COMMENTARY ON CONSULTATION
DRAFTS
December 16, 2003
I. INTRODUCTION
The CSA are pleased to present consultation
drafts of a Uniform Securities Act ("USA") and
Model Administration Act ("MAA") (collectively
the "Consultation Drafts"). The publication
of these Consultation Drafts is an important milestone
in the CSA's Uniform Securities Legislation ("USL")
Project.
1. Background
The CSA launched the USL Project in the
spring of 2002. At that time, debate on reform of Canada's
system of securities regulation was gaining momentum.
The central theme of the debate is that Canadian capital
markets need a more streamlined system of securities regulation
with fewer administrative hurdles. This debate continues
today with the initiatives of the provincial ministers
responsible for securities regulation{1}
(the "Ministers' Initiative") and the work of
the federal Wise Persons' Committee.{2}
The CSA believe that the USL Project provides
an attainable solution to what is widely regarded as a
key problem with Canada's system of securities regulation
- the costs of identifying and reconciling inter-jurisdictional
variations in laws, rules and administrative procedures
- without being dependent on the final outcome of the
debate.
Despite our decentralized system of securities
regulation, the CSA have recognized for many years the
need for regulation that is streamlined and seamless and
have worked together to harmonize and co-ordinate our
regulatory efforts. Uniform laws are the next step in
this evolution.
The CSA launched the USL Project in the
spring of 2002{3}
under the direction of a senior-level committee (the "Steering
Committee") with the following mandate:
The objective of the USL Project is
to develop a uniform act and uniform rules within two
years that would be adopted across Canada. Although
the primary focus is to achieve harmonization of legislation,
we will take advantage of opportunities to simplify
the system when that can be accommodated within the
timeframe.
Following a detailed review of representative
Canadian securities legislation, we published in January
2003 a concept proposal entitled "Blueprint for Uniform
Securities Laws for Canada" (the "Concept Proposal").{4}
The Concept Proposal sets out the CSA's views on how to
rationalize the substantive differences identified in
current legislation and discussed proposed policy changes.
We received over 80 comment letters and the Steering Committee
engaged in extensive consultation with stakeholders. After
carefully considering the comments and stakeholder input,
we published a summary of comments and responses to the
comments in July 2003.{5}
Having considered comments on the Concept
Proposal and stakeholder feedback, we began to work on
draft legislation. CSA staff, under the direction of the
Steering Committee, worked with an independent legislative
drafting consultant with experience in provincial legislative
counsel offices to develop the accompanying Consultation
Drafts.
2. The Situation in Québec
Although the CVMQ is an active participant
in the USL Project, Québec's civil law regime and
particular legislative drafting requirements will necessitate
adjustments to the USL in this jurisdiction.{6}
Moreover, certain modifications to the Consultation Drafts
are also required in order to take into account Québec's
existing legislative corpus, notably the recently adopted
Act respecting the Agence nationale d'encadrement du
secteur financier.{7}
Accordingly, while the legal texts in Québec will
not be strictly uniform with the USL in other jurisdictions,
they will reflect in many instances the same consensus
policy decisions that underlie the Consultation Drafts
so that, as a practical result, there will be a largely
harmonized set of requirements across the country.
3. The Situation in British Columbia
The BCSC is an active participant in the
USL project but is also working on a parallel project
of more fundamental streamlining and simplification of
British Columbia's legislation. The BCSC expects that,
if British Columbia proceeds with that legislation, it
will include harmonized interfaces with the legislation
in other provinces (either the USL or the current legislation)
to ensure that market participants are not faced with
conflicting regulatory requirements.
4. Status of the Consultation Drafts
The Consultation Drafts are the CSA's
legislative proposal for uniform securities legislation.
They have not been reviewed or approved by any provincial
or territorial government, nor have they gone through
the processes that typically accompany the introduction
of new legislation such as legislative counsel, government
caucus and cabinet review.
II. OVERVIEW OF THE CONSULTATION DRAFTS
1. The Uniform Securities Act
The USA is "platform" legislation,
meaning that it contains the core, fundamental principles
of securities laws. The detailed requirements that overlay
these fundamental principles will be contained in rules
made under the legislation.
Platform legislation is instrumental to
achieving both the uniformity and streamlining goals of
the USL Project. The USA reflects the CSA's consensus
on the fundamental principles of securities regulation
and establishes a common platform on which future regulatory
initiatives can be based.
The USA will also allow CSA members to
be flexible and responsive to regulatory imperatives through
the rule-making process, which is significantly faster
than legislative amendment. The example of the so-called
"Zimmerman amendments" to the take-over bid
provisions cited in this respect in the Concept Proposal
bears repeating here. Though non-controversial, the Zimmerman
amendments took four years to be passed by the legislatures
of all applicable jurisdictions.
The USA is also instrumental to streamlining.
As the Final Report of the Five Year Review Committee
observed, the Ontario Securities Act "is cluttered
with outdated provisions that have been superseded by
rules". The same can be said of most, if not all
of our current statutes.{8}
Moreover, securities legislation has not been updated
in several decades in a few jurisdictions. The USL Project
provides a good opportunity for them to modernize as well
as harmonize.
