Taskforce Makes Proposals to Modernize Ontario Capital Markets

July 16, 2020

Ontario Capital Markets Modernization Taskforce releases recommendations intended to streamline the regulatory governance structure in Ontario and foster innovation in Ontario’s capital markets.

  • On July 9, the Capital Markets Modernization Taskforce issued a set of recommendations intended to modernize capital markets in Ontario.
  • The Taskforce, established by the Ontario government last year, is accepting stakeholder feedback on its proposals until September 7, 2020.
  • A final report is expected to be delivered to the Minister of Finance by the end of the year.

The Consultation Report

On July 9, Ontario’s Capital Markets Modernization Taskforce (the Taskforce) released a consultation report (the Report) setting out over 40 policy proposals intended to “modernize the province’s capital markets.” The Taskforce, announced as part of Ontario’s economic statement of Fall 2019, was mandated with consulting stakeholders and making recommendations to “help inform the government’s vision of creating a 21st century securities regulatory framework.”

In developing its proposals, the Taskforce consulted with over 110 stakeholders in the first half of 2020, including financial institutions, public companies, investor advocacy groups and academics. While the Report addresses many concerns related to Ontario’s securities legislation and regulatory regime, not all of the proposals are new. Specifically, some that seek to reduce regulatory burden and improve access to Ontario capital markets are ideas that have been included in the OSC’s burden reduction initiative, as we’ve previously discussed.

Improving Ontario’s Regulatory Structure

The Report makes a number of specific recommendations intended to improve the existing regulatory structure in Ontario. These proposals include:

  • expanding the mandate of the Ontario Securities Commission (OSC) to include “fostering capital formation and competition in the markets”;
  • separating the OSC’s adjudicative functions from its regulatory functions, either by creating a separate tribunal within the current OSC structure or creating a new tribunal as a separate entity;
  • increasing the OSC’s oversight of the Mutual Fund Dealers Association of Canada (MFDA) and Investment Industry Regulatory Organization of Canada (IIROC); and
  • combining the functions of the MFDA and IIROC in one self-regulatory organization, in line with a consultation paper recently released by the Canadian Securities Administrators (CSA).

Regulation as a Competitive Advantage

The Report also contains a number of proposals intended to place Ontario on a more competitive footing with other jurisdictions, including:

  • removing the four-month restricted period for securities issued by exempt market issuers under certain prospectus exemptions and subjecting the securities solely to a seasoning period;
  • reducing the frequency of continuous disclosure filings to provide issuers the option of semi-annual rather than quarterly reporting;
  • introducing a prospectus exemption for ordinary course financings for reporting issuers with up-to-date continuous disclosure filings;
  • expanding the ability of reporting issuers to pre-market transactions prior to filing a preliminary prospectus;
  • adopting the “full use” of electronic document delivery, commonly referred to as “access equals delivery”;
  • consolidating reporting by combining the form requirements for the Annual Information Form (AIF), Management’s Discussion & Analysis (MD&A) and financial statements;
  • permitting exempt market dealers to act as selling group members in prospectus offerings;
  • permitting the OSC to develop a well-known seasoned issuer model (similar to that used in the United States) to issue shelf prospectus receipts automatically for large issuers;
  • prohibiting short selling in connection with prospectus offerings and private placements;
  • introducing new accredited investor categories to include individuals who have completed certain proficiency requirements, such as the Canadian Securities Course Exam; and
  • expediting the SEDAR+ project that would allow for a single portal to access all securities regulatory filings.

Ensuring a Level Playing Field

The Report includes a number of proposals intended to encourage a level playing field between independent and institutional market participants, namely:

Notably, the Report also calls for increased diversity to be represented at the board and executive level of the OSC who would be tasked with discharging the diversity mandate. The call for greater diversity on boards and in senior management is similar to that already required by the Canada Business Corporations Act for federally incorporated public companies but would be a significant step forward for TSX-listed issuers incorporated in other jurisdiction, as recently discussed by Ramandeep Grewal in an article published by The Lawyer’s Daily.

Proxy System, Corporate Governance and M&A

According to the Report, multiple stakeholders suggested that the existing shareholder and proxy voting system “reflects an imbalance between activist shareholders and the boards of issuers”. The Report’s consideration of mergers and acquisitions and the existing proxy system thus includes a number of recommendations intended to address this issue, including:

  • requiring that proxy advisory firms include an issuer’s rebuttal in their report to clients where the proxy advisory firm recommends a vote against management’s recommendations;
  • decreasing the early warning reporting threshold in regards to shareholder ownership from 10% to 5% (a change proposed by the CSA in 2013 but ultimately not adopted);
  • adopting quarterly disclosure requirements for institutional investors in respect of their holdings of Canadian issuers;
  • requiring that TSX-listed issuers have annual advisory shareholder votes on executive compensation;
  • empowering the OSC to provide its views to issuers seeking to exclude shareholder proposals through a no-action letter;
  • requiring enhanced disclosure of environmental, social and governance (ESG) information;
  • requiring universal proxy ballots for contested meetings where one party elects to use a universal ballot and mandating voting disclosure on an ongoing basis to each side;
  • enhancing the OSC’s power in regard to M&A remedies;
  • introducing new rules to prevent over-voting; and
  • eliminating the non-objecting beneficial owner and objecting beneficial owner statuses.

Fostering Innovation

According to the Taskforce, improving the regulatory structure in Ontario could also contribute to fostering innovation and “incubate innovative companies”. In order to encourage such innovation, the Report recommends:

  • creating a regulatory sandbox, which could eventually be expanded across Canada, to allow companies to test innovative products and business models “with a light regulatory touch”;
  • requiring that capital market participants provide open data in order to support FinTech solutions that rely on such data; and
  • permitting angel groups to participate in funding start-ups.

As we’ve previously discussed, the Toronto Stock Exchange introduced its TSX Sandbox last year, while the CSA launched its regulatory sandbox in 2017.

Modernizing Enforcement and Enhancing Investor Protection

In terms of enhancing enforcement, the Report makes a number of recommendations based on the assumption that there would be a separation of the adjudicative and regulatory functions of the OSC, specifically:

  • allowing the OSC to make reciprocation orders that would allow orders made by other Canadian regulators to apply in Ontario as if made by the OSC;
  • improving the OSC’s ability to collect monetary sanctions through such tools as seizing properties and preventing individuals who have failed to pay fines or penalties from being issued licence plates or driver’s licences;
  • creating a new prohibition on making misleading or untrue statements about public companies;
  • increasing the maximum administrative monetary penalties to $5 million;
  • providing the OSC with enhanced investigative tools, such as the power to compel individuals and firms that are not the target of investigations;
  • broadening confidentiality exceptions for disclosing an investigation and examination order or summons; and
  • developing provisions regarding the confidentiality of dialogue between OSC staff and those under investigation so as to encourage the resolution of matters.

Investor-protection recommendations include (i) requiring that funds collected through disgorgement orders be deposited into court and distributed to investors who suffered direct financial harm; and (ii) giving a dispute resolution service such as the Ombudsman for Banking Services and Investments (OBSI) the power to make binding decisions to compensate investors.

Next Steps

The Taskforce is accepting feedback on its Report, and the specific questions posed in regard to each of its proposals, until September 7, 2020. The Taskforce intends to deliver a final report to the Minister of Finance by the end of 2020.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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