

Within the USL Project, the harmonization of capital raising exemptions is a top priority. The USL would reconcile Alberta and BC's capital raising exemptions contained in Multilateral Instrument 45-103 Capital Raising Exemptions ("MI 45-103"){14} with OSC Rule 45-501 Exempt Distributions ("OSC Rule 45-501"){15} and the regime in Québec.{16}

(a) The Prescribed Minimum Amount Exemption

Most jurisdictions exempt trades in securities where the purchase price of the security is not less than a prescribed minimum amount. Ontario removed this exemption with the adoption of OSC Rule 45-501. Alberta and BC have committed to maintain this exemption for one year from the implementation of MI 45-103 but to review it at that time to determine whether it remains necessary. Québec intends to maintain its prescribed minimum amount exemption pending a decision on whether it would adopt the accredited investor exemption.

The prescribed minimum amount exemption has drawbacks, some of which are:

1. The ability to make an investment of the prescribed minimum amount does not necessarily indicate that an investor is not in need of protection; and

2. Prescribing a minimum amount may cause an investor to invest more than he or she otherwise would in order to qualify for the offering.

In addition, the prescribed minimum amount exemption may prove to be unnecessary given the availability of the accredited investor exemption and the offering memorandum ("OM") exemption, which are discussed below.

(b) The Accredited Investor Exemption

Ontario, Alberta and BC have an exemption for "accredited investors". Generally, an "accredited investor" is an institutional investor or a high net worth individual. The inclusion of this exemption in the USL would represent a substantial change for jurisdictions where it is not currently available. However, most jurisdictions are likely to adopt the accredited investor exemption as part of an initiative to expand MI 45-103, and therefore the policy debate necessary to implement this change is well underway.

(c) The Private Issuer Exemption

Most jurisdictions exempt the securities of a "private issuer" from the registration and prospectus requirements. A "private issuer" is generally defined as an issuer that has no more than 50 beneficial security holders and does not allow its securities to be held by members of the public.

Uncertainty about who is and is not a member of "the public" has deterred issuers from relying on the statutory private issuer exemption. MI 45-103 modified the statutory private issuer exemption in Alberta and BC to provide additional guidance with respect to who is not a member of the public. It provides that the following persons may hold the securities of a private company:

1. Directors, officers, employees or control persons of an issuer;

2. Spouses, parents, grandparents, siblings or children of directors, senior officers or control persons of an issuer;

3. Close personal friends of directors, senior officers or control persons of an issuer;

4. Close business associates of directors, senior officers or control persons of an issuer;

5. Spouses, parents, grandparents, siblings or children of selling security holders;

6. Current holders of non-debt securities of an issuer;

7. Accredited investors;

8. Entities wholly owned by any combination of the entities listed in 1 through 7 above; and

9. Persons who are not members of the public.

With the implementation of OSC Rule 45-501, Ontario replaced its private issuer exemption with the closely-held issuer exemption. It permits an issuer to raise up to $3,000,000 as long as it has no more than 35 beneficial security holders, excluding accredited investors and employees.

The USL would reconcile these two approaches to the registration and prospectus exemption for issuers that have not issued securities to the public.

(d) The Family, Close Friends and Business Associates Exemption

MI 45-103 exempts trades to family members, close personal friends and close business associates of an issuer's directors, senior officers and control persons. The "accredited investor" exemption in OSC Rule 45-501 is available to family members of an issuer's directors, officers or promoters. However, there is no exemption in Ontario securities laws for the close friends or close business associates of the principals of an issuer.

The rationale for the close friends and business associates exemption in MI 45-103 is common to many exemptions that would be included in the USL: the relationship between the principals of an issuer and the prospective purchasers of securities allows the presumption that the prospective purchasers would be provided with the information necessary to make an investment decision.

(e) The Offering Memorandum Exemption

The OM exemption in MI 45-103 allows an issuer to issue securities under an offering memorandum to an unlimited number of purchasers without involving a registrant. In Alberta, a registrant must be involved for investments of over $10,000 unless the investor meets certain criteria intended to gauge his or her ability to withstand loss.