The platform approach in the USA has the
most significant impact on the continuous disclosure,
take-over bid, and prospectus and registration (including
exemption) parts of current legislation. Rules in these
areas have already been substantially developed as concurrent
CSA initiatives (e.g., proposed continuous disclosure
requirements) will be developed under the USL Project
(e.g., uniform exemption, registration and take-over
bid rules).
The overview of the USA in the next part
of this Commentary identifies important provisions from
our current legislation that are not contained in the
Consultation Drafts but will be replaced by uniform rules.
2. The Model Administration Act
The MAA is model legislation. It contains
the procedural provisions of securities laws that would
apply to the Alberta Securities Commission and to market
participants in Alberta. The CSA recognize that it would
be desirable to have uniform procedural and substantive
provisions, but the former cannot be easily harmonized
because they must fit within the laws of the province
or territory from which the SRA derives its authority.
The MAA will provide the framework for the administration
act that each jurisdiction will adopt so as to ensure
as much uniformity of content as possible. Each jurisdiction's
Administration Act will contain provisions for the following
common elements:
1. The formation, constitution and governance
of the SRA and the SRA's ability to delegate powers,
functions and duties to its staff;
2. Information sharing;
3. Powers and procedures respecting
investigations;
4. Powers and procedures for hearings
by the SRA and public interest orders that may be made
by the SRA after a hearing;
5. The review of decisions by the SRA
and the appeal of decisions of the SRA;
6. The powers for the Lieutenant Governor
in council to make regulations; and
7. The procedure for the SRA to make
rules.
The overview of the USA in the next part
of this Commentary identifies the areas where the MAA
and USA should be read together.
3. Transitional Matters
The Consultation Drafts are silent with
respect to transitional provisions. Thoughtful, practical
transitional provisions will be required to ensure a clear,
effective transition from current legislation to the USL.
III. THE UNIFORM SECURITIES ACT
Part 1: Purpose and Interpretation
1. Introduction
Part 1 of the USA contains definitions
and interpretive provisions. Part 1 follows the current
approach of securities legislation in that most defined
terms apply generally and are located at the front of
the USA. There are a few terms that are defined for a
specific purpose. They are discussed in the context of
the relevant Part.
Definitions are central to any statute
and are particularly important to securities laws since
defined terms essentially set the ambit of activity that
is subject to regulation. Uniform definitions will provide
greater certainty to market participants and will eliminate
the need for many applications for exemptive relief in
inter-jurisdictional transactions. There will be uniform
definitions of fundamental terms such as "control
person", "distribution", "insider",
"mutual fund", "non-redeemable investment
fund", "officer" and "senior officer".
The definitions of "security", "trade"
and "reporting issuer" differ in minor ways,
as explained below.
2. Defined Terms Relating to Derivative
Contracts
There are differing approaches to the
regulation of trading in derivatives in different provinces.
The CSA recognize that it would be desirable to harmonize
the regulation of derivative contracts, but this initiative
is beyond the scope of the USL Project. The USA accommodates
the differences in regulation without detracting significantly
from uniformity. Specifically:
1. In Ontario and Manitoba exchange-traded
derivatives (except equity options) are regulated under
commodity futures legislation rather than securities
legislation. The concept of an "exchange-traded
derivative" will therefore not be included in Ontario
and Manitoba, and the definition of "security"
in these two jurisdictions will not include "exchange-traded
derivatives".
2. Currently, Ontario regulates over
the counter derivatives ("OTC derivatives")
under securities legislation if the product falls within
one of the heads of the definition of "security".
The regulatory structure of OTC derivatives will be
maintained in Ontario by
(a) not including a definition of
derivative in the USA, but including a head of rule-making
authority enabling the Commission to define "derivative";
and
(b) not including a "derivative"
in the definition of "security"{9}.
3. The definition of "trade"
in Ontario will not include entering into a derivative.
3. Definitions of "material
fact" and "material change"
The USA defines "material fact"
and "material change" based on the reasonable
investor materiality standard. For example, a "material
fact" means, when used in relation to an issuer or
its securities, a fact in respect of which there is a
substantial likelihood that a reasonable investor would
consider it important in making a decision, including
a decision to purchase, hold, sell or redeem securities
of the issuer and a decision to vote.{10}
This is a change from the current definitions of material
change and material fact which are based on a market impact
standard of materiality.{11}
For example, currently a material fact means when used
in relation to securities issued or proposed to be issued,
a fact that would reasonably be expected to have a significant
effect on the market price or value of the issuer's securities.