The OM exemption is currently in force in Alberta and BC only, but all jurisdictions except Ontario and Québec are participating in an initiative to implement MI 45-103. The offering memorandum exemption is still under consideration in Ontario and Québec. If Ontario and Québec choose to adopt the OM exemption under the USL, it would be included in a Uniform Exemptions Rule. Otherwise, it would be adopted in all jurisdictions of Canada except Ontario and Québec.

3. Certain Common Exemptions

(a) The Exemption for Mortgages

The USL should exempt trades in mortgages. If the mortgage is syndicated or on property that is not real property, the purchaser should be an institutional investor.

Most jurisdictions have an exemption for trades in mortgages or other encumbrances on property traded by a person registered or exempt from registration under provincial or territorial mortgage brokers legislation. The exemption does not apply to trades in mortgages or encumbrances on property that are contained in or secured by a bond. In BC,{17} this exemption is only available to purchasers who are institutional investors where the mortgage is syndicated or on property that is not real property. This restriction was adopted to prevent use of this exemption to sell risky investments to unsophisticated investors. The USL provision would contain this restriction.

(b) The Exemption for Short Term Debt

The USL should exempt trades to individuals in short-term debt subject to conditions.

Most jurisdictions exempt trades in short-term debt. Where the purchaser is an individual, the minimum investment must be $50,000. In BC, this exemption is not available for trades to individuals. This restriction prevents an issuer from circumventing the prescribed minimum amount exemption or lowering the minimum by issuing short-term debt rather than long-term debt or equity. It would be preferable to remove the prescribed minimum amount from this exemption and replace it with two conditions:

1. The debt is not convertible or exchangeable into or accompanied by a right to purchase another security other than the short-term debt in question; and

2. The short-term debt receives an acceptable rating by a recognized rating service.

The rating requirement would not apply to an offering restricted to institutional investors.

(c) The Exemption for Trades in Securities of an Issuer to its Employees, Officers and Directors

The USL should incorporate the final rule being developed by the CSA for trades by an issuer to employees, consultants, senior officers and directors.

Most jurisdictions have exemptions for trades by an issuer to its employees, senior officers and directors. Some jurisdictions also exempt trades to consultants and investor relations persons. The CSA have proposed to harmonize these exemptions across Canada.{18} The harmonized rule should be in place in time for incorporation into the USL.

(d) The Exemption for Distributions Outside the Local Jurisdiction

The USL should exempt a distribution made to purchasers outside Canada so long as specified steps are taken to ensure that the securities do not come to rest in Canada.

A person who trades a security must determine if the securities laws of a particular Canadian jurisdiction apply to the trade. Even if none of the initial purchasers of securities are located in that jurisdiction, there may be a distribution and therefore the securities laws of that jurisdiction may apply to the distribution.

This is a complex area of securities law which gives rise to different issues depending upon the location of the issuer and the purchasers.

(i) Private Placements to Purchasers in Other Canadian Jurisdictions

With the implementation of harmonized exemptions and resale rules, no special rules are needed for distributions or resales of securities privately placed within Canada. Since the resale rules would be the same no matter where in Canada the issuer and purchasers are located, a purchaser under a private placement need only comply with the hold period and other resale rules of his or her home jurisdiction to be in compliance throughout Canada.

The only exception to the harmonized resale rules would be in Manitoba, which intends to maintain its rules allowing purchasers of exempt securities of a non-reporting issuer to resell them through a Manitoba registrant after a hold period. However, Manitoba would require that the securities be legended to indicate that they cannot be traded outside Manitoba.

(ii) Private Placements by Canadian Issuers to Purchasers Outside Canada

Canadian issuers should be able to distribute securities to purchasers outside Canada without having to comply with Canadian registration and prospectus requirements. However, these distributions raise two regulatory concerns:

1. The securities might flow back to purchasers in Canada resulting in an indirect distribution to Canadian purchasers; and

2. A Canadian issuer might sell the securities in contravention of the laws in the purchasers' jurisdiction, potentially bringing Canada's regulatory system into disrepute.