We are proposing a reasonable investor
standard of materiality for three principal reasons:
1. The reasonable investor standard
is consistent with the test in the United States and
the test that applies in the insider trading context
in the Québec Act;
2. We believe that the reasonable investor
standard will be more effective in the enforcement of
insider trading; and
3. The reasonable investor standard
has already been adopted in a number of contexts in
provincial and territorial securities law and the proposed
change provides an opportunity to rationalize materiality
standards within Canada.{12}
The reasonable investor standard was not
contemplated in the Concept Proposal, but it has been
the subject of extensive public debate and comment in
the past. The CSA obtained public comment on similar proposed
amendments to these definitions in 1997{13},
and the Five Year Review Committee obtained comments on
a consistent proposal, which it ultimately recommended
in its Final Report.{14}
4. Definition of "reporting
issuer"
The definition of reporting issuer in
the USA provides largely uniform tests for when reporting
issuer status arises, with two exceptions:
1. there is a residual ability for jurisdictions
to prescribe additional means of becoming a reporting
issuer; and
2. the circumstances in which an issuer
becomes a reporting issuer by virtue of an exchange
listing will be determined by rule or order. This differs
from the Concept Proposal, which contemplated that a
stock exchange listing would give rise to reporting
issuer status only if the exchange carries on business
in and is recognized in the jurisdiction, subject to
a de minimus test. The CSA considered this matter
further and concluded that each jurisdiction should
be able to decide whether to impose reporting issuer
status on an issuer as a result of its listing on a
particular exchange, whether or not the exchange carries
on business in the jurisdiction.
Part 2: Marketplaces, Self-Regulation
and Market Participants
1. Introduction
Part 2 of the USA contains provisions
relating to the oversight of self-regulatory organizations
("SROs") and market participants. It retains
the concept of mandatory recognition for exchanges that
carry on business in the jurisdiction and introduces it
for quotation and trade reporting systems. Recognition
of other entities like SROs and clearing agencies will
not be mandatory, but the SRA may designate the entity
as requiring recognition after giving the entity an opportunity
to be heard. Once designated as requiring recognition,
the entity cannot carry on business in the jurisdiction
unless it is recognized by the SRA. The SRA will grant
recognition if it would be in the public interest to do
so. Ontario's Securities Administration Act will require
clearing agencies and SROs to be recognized if they are
carrying on business in Ontario. In Québec, all
SROs will be required to be recognized if they are carrying
on business in Québec, as is the case currently.
The USA continues to give SRAs oversight
responsibility for recognized entities. The MAA strengthens
the SRAs' oversight powers by giving SRAs the ability
to order, after a hearing, a person to comply with a recognized
entity's decisions, policies and similar instruments.
The USA also gives recognized entities statutory immunity
in connection with functions that have been delegated
to them by the SRAs.
2. Powers of Recognized Entities
Recognized entities are required to regulate
their participants. The USA gives recognized entities
certain powers to meet this requirement. For example,
the USA provides all recognized entities with the power
to regulate a person with respect to the person's activities
while a participant or an employee, agent or subscriber
of a participant. Currently only some jurisdictions provide
recognized entities with this power. The USA also allows
the SRA to authorize recognized entities to
1. exercise many of the same powers
regarding compelling evidence and conducting hearings
as are vested in the court for the trial of civil actions;
2. apply to court for the appointment
of a receiver to oversee the affairs of a participant;
and
3. file a copy of a decision or settlement
agreement with the court so it can be enforced as though
it were a judgment of the court.
Part 3: Registration
1. Introduction
The adviser and dealer registration requirements
are contained in Part 3 of the USA, which maintains the
current requirement for both securities firms and their
representatives to be registered. Part 3 will also contain
certain key provisions that are ancillary to the registration
regime like provisions regarding the application process,
voluntary surrender of registration and continuing obligations
following a suspension or termination of registration.
In accordance with the platform nature of the USA, details
regarding the manner of applying for registration, registration
categories, the criteria for obtaining registration, ongoing
responsibilities of registrants and renewal, surrender
and termination procedures will be contained in a Uniform
Rule.
2. The Registration Trigger
The dealer registration requirement in
most Canadian jurisdictions is currently triggered whenever
a person trades in a security (the "trade trigger").
This differs from the current dealer registration requirement
in Québec, which applies to a person who carries
on business as a dealer (the "business trigger"),
and from the "in the business test" that determines
when a person must be registered as an adviser in most
Canadian jurisdictions.
We indicated in the Concept Proposal that
the USA would preserve the trade trigger for the dealer
registration requirement. We also, however, recognized
criticisms that the trade trigger is too broad and acknowledged
the recommendation of Ontario's Five Year Review Committee
that the dealer registration requirement be moved to a
business trigger. Upon further policy analysis and consideration
of industry feedback, we have included in the USA a business
trigger for both adviser and dealer registration.
Moving the dealer registration requirement
to a business trigger is consistent with the existing
adviser registration requirement and, as noted above,
will harmonize the dealer registration requirement across
Canada with the existing provision in Québec (as
well as the regulatory approach to participant registration
in foreign jurisdictions like the United States, Australia
and the United Kingdom). A business trigger will also
obviate the need for some exemptions to the dealer registration
requirement that are necessary under the current trade
trigger.
Part 4: Prospectus Requirements
1. Introduction
Part 4 of the USA sets forth the core
prospectus requirement by prohibiting any distribution
of securities except pursuant to a prospectus or an exemption
from the prospectus requirement. It also provides the
flexibility to accommodate alternative offering systems
that are based on an issuer's continuous disclosure record,
like the "integrated disclosure system" proposed
by the CSA in January 2000{15}
and the "continuous market access" system proposed
by the British Columbia Securities Commission in April
2003.{16}
Part 4 maintains the current requirement
that a prospectus provide full, true and plain disclosure
of all material facts relating to the securities issued
or proposed to be distributed, and includes general provisions
relating to the filing of a prospectus and the issuance
of receipts. The rules will contain particulars with respect
to the form and content of a prospectus, the specific
grounds on which a prospectus receipt must be refused,
the process by which prospectuses are filed and cleared,
prospectus amendment requirements, delivery obligations
and lapse date details. This is consistent with the platform
nature of the USA as well as current regulatory practice,
which finds the majority of all prospectus-related requirements
in rules{17}
instead of the statute.
2. Prospectus Exemptions
Although exemptions from the prospectus
requirement are specifically contemplated in Part 4, we
do not propose to include these exemptions in the USA
itself. Instead, we will harmonize and consolidate most
prospectus exemptions in a Uniform Rule, while some jurisdictions
may also opt to enact local rules to preserve additional
exemptions that are considered to be local in both nature
and scope. The Concept Proposal discusses in some detail
the various prospectus exemptions proposed to be carried
forward under USL.
Part 5: Continuous Disclosure
1. Introduction
The provisions of Part 5 relating to issuers'
continuous disclosure ("CD") obligations are
limited to a general enabling authority regarding the
kind of disclosure to be required under the rules, coupled
with a provision for SRA reviews of an issuer's CD record.
Details regarding the preparation, filing
and release of CD materials will be contained in Uniform
Rules. In this regard, the USA will dovetail with Proposed
National Instrument 51-102 Continuous Disclosure Obligations{18},
which harmonizes, consolidates and improves upon current
CD requirements applicable to reporting issuers (other
than investment funds), and Proposed National Instrument
81-106 Investment Fund Continuous Disclosure,{19}
which will apply to all types of investment funds and
will introduce CD obligations that are particular to these
issuers.
The Concept Proposal highlights some of
the improvements that would be brought about by each of
these proposed instruments, both of which we expect to
implement before completing the USL Project.
2. Becoming and Ceasing to be a Reporting
Issuer
The definition of "reporting issuer"
in the USA will substantially harmonize the tests for
determining whether or not an issuer becomes subject to
statutory CD requirements.{20}
The USA will also enable the securities regulatory authority
to designate an issuer to be a reporting issuer, either
on its own motion or on application from an interested
person. The rules will permit a reporting issuer to voluntarily
surrender its reporting issuer status.
Part 6: Trade and Related Disclosure
Part 6 brings together the USA provisions
relating to insider reporting and the early warning system.
1. Insider Reporting
Division 1 of Part 6 provides generally
for the filing of insider reports. The details of an insider's
reporting obligations, including the time periods for
filing, the form and content of an insider report, and
the manner of filing, will be set forth in a Uniform Rule.
As noted in the Concept Proposal, existing
insider reporting requirements are largely harmonized
in Canada, and National Instrument 55-102 System for
Electronic Disclosure by Insiders has introduced uniform
forms and filing procedures. These will be carried forward
under USL. The USA will, however, adopt a broader, streamlined
approach to the kinds of interests that are currently
reportable by covering any right or obligation to buy
or sell securities and also any interest in a related
financial instrument.
2. Related Financial Instruments
/ Equity Monetization
The term "related financial instrument",
which is defined in Part 1 of the USA, generally captures
derivative-based interests. By requiring an insider to
report an interest in, or right or obligation associated
with, a related financial instrument, the USA will require
disclosure to the marketplace of so-called "equity
monetization" transactions, regardless of their technical
form. These transactions allow an investor to receive
a cash amount similar to proceeds of disposition and to
transfer part or all of the economic risk and/or return
associated with securities without actually transferring
legal and beneficial ownership. In this regard, the USL
will maintain and adapt Proposed Multilateral Instrument
55-103 Insider Reporting for Certain Derivative Transactions
(Equity Monetization).{21}
3. Definition of "Insider"
The USA defines "insider" in
a manner that is generally consistent with current securities
legislation, but with certain refinements aimed at limiting
the insider reporting obligation to "true" insiders
and obviating the need for exemptive relief in recurring
circumstances.{22}
These refinements include
1. confining the definition of "senior
officer" to an issuer's CEO, CFO or COO or any
other officer "whose responsibilities routinely
give the officer access to inside information relating
to the issuer";
2. including in the definition of "insider"
only those directors and senior officers of an issuer's
subsidiary whose responsibilities routinely give that
person access to inside information relating to the
reporting issuer; and
3. excluding from Division 1 a person
who is deemed to beneficially own securities merely
because they are owned by one of its affiliates.
The Concept Proposal contemplated a function
based approach to determining who the senior officers
of an issuer are for the purposes of insider reporting,
based around a definition of "executive officer".
On further consideration, we have decided to incorporate
the function based approach into the definition of "senior
officer" yet retain the references to CEO, CFO or
COO to provide the clarity and certainty that issuers
require in this context.