To address these concerns, the USL would exempt such trades if the following conditions were satisfied:

1. The purchasers of the securities are outside Canada;

2. If an underwriter is participating in the distribution, the agreement between the issuer and the underwriter prohibits the sale of the securities to any person in Canada;

3. There are no directed selling efforts in Canada (i.e., actions taken for the purpose of, or reasonably expected to have the effect of, preparing the market or creating a demand for the securities);

4. Compliance with a restricted period during which the securities could not be resold to a person in Canada. The restricted period for equity would be four-months which must be shown in a legend on the certificate. The restricted period for debt would be 40 days during which the debt securities must be represented by a temporary global certificate;

5. The offering complies with the laws of the jurisdiction in which it is made; and

6. Disclosure is made that the distribution is exempted from the laws of the relevant Canadian jurisdiction.

(iii) Private Placements by Foreign Issuers to Purchasers Outside Canada

A private placement by a foreign issuer to a purchaser outside Canada would not be directly subject to Canadian law, but if the securities were re-sold into Canada or through a Canadian market, the private placement could be considered an indirect distribution. If the issuer's securities were listed on a Canadian exchange or for some other reason the issuer could reasonably expect that its securities might be resold into Canada, Canadian regulators would generally hold the issuer responsible for any indirect distribution.

The USL would provide that a foreign issuer listed in Canada or having significant Canadian market interest could protect itself from being found responsible for an indirect distribution by taking the following precautions:

1. Imposing offering restrictions. Specifically, if an underwriter participates in the distribution, the agreement between the issuer and the underwriter must prohibit the sale of the securities to any person in Canada;

2. Stating in any offering document that the securities are not qualified for sale in Canada;

3. Imposing restricted periods equivalent to the hold periods under Canadian securities laws and legending the certificates; and

4. Ensuring no directed selling efforts occur in Canada (i.e., actions taken for the purpose of, or reasonably expected to have the effect of, preparing the market or creating a demand for the securities).

Alternatively, if an issuer's home jurisdiction imposed equivalent or longer restricted periods than those required under Canadian securities law, compliance with the home jurisdiction's requirements would likely be sufficient to address potential flow back of the securities into Canada.

(iv) Distributions Qualified by a Prospectus

Where an issuer is distributing securities under a prospectus offering to purchasers outside the local jurisdiction, the USL would adopt the approach in proposed Multilateral Instrument 72-101 Distributions Outside the Local Jurisdiction. It provides for an exemption from the prospectus requirement where the following conditions are satisfied:

1. A public offering document is filed in a jurisdiction of Canada, the United States of America or the United Kingdom in connection with the distribution;

2. The purchasers of the securities are outside the local jurisdiction;

3. If an underwriter is participating in the distribution, the agreement between the issuer and the underwriter prohibits the sale of the securities to any person in the local jurisdiction; and

4. No actions are taken for the purpose of, or that could reasonably be expected to have the effect of, preparing the market in the local jurisdiction, or creating a demand in the local jurisdiction, for the securities being distributed.

(e) The Exemption for Dividend Reinvestment Programs

The USL should exempt trades by an issuer or an administrator in securities of the issuer under a dividend or interest reinvestment plan. The cash payment option should be restricted to listed issuers or reporting issuers not in default under securities laws.

Most jurisdictions have an exemption that allows existing security holders of an issuer who receive a distribution of earnings from the issuer to reinvest that amount into additional securities of the issuer. In most jurisdictions, a security holder may increase the amount of securities purchased by contributing cash ("cash payment option") provided that no more than 2% of the issuer's float is issued in this manner. In Ontario, use of the cash payment option is not permitted by issuers who are not non-defaulting reporting issuers and who are not listed issuers on certain exchanges. These restrictions prevent unlisted issuers or issuers who are not reporting issuers from indirectly distributing securities to the public. The USL provision would include these restrictions.

(f) The Exemption for Trades in Securities of an Investment Club

The USL should exempt trades in securities of investment clubs.