The Concept Proposal also stated that
a reporting issuer would not be an insider of itself.
We initially proposed deleting this aspect of the definition
since, in many cases, an issuer that acquires its own
securities will immediately cancel the securities. We
also recognize that this aspect of the definition may
create some confusion on the part of market participants,
since there may be a question, for example, as to whether
an issuer that acquires its own securities, and then immediately
cancels them, "holds" the securities for the
purposes of the definition. However, as a result of our
consideration of stakeholder comments and our own ongoing
consideration of this matter, we have decided to retain
this aspect of the definition of "insider".
We will consider any related concerns in a proposed rule
relating to exemptions from the insider reporting requirement.
4. Early Warning System
Division 2 of Part 6 establishes the framework
of the early warning system. The following particulars,
among others, will be included in a Uniform Rule:
1. the ownership thresholds at which
the early warning reporting obligation is initially
triggered and beyond which subsequent reports are required;
2. the time periods for delivery and
filing;
3. the content of early warning disclosure;
4. the manner of filing;
5. any moratoriums or other limitations
on further acquisitions; and
6. appropriate exemptions from or relaxations
of the general provisions for offerors under a formal
take-over or issuer bid or for passive institutional
investors.{23}
5. Control Persons
As noted in our response to comments received
on the Concept Proposal,{24}
we have decided not to impose a general advance notice
requirement on all control person distributions made pursuant
to a prospectus exemption. MI 45-102 Resale of Securities
will be amended to make the notice requirements relating
to the control person prospectus exemption more meaningful.
Part 7: Take-over and Issuer Bids
Part 7 of the USA contains the basic obligations
of an offeror under a take-over bid or an issuer bid to
communicate its bid to the target security holders, to
make adequate financing arrangements in the case of a
cash bid and to treat target security holders equally,
and of an offeree issuer's board of directors, to respond
to a take-over bid with a recommendation to accept or
reject the bid or a statement that they are not making
a recommendation. The take-over and issuer bid requirements
will apply to both direct and indirect offers.
A uniform rule will contain the details
with respect to the threshold required to trigger the
take-over bid requirements, the form and content of take-over
or issuer bid circulars and related materials, the manner
of communicating the bid to target security holders and
to the offeree issuer, the time periods for delivery or
filing, the requirements for notices of change or variation,
the filing of a bid circular and related materials, the
types of bids that will be exempt from the formal bid
requirements, and the circumstances where parties will
be deemed to be acting jointly or in concert with an offeror.
Part 8: Civil Liability -- General
Part 8 contains the rights of action that
currently exist for primary market purchasers and in connection
with insider trading. Part 8 reflects only minor differences
from what was contemplated in the Concept Proposal. This
draft legislation basically harmonizes existing provisions.
We have not updated it to reflect the more recent thinking
that is behind the secondary market liability provisions
in Part 9. Before finalizing the USA, we will examine
the possibility of updating Part 8.
There are uniform{25}
rights of action for misrepresentations in a prospectus,
an offering memorandum, and take-over and issuer bid disclosure
documents.{26}
Defences have been added to these heads of liability to
parallel those available in the secondary market context.
There are uniform withdrawal rights for purchasers under
an offering memorandum that is required to be delivered
under the exemption on which the issuer has relied. Part
8 also contains rights of action against persons who engage
in insider trading, tipping, procuring or front-running.{27}
Additionally, Part 8 contains rights of
action against a dealer or offeror for failure to deliver
a prospectus or take-over or issuer bid disclosure document,
and against an issuer for failure to deliver a required
offering memorandum. There is a civil remedy against an
issuer or selling security holder who fails to file a
prospectus. This last provision provides purchasers under
an illegal distribution with a civil remedy.
Part 9: Secondary Market Civil Liability
Part 9 introduces a secondary market civil
liability regime. It is based almost entirely on Ontario's
secondary market civil liability regime which was passed
by the Ontario Legislature (but has not yet been proclaimed).{28}
{29} The Ontario regime is in turn
based on the recommendations of the Allen Committee report,{30}
the CSA Civil Remedies Committee,{31}
and the Five Year Review Committee.{32}
Part 10: Inter-Jurisdictional Arrangements
and Immunity
Part 10 of the USA contains three types
of provisions to enable "one stop" regulation
for market participants.
1. Legal Delegation
The first set of provisions allows an
SRA to delegate any of its powers, functions and duties
to another SRA in Canada and to accept a delegation from
another SRA. The effect of legal delegation is that one
SRA could make discretionary decisions on behalf of all
other SRAs. The USL proposals enable legal delegation
but do not mandate it. The decision to delegate will rest
with each SRA and its overseeing government; they will
decide which powers, functions and duties they will delegate
and to which SRA(s).
2. Mutual Recognition
Part 10 also includes provisions that
achieve "one stop" regulation based on acceptance
of the securities laws of another jurisdiction, or what
we would loosely term a "mutual recognition"
approach. These provisions allow the SRA
1. to adopt or incorporate the securities
laws of another SRA or a foreign regulator;
2. to accept compliance with the laws
of another SRA rather than requiring compliance with
provisions of local securities laws; or
3. to deem that compliance with the
laws of another SRA constitutes compliance with local
securities laws.
3. Adoption of Another SRA's Decision
Part 10 includes a provision that allows
an SRA to adopt a decision made by another SRA. This provision
is intended to permit case-by-case and after the fact
adoptions of individual decisions, for example in an enforcement
context.
4. Immunity Provisions
Part 10 also contains immunity provisions
that are similar to those in current securities legislation
but have been revised to provide appropriate immunities
to SRAs and their employees acting under a delegation.
The immunity provisions in the USA extend immunity to
both the SRA and a delegate of the SRA for good faith
acts done under local securities laws and under the laws
of another Canadian jurisdiction.
5. "One stop" Regulation
The delegation, mutual recognition and
immunity provisions in Part 10 were specifically contemplated
in the Concept Proposal and were recommended by the Five
Year Review Committee.{33}
The USA will also allow SRAs to continue
to use exemptions under Part 11 to implement "one-stop"
regulation.
The SRAs could use one or more of the
provisions that authorize delegation, mutual recognition,
adoption of decisions, or exemptions to eliminate the
administrative overlap that results from the current structure
of Canadian securities regulation. The SRAs expect to
enter into inter-jurisdictional agreements to document
their delegation and mutual recognition arrangements.
6. Reviews and Appeals
The provisions regarding reviews and appeals
of delegated decisions are in Part 6 of the MAA. The provisions
contemplate a right to appeal a final decision of an SRA
to the appropriate court in both the delegate and delegating
jurisdictions. This structure preserves all possible appeal
rights, but it also gives rise to the possibility of having
multiple appeals of the same decision with different outcomes.
A single stream of appeal model whereby the appeal specifically
lies to the courts in the delegate jurisdiction would
remove the potential for multiple appeals but would also
raise complex legal and constitutional issues.
Part 6 of the MAA also contains the provisions
regarding review by the SRA of decisions made by staff.
Only the SRA delegate can review decisions of its staff
made under authority delegated by another SRA.
Part 11: Decisions and Rule-Making
Authority
Part 11 contains provisions of a general
nature that provide the SRAs with the ability to make,
revoke and impose terms and conditions on decisions and
to grant exemptions from securities laws.
Part 11 also contains the heads of rule-making
authority that apply to the USA.{34}
The heads of authority were drafted with the intention
of harmonizing and consolidating existing rule-making
authority. There is also a general head of rule-making
authority that is intended to apply in the event that
a rule needs to be made in response to unforeseen market
circumstances.
It is highly desirable to have common
heads of rule-making authority so as to provide for uniform
rules.{35}
However, the procedure for making rules will be unique
to each jurisdiction. This will ensure transparency and
will preserve the appropriate level of government oversight
and accountability in rule-making procedures. Consequently,
each jurisdiction will maintain procedures for rule-making
in or under its own Administration Act.
Part 12: Prohibitions, Duties, Offences
and Penalties
1. Introduction
Part 12 of the USA contains uniform prohibitions,
offences, and defences. Part 12 also contains the penalties
that can be imposed by a court in a quasi-criminal context.
Regulatory penalties such as freeze orders, administrative
penalties and orders available to the SRA after a hearing,
are set out in Part 6 of the MAA. The investigative powers
of the SRA are contained in Part 3 of the MAA. As such,
Parts 3 and 6 of the MAA and Part 12 of the USA should
be read together.{36}
The discussion below is confined to the differences between
the Concept Proposal and the proposals in Part 12 of the
USA and Part 6 of the MAA.
2. Due Diligence Defence
The USA provides a general due diligence
defence that is consistent with the defence available
at common law. The general due diligence defence is in
place of the context-specific due diligence defences that
exist in current legislation. The general due diligence
defence provides that a person does not contravene securities
laws if the person reasonably believed in mistaken facts
which, if true, would not have resulted in the contravention
of securities laws and that person exercised all reasonable
diligence. The defence is not available in civil actions
under Part 8 or Part 9, which contain more specific due
diligence defences.
3. Front-running Prohibition
The front-running prohibitions in current
securities acts are limited to trading with knowledge
of the investment program of a mutual fund or a client
of a portfolio manager. It became apparent during the
drafting of the enforcement provisions that our approach
to front-running needs to be updated to reflect the scope
of activity that should be prohibited. The USA prohibits
trading, tipping or otherwise taking advantage of material
order information, which is defined as information regarding
an order or intended order for the purchase or sale of
securities that could reasonably be expected to affect
the market price of those securities. The front-running
prohibition is analogous to the insider trading prohibition.
Accordingly the maximum fines for front running parallel
those for insider trading. The definitions of "profit
made" and "loss avoided" in the context
of the fines for front-running and insider trading will
be contained in the USA or rules.
4. Insider Trading Prohibition
Three changes to the insider-trading regime
are proposed in Part 12. First, the prohibition on tipping
has been expanded to prohibit a person in a special relationship
with a reporting issuer who has knowledge of an undisclosed
material fact or change from encouraging or recommending
to another person that that person buy or sell securities
of the reporting issuer.{37}
The rationale for this is that the act of procuring a
trade on undisclosed material information is as harmful
to market integrity as is informing someone of undisclosed
material information. The prohibition on procuring is
based on similar provisions in place in other jurisdictions
such as the UK, Australia and the US.