Most jurisdictions currently have an exemption for trades in securities of a "private mutual fund". The definition of "private mutual fund" includes both investment clubs and loan and trust pools. Loan and trust pools are mutual funds that are administered by a trust company but have no promoter other than the trust company. However, the "private mutual fund" definition does not apply to pooled funds managed by a portfolio manager. The regulatory issues are the same regardless of whether the pooled fund is managed by a loan and trust pool or a portfolio manager. The USL would therefore eliminate this discrepancy by replacing the exemption for a "private mutual fund" with an exemption for an "investment club", which would be defined as an issuer:

1. Whose securities are held by not more than 50 persons;

2. That has never sought to borrow money from the public;

3. That does not pay or give remuneration for investment, management or administration advice; and

4. All of whose members are required, for the purposes of financing its operations, to make contributions in proportion to the securities issued by it that each member holds.

(g) The Exemption for Trades in Securities of Mutual Funds and Non-Redeemable Investment Funds

The USL should exempt trades in securities of a mutual fund or non-redeemable investment fund if the purchaser would hold a prescribed minimum amount of securities at the completion of the trade. Existing holdings should be taken into account in determining whether the purchaser holds the prescribed minimum amount of securities.

Most jurisdictions have an exemption for trades in a security of a mutual fund or non-redeemable investment fund if:

1. The purchaser acquires the securities as principal; and

2. Either the net aggregate acquisition cost to the purchaser is at least a prescribed minimum amount or the purchaser would, upon completion of the transaction, hold securities with an aggregate acquisition cost or aggregate net asset value of not less than a prescribed minimum amount.

In Ontario, the exemption is only available to a fund that is not a reporting issuer. The Ontario exemption also requires the mutual fund to be managed by a portfolio manager or a trust corporation registered under applicable local legislation. Ontario may retain these additional requirements.{19}

4. Other Exemptions With National Scope

(a) The Exemption for Securities Issued to Satisfy a Debt

The USL should exempt trades by an issuer in its own securities to satisfy a genuine debt subject to conditions.

Currently, BC exempts trades in securities by persons to satisfy genuine debts. However, it is often possible to effect such an exempt trade in substance by using other available exemptions. Therefore, it seems preferable to develop an exemption that directly allows trades to satisfy debts provided appropriate requirements and limits are present to ensure adequate investor protection.

(b) The Exemption for Security Issuers

The USL should exempt issuances by an issuer of its own securities.

The security issuer registration category allows an issuer to act as a registrant for issuances of its own securities exclusively for its own account. Rather than requiring registration and all its attendant obligations, the USL would replace this registration category with an exemption for issuers distributing their own securities. The exemption would be subject to appropriate conditions.

VIII. CONTINUOUS DISCLOSURE REQUIREMENTS

1. Introduction

Securities laws require issuers that fall within the definition of "reporting issuer" to make two types of disclosure on a continuing basis:

1. Periodic disclosure of financial and business information; and

2. Timely disclosure of material changes in their affairs.

These requirements attempt to create an even playing field where all investors have access to the same information.

2. Becoming a Reporting Issuer

The USL should harmonize the triggers for reporting issuer status.

Current definitions of "reporting issuer" contained in securities legislation are similar. However, there are two specific differences that would be addressed in the context of the USL.

First, in some jurisdictions, an issuer who lists its securities on an exchange that carries on business in a particular jurisdiction becomes a reporting issuer in that jurisdiction. However, in other jurisdictions, the listing must be on a recognized exchange for an issuer to become a reporting issuer. The USL would harmonize this discrepancy by providing that an exchange must be carrying on business within a jurisdiction and must be recognized or designated for reporting issuer purposes in that jurisdiction before a listing on that exchange results in reporting issuer status. Each jurisdiction would have the ability to exempt issuers who have a de minimus number or percentage of security holders in that jurisdiction. The threshold would not be harmonized since what is considered de minimus would vary with the size of the jurisdiction.