Second, the insider trading prohibitions
have been drafted to cover equity monetization transactions.
This is consistent with the policy objectives behind proposed
MI 55-103.{38}
Finally, the definition of "person
in a special relationship with a reporting issuer"
has been expanded to contemplate indirect offering structures.
To remove any doubt that the underlying operating company
in an indirect offering structure and its significant
shareholders, employees, affiliates and associates fall
within the definition of person in a special relationship
with a reporting issuer, the USA provides that a reference
to a reporting issuer in the definition of person in a
special relationship includes a reference to a subsidiary
of the reporting issuer.
We also note that the Insider Trading
Task Force, comprised of representatives from Canada's
SROs and the CSA, recently released a report that makes
numerous recommendations to increase the effectiveness
of the current insider trading regime.{39}
We intend to review the USA once the recommendations
of the task force have been debated publicly through the
comment process on the Insider Trading Task Force Report
and these Consultation Drafts.
IV. CONCLUSION
The CSA value the input we have received
through formal comments and informal consultations, which
have contributed significantly to the development of these
Consultation Drafts of the USA and MAA. We look forward
to receiving comments on the drafts to help us improve
them further as we move on to the next phase of this important
project.
{1}
See discussion paper "Securities Regulation in
Canada: An Interprovincial Securities Framework"
(June 2003).
{2}
See http://www.wise-averties.ca/
{3}
See CSA Notice 11-303 The Uniform Securities Legislation
Project (March 8, 2002).
{4}
See CSA Notice and Request for Comment 11-402 Concept
Proposal for Uniform Securities Legislation (January
30, 2003). See pp. 6 ff of the Concept Proposal for
a more detailed description of the methodology of our
analysis.
{5}
See CSA Notice 11-304 Responses to Comments Received
on Concept Proposal "Blueprint for Uniform Securities
Legislation for Canada" (July 31, 2003).
{6}
See, for example, Parts 8 and 9 of the Uniform Securities
Act which deal with civil liability in the primary and
secondary markets have been adapted to the Civil Code
of Québec.
{7}
Statutes of Québec, 2002, c. 45.
{8}
See Five Year Review Committee Final Report: Reviewing
the Securities Act (Ontario) (March 21, 2003), at p.
71.
{9}
As a result of the different approach that Ontario is
taking with respect to derivatives, there will be parts
of the USA that will be drafted differently for Ontario.
For example, the prohibitions against fraud and market
manipulation and front-running will be drafted in Ontario
to include specific references to derivatives.
{10}
The USA also has a context specific definition of material
change for investment funds.
{11}
The standard of materiality in the Québec Act
in the insider trading context is a reasonable investor
standard.
{12}
See, for example, National Instrument 51-101 Standards
of Disclosure for Oil and Gas Activities, National
Instrument 81-102 Mutual Funds, and OSC Form
41-501F1 Information Required in a Prospectus.
{13}
See CSA Notice 53-302 Report of the Canadian Securities
Administrators - Proposal for a Statutory Civil Remedy
for Investors in the Secondary Market and Response to
the Proposed Change to the Definitions of "Material
Fact" and "Material Change" (November
3, 2000).
{14}
See Five Year Review Committee Final Report, supra
note 8.
{15}
See CSA Notice and Request for Comment 44-401 and 51-401
Concept Proposal for an Integrated Disclosure System
(January 28, 2000).
{16}
See BC Notice 2003/12 The BC Model -- Draft Legislation,
Commentary And Guides For A New Way To Regulate
(April 15, 2003).
{17}
See, for example, National Instrument 41-101 Prospectus
Disclosure Requirements, National Instrument 44-101
Short Form Prospectus Distributions, National
Instrument 44-102 Shelf Distributions, National
Instrument 44-103 Post-Receipt Pricing and National
Instrument 81-101 Mutual Fund Prospectus Disclosure.
See also OSC Rule 41-501 General Prospectus Requirements
and the various local instruments in other CSA jurisdictions
which permit compliance with the OSC rule in lieu of
local requirements with respect to the form and content
of prospectuses.
{18}
See CSA Notice and Request for Comment relating to Changes
to Proposed National Instrument 51-102 Continuous
Disclosure Obligations (June 20, 2003).
{19}
See CSA Notice and Request for Comment relating to Proposed
National Instrument 81-106 Investment Fund Continuous
Disclosure (September 20, 2002).
{20}
See the discussion of the definition of "reporting
issuer" in Part 1, above at [4. Definition of "reporting
issuer"].
{21}
See Notice of Proposed Multilateral Instrument 55-103
Insider Reporting for Certain Derivative Transactions
(Equity Monetization) (November 28, 2003).
{22}
See CSA Staff Notice 55-306 Applications for Relief
from the Insider Reporting Requirements by Certain Vice-Presidents,
which discusses the phenomenon of "title creep"
or "title inflation" and its effect on insider
reporting obligations as a result of the current title-based
definition of "senior officer" in most jurisdictions,
and National Instrument 55-101 Exemption from Certain
Insider Reporting Requirements, which, among other
things, exempts from the insider reporting obligation
persons who are insiders of a reporting issuer only
by reason of being directors or senior officers of minor
subsidiaries of a reporting issuer or of affiliates
of other insiders of the reporting issuer and who do
not have access to undisclosed material information
concerning the reporting issuer.
{23}
National Instrument 62-103 The Early Warning System
and Related Take-over Bid and Insider Reporting Issues
will form the basis of a Uniform Rule regarding the
early warning system.
{24}
See CSA Notice 11-304 Responses to Comments Received
on Concept Proposal "Blueprint for Uniform Securities
Laws for Canada" (Appendix B, No. 155).
{25}
Québec has certain recourses that are in addition
to those set out in this Part. For example, Québec's
current securities legislation also has a recourse for
revision of price. Moreover, a recourse for rescission
does not preclude a recourse in damages, as is the case
under the USA. In order not to limit recourses already
available to Québec investors, the status quo
will be maintained in the Québec version of the
USA.
{26}
The final USA will also contain appropriate rights of
action for purchasers under non-prospectus alternative
offering systems to ensure that no offering is done
without liability for misrepresentation.
{27}
Note that the civil remedies for insider trading and
front running have been modified from current legislation
so as to correspond to the proposed prohibitions in
Part 12 of the USA.
{28}
See Keeping the Promise for a Strong Economy Act
(Budget Measures, 2002), c. 22 S.O. 2002, formerly
Bill 198, 3rd Sess., 37th Leg.,
Ontario, 2002, (Royal Assent given on December 9, 2002)
as proposed to be amended by Bill 41, The Right Choices
Act (Budget Measures), 2003. Bill 41 was given first
reading in the Ontario Legislature on May 22, 2003.
The Ontario Legislature adjourned on June 26, 2003,
without having given Bill 41 second reading. The USA
includes the Ontario statutory civil liability regime
as it was proposed to be amended by Bill 41.
{29}
The definition of "responsible issuer" in
Bill 198 differs from that proposed in the USA. Bill
198 defines "responsible issuer" to mean a
reporting issuer or any other issuer with a real and
substantial connection to Ontario, any securities of
which are publicly traded. Part 9 of the USA defines
"responsible issuer" to mean a reporting issuer
in that particular jurisdiction or any other jurisdiction
of Canada. This departure from Bill 198 wording ensures
that security holders in a province where the issuer
is not a reporting issuer will have the same rights
as security holders in jurisdictions where the issuer
is a reporting issuer. Ontario intends to maintain the
Bill 198 definition of "responsible issuer".
In the OSC's view, the Bill 198 definition of "responsible
issuer" is sufficiently broad to provide a right
of action against an issuer who is not a reporting issuer
in the investor's resident province.
{30}
See the Final Report of the TSE Committee on Corporate
Disclosure (the "Allen Committee"), Responsible
Corporate Disclosure: A Search for Balance (March
1997).
{31}
See CSA Notice 53-302 Proposal for a Statutory Civil
Remedy for Investors in the Secondary Market and Response
to the Proposed Change to the Definitions of "Material
Fact" and "Material Change" (November
3, 2000).
{32}
See the Five Year Review Committee Final Report, supra
note 8 at pp. 129-133.
{33}
See Five Year Review Committee Final Report, supra
note 8 at pp. 40-41.
{34}
There are also provisions respecting regulations and
rule-making in the MAA. See Part 7. These heads of authority
are in the MAA for one of two reasons: 1) they are subject
matters over which only the Lieutenant Governor in Council
has regulation-making authority and the SRA does not
have rule-making authority, so it is necessary to put
these subject matters in the MAA to preserve the status
quo in each jurisdiction, and 2) they relate to matters
contained in the MAA (for example, the conduct and governance
of the SRA; the practice and procedure for investigations,
examinations and inspections under securities laws;
and the hearing procedures).
{35}
It is possible, though, that differing provincial legislative
conventions may result in variances from the proposed
uniform rule-making heads of authority in some jurisdictions.
For example, British Columbia proposes adopting a general
rule-making authority provision like the one in its
current legislation. The British Columbia provision
would include a general authority to make rules for
the purpose of regulating trading in securities and
carrying out the purpose of the Act, together with specific
authorities where legally necessary.
{36}
This structure was contemplated in the Concept Proposal.
See the discussion at pp. 7-12 and in Appendix A.
{37}
Québec also has this prohibition in its current
legislation. However, it is broader as there is no need,
in most cases, to establish a "special relationship
with a reporting issuer" for this prohibition to
apply.
{38}
Supra note 21.
{39}
Illegal Insider Trading in Canada: Recommendations
on Prevention, Detection and Deterrence (November,
2003). The Task Force is comprised of representatives
from the ASC, BCSC, CVMQ, OSC, the Investment Dealers
Association of Canada, the Bourse de Montréal,
and Market Regulation Services Inc.