Second, only the Ontario Securities Act contains a provision allowing staff to apply to the SRA to deem an issuer to be a reporting issuer. The USL would include such a provision.

Therefore, under the USL, an issuer would become a reporting issuer in a jurisdiction if it:

1. Filed and obtained a receipt for a prospectus in that jurisdiction;

2. Became listed on an exchange that carries on business in and is recognized or designated in that jurisdiction, subject to a de minimus test for the percentage of shareholders within the jurisdiction;

3. Completed a business combination where one of the parties to the transaction is a reporting issuer in that jurisdiction; and

4. Was deemed to be a reporting issuer in that jurisdiction whether by order (on application by an issuer or at the request of an SRA) or rule.{20}

When an SRA deems an issuer to be a reporting issuer in the jurisdiction, it would have the ability to recognize the issuer's reporting issuer history in another jurisdiction.

3. Ceasing to be a Reporting Issuer

The USL should allow a reporting issuer with very few security holders in a particular jurisdiction to voluntarily surrender its reporting issuer status in that jurisdiction without making application to the relevant SRA.

Currently, most jurisdictions provide that a reporting issuer may cease to be a reporting issuer in a particular jurisdiction in one of two ways:

1. An SRA may revoke its reporting issuer status; or

2. A reporting issuer may apply for an order from an SRA deeming it to cease to be a reporting issuer.

These methods of ceasing to be a reporting issuer would continue under the USL. In addition, the USL would allow a reporting issuer to voluntarily surrender its reporting issuer status without making application to an SRA. The USL provision would be modeled after BC Instrument 11-502 Voluntary Surrender of Reporting Issuer Status and Alberta Policy 12-601 Applications to the ASC and would allow voluntary surrender if the following conditions were satisfied:

1. The reporting issuer has no more than 25 security holders, including holders of debt securities, in the jurisdiction in which it wants to cease to be a reporting issuer and no more than 50 security holders, including holders of debt securities, in Canada;

2. The reporting issuer's securities are not traded on a marketplace;

3. The reporting issuer is not in default of any of its obligations as a reporting issuer; and

4. The reporting issuer notifies the market and regulators that it meets the above conditions and would cease to be a reporting issuer no earlier than 10 days from the date of the notice.

4. Continuous Disclosure Obligations

The USL should adopt the continuous disclosure rules being developed by the CSA for investment funds and other reporting issuers.

The CSA has published proposed national instruments that would harmonize and streamline continuous disclosure obligations and consolidate the various local requirements for both investment funds and other reporting issuers. We expect these instruments to be implemented prior to the completion of the USL Project.

Proposed National Instrument 51-102 Continuous Disclosure Obligations ("Proposed NI 51-102") would apply to reporting issuers that are not investment funds. In addition to harmonizing and streamlining continuous disclosure requirements, Proposed NI 51-102 would enhance the consistency of disclosure in the primary and secondary markets and facilitate future changes to the prospectus regime. Although it largely consolidates local laws, there are some significant enhancements of disclosure obligations.{21} For example, two significant changes are:

1. Reporting issuers would be under shorter filing deadlines for annual financial statements. Some reporting issuers would also be under shorter filing deadlines for interim financial statements; and

2. Financial statement information on significant business acquisitions would be required within 75 days after completion of the acquisition. Currently, this information need only be disclosed in a prospectus.

Proposed NI 51-102 also provides a harmonized regime for the regulation of proxies and proxy solicitation which would replace the proxy rules contained in securities laws.

Proposed National Instrument 81-106 Investment Fund Disclosure ("Proposed NI 81-106"){22} would apply to all types of investment funds including mutual funds, labour sponsored investment funds, exchange traded funds, split share corporations, closed end funds and scholarship plans.{23} Proposed NI 81-106 would require investment funds to make annual and quarterly management reports of fund performance, and would revise and update the requirements relating to annual and interim financial statements. In addition, fund holders would be able to consent to not receiving any or all of an investment fund's management reports of fund performance and financial statements.

The USL should authorize SRAs to conduct continuous disclosure reviews.

The Budget Measures Act would authorize the OSC or any of its members, employees or agents to conduct a review of the disclosures that have been made or that ought to have been made by a reporting issuer or mutual fund in Ontario. This provision is critical to an enhanced continuous disclosure regime because it would give SRAs jurisdiction to require an issuer to respond to identified deficiencies. Therefore, it would be included in the USL.

Under the USL, a reporting issuer should be subject to statutory civil liability for its continuous disclosure record in any Canadian jurisdiction.

Under the USL, the statutory civil liability of a reporting issuer relating to continuous disclosure obligations would apply to any issuer that is a reporting issuer in any jurisdiction of Canada.

IX. INSIDER REPORTING OBLIGATIONS

1. Introduction

"Insiders" of a reporting issuer must report their trades in voting securities of that issuer. The purposes of insider reporting obligations are to:

1. Provide the market with information about trades by those who have the best access to information about a reporting issuer;

2. Instill greater investor confidence in the market; and

3. Deter insiders from trading on undisclosed material information.

This area is largely harmonized. All jurisdictions require insiders to file reports within 10 days of becoming an insider of a reporting issuer (assuming that the insider holds securities) and within 10 days after a change in their holdings. National Instrument 55-102 System for Electronic Disclosure by Insiders harmonized the requirements for the form of insider filings across Canada. Until SEDI is operational, insider reports are to be filed in paper format. Once SEDI is operational, insider reports would be filed on-line.

2. Definition of an Insider

A reporting issuer who holds its own securities should not be deemed to be an insider of itself for insider reporting purposes.

Although there are minor differences among jurisdictions, insiders of a reporting issuer generally include:

1. Directors and senior officers of the reporting issuer and it subsidiaries;

2. Directors and officers of a reporting issuer that itself is an insider of the reporting issuer;

3. Persons with an interest of more than 10% in the reporting issuer's voting securities;{24} and

4. A reporting issuer itself so long as it holds its own securities.

Except in Manitoba, a reporting issuer who holds its own securities is an insider of itself unless it intends to cancel them. However, generally, an issuer who acquires its own securities does so with the intention of canceling them rather than holding them. Therefore, the USL would not impose insider status on a reporting issuer that holds its own securities.

The USL should adopt a function-based approach for determining who the senior officers of a reporting issuer are for the purposes of insider reporting.

In most provinces, "senior officer" means a person holding one of a number of listed offices, a person performing the functions of those offices and an issuer's five highest paid employees. The Québec Securities Act defines insider solely on the basis of function.

The USL would take a function-based approach to determining who the insiders of a reporting issuer are. Under the current title-based approach, people who do not perform an executive function or have regular access to inside information may be required to file insider reports. The USL would contain a definition of "executive officer" which would include:

1. An individual performing the functions of the chief executive officer, chief financial officer or chief operating officer; or

2. An individual working for an issuer, or any of its affiliates, in an executive capacity whose usual responsibilities expose the individual to non-public material information about the issuer.

3. Disclosure Triggers

(a) Deemed Changes in Beneficial Ownership

The USL should require insiders to report the acquisition or disposition of any right or obligation to purchase or sell securities of the reporting issuer.

In most provinces, the acquisition or disposition of a put, call or other option by an insider of a reporting issuer is deemed to be a change in the beneficial ownership of the underlying security of the reporting issuer. The insider must report this deemed change in beneficial ownership. The BC Securities Act takes a more streamlined approach by requiring an insider to report an acquisition or disposition of any right or obligation to purchase or sell securities of a reporting issuer. The USL would adopt BC's approach because it is broad enough to capture many types of derivative securities and extracts the necessary information.

(b) Transfer of Registered Ownership by an Insider

The USL should not require a transferee of registered ownership of securities beneficially held by an insider to report the transfer.

The Alberta, Ontario and Québec statutes all include provisions that require the registered owner of securities beneficially held by an insider to report the transfer from the insider to the registered owner to the relevant SRA if the registered owner knows that the insider did not report the transfer. These reporting requirements do not apply if the transfer is to give collateral for a genuine debt.

This provision would not be included in the USL. It creates an obligation on a registered owner to find out whether the beneficial owner is an insider and whether the insider filed the required report. The obligation to report such a transfer properly belongs to the insider only.

(c) Equity Monetization Transactions

The USL should adopt the rules relating to equity monetization transactions being developed by the CSA.

Equity monetization transactions unlock the cash potential of (or realize the economic benefit of) securities{25} thereby allowing the owner of the securities to redirect the liquidity to other uses. These transactions remove the owner's exposure to risk associated with the securities by transferring it to others. Where the owner is an insider, his or her disclosure of securities holdings is misleading. The USL would incorporate the CSA initiatives underway to ensure that equity monetization transactions trigger insider reporting obligations.

X. THE EARLY WARNING SYSTEM

The USL should contain an exemption from the early warning requirements for offerors that are acquiring securities under a formal bid.

Securities laws require security holders to give notice of changes in their holdings that may affect control of an issuer. These disclosure requirements, known as the "early warning system", provide that:

1. "Offerors"{26} that reach a certain percentage of security holdings in a reporting issuer (10% or more) must disclose their holdings immediately by press release and again two days later by filing a report; and

2. Offerors must make the same disclosure upon acquiring an additional 2% or more of the same class of securities or if there is a change in another material fact in a previously filed report.

Securities acts also impose a trading moratorium on an offeror who holds less than 20% of an issuer's securities that begins on the day an event requiring a report occurs and lasts until one day after the report is filed.

National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues provides an alternative monthly reporting system for institutional investors that do not intend to make a formal take-over bid.

In all jurisdictions except Ontario, offerors acquiring securities under a formal bid are exempt from the early warning requirements. If there is a formal bid, the offeror would be required to disclose any acquisition of securities under the take-over bid rules and therefore it is redundant to require them to do so under the early warning system. The USL would include an exemption from the early warning requirements for offerors acquiring securities under a formal bid.

XI. CONTROL PERSONS

1. Introduction

Multilateral Instrument 45-102 Resale of Securities ("MI 45-102"), which applies in all jurisdictions but Québec, harmonized rules relating to "control distributions".{27} A control distribution is a trade in a previously issued security from the holdings of a control person.

Control persons are required to give advance notice of their intention to sell for two principal reasons:

1. To ensure the market receives advance warning of a trade potentially large enough to affect control of an issuer or to move the price of the issuer's securities; and

2. To help SRAs and SROs monitor the trading activity of major security holders.

Control persons must also file an insider report within three days of completing any trade under the prospectus exemption contained in MI 45-102, instead of the normal 10 days.

2. Definition of Control Person

The USL should contain a definition of "control person".

Currently, "control person" is specifically defined in Alberta and BC. In Ontario, Manitoba and Québec, the control person concept is buried in the definition of "distribution".{28} Generally, a "control person" is a person, company or group of persons or companies having sufficient control over voting rights of an issuer to materially affect control of that issuer. In Québec, the concept of control person is based on holdings of a class or series of securities rather than on outstanding voting securities of an issuer. Except in Manitoba, a holding of 20% of the voting securities of an issuer is deemed, in the absence of contrary evidence, to be sufficient to materially affect control of that issuer.{29}

The USL definition of "control person" would take the form of the current Alberta, BC and Ontario provisions and provide that the following are control persons:

1. Any person or company that holds or is one of a combination of persons or companies that holds a sufficient number of any of the securities of an issuer so as to affect materially the control of that issuer; and

2. Any person or company that holds or is one of a combination of persons or companies that holds more than 20% of the outstanding voting securities of an issuer except where there is evidence that the holding of those securities does not affect materially the control of that issuer.

3. Control Distributions

(a) Notice Requirements

The USL should require control persons to file a notice of intention to trade in securities held by them within the timelines currently mandated by MI 45-102.

As for any distribution, a person making a control distribution must either file a prospectus or rely on a prospectus exemption. MI 45-102 provides a pro