Any time Alberta and Quebec are on the same side of an argument against the rest of Canada’s provinces, it tends to attract attention. So when both provinces promised to make constitutional challenges following the delivery of a draft national securities act in May, it added fuel to the discussion, which has been ongoing for decades, but is now ramping up to completion.
In-house counsel at Canadian public companies are undoubtedly keeping a close eye on these developments and the possible benefits or drawbacks for issuers in different jurisdictions. But with actual implementation of the national securities regulator potentially two years away, lawyers say this is only one of many issues in securities law currently attracting their attention, as the regulatory landscape continues to evolve. Andrea Horton, senior counsel in the litigation group at the Royal Bank of Canada, says in-house counsel are currently looking at the proposed national securities regulator legislation, both from a legal standpoint but also from an implementation perspective. This includes how the authority might be structured in each province, and which issues are going to be national and which will be left to the province if a jurisdiction chooses not to opt in. “It’s certainly something that we’re alive to, and it’s still very early days, but I think we’re all trying to get a handle on what are the implications of the draft legislation, how is it similar and how is it different to what we’ve experienced on the provincial level,” she says.
For public companies, there are similarities between the draft national securities act and the current system of 13 provincial and territorial securities commissions, explains Anita Anand, an associate professor at the University of Toronto Faculty of Law. “In terms of, for example, prospectus filings and offerings of securities, not much will change for public companies because they, right now, have to file disclosure, and they will have to file the same disclosure even under a national securities act,” says Anand. There are, however, a few differences that may affect public companies directly or indirectly. For example, one of the new mandates of securities regulators is going to be to contribute to the integrity and stability of the financial system. “This is a somewhat broad principle and it’s not clear at the present time what this is going to mean in practice, but it may mean heightened disclosure from time to time,” she says.
In terms of enforcement, there are also some distinctions, says Anand. In particular, as criminal law is under federal jurisdiction, if the federal government is going to be regulating the securities markets, it will have a host of new criminal law powers at its disposal with regard to enforcement.
In July, as part of this transition, the Canadian Securities Transition Office released its plan for establishing the Canadian Securities Regulatory Authority with a target launch date of July 1, 2012. The transition office says the CSRA will operate as a Crown corporation and provide “a unified Canadian voice and influence internationally,” as a national body with an office in each participating province.
However, the debate seems far from over. The government has referred the question to the Supreme Court of Canada of whether the proposed Canadian securities act is within the legislative authority of Parliament “to provide legal certainty to the provinces, territories, and market participants.” The court is set to hear the reference next April.
The Quebec and Alberta governments oppose the plan, and have asked their respective provincial courts of appeal to rule on the constitutionality of the federal proposal. However, public companies’ responses on this issue can also potentially differ depending on which jurisdiction they find themselves in or where they do business, say lawyers. “Certainly in some jurisdictions, Quebec and Alberta, there’s more trepidation with regard to this process. Certainly in Alberta there’s considerable concern that they will lose the benefit that they feel they have right now of having a regulator that is close to them, that is easily accessible, that is understanding of their issues for the types of companies they’re working with,” says Heather Zordel, a partner in the securities group at Cassels Brock & Blackwell LLP in Toronto and a member of the Expert Panel on Securities Regulation. She says part of the exercise with establishing a national regulator is to give these stakeholders some comfort they will still have a high degree of service that is understanding of the issues in their area ensuring that the new organization maximizes the value of the expertise in different areas, such as oil and gas.
Peter Inglis, a lawyer with Bennett Jones LLP in Edmonton and chairman of the Canadian Bar Association’s securities law section for Alberta North, says the regional headquarters question with the securities regulator is an issue that is coming up with public companies and in-house counsel. “The interest in Alberta would be that there should be — based on all of the same metrics that people have always looked at for the Canadian marketplace — that the second-most obvious place for a securities regulator to be, outside of Toronto, would be Calgary, and that any national securities regulation scheme that excludes the Alberta market would be [an] ill-advised structure,” he says.
There could also potentially be some regional participation, either pro or con, based on the litigation developing in Alberta and at the federal level, he adds. “I would expect that there’d be some solicitation by issuers to participate either in the Alberta Court of Appeal application by the Alberta government or the Supreme Court reference that the federal government is likely to make,” he says.
Beginning in 2004, all provinces and territories except Ontario signed onto the passport system, which has, since 2008, enabled participants to clear a prospectus or obtain a discretionary exemption through a decision from the securities regulator in their home province or territory and have that decision apply in all other jurisdictions, according to the provincial-territorial securities initiative. “When you’re in Quebec and you look at the passport system, it works pretty well and people are happy with it and so the view is kind of, well if it works, why fix it?” says Daniel Desjardins, senior vice president and general counsel at Bombardier Inc.
Zordel says while the passport system has been beneficial, she considers it an interim step in the road towards a harmonized system. “What does that mean for in-house counsel? It means that finally, hopefully, the requests that many of them had across the country for an easier system to deal with in securities law, if they’re public companies, will be addressed,” she says.
While more locally based companies may have more trepidation when it comes to a national regulator, she says internationally focused organizations want a simpler regime. “For public companies, while it may not be immediately obvious that there’s improvements in process, but over a time they’ll see that things should get a little easier to deal with because you’ll have fewer differences in jurisdictions, you have to deal with fewer opportunities for differences in interpretation,” she adds.
Indeed, it is hoped that a national regulator could alleviate some multi-jurisdictional obstacles and increase efficiency, says Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver and chairman of its corporate finance and securities practice group. “It’s always been a difficulty saying, ‘OK, where do we have to file, why do we have to file there, more fees for this jurisdiction, less fees for that jurisdiction, what do we have to think about,’” he says. “Anything that adds to that makes clients concerned. Not only that they’re going to miss something and get into trouble, but also it’s fees generating for the commissions and they’d rather know that they’ve got one-stop shopping, I think. So I haven’t had a sense from anybody that they feel they’d be better off with the partialization we’ve got now.”
Registration reform
While the debate continues regarding a national regulator, registration reform is another related issue that over the last year has affected and continues to affect many public companies and their counsel. The reforms apply to firms and individuals who deal in securities, provide investment advice, or manage investment funds, according to the New Brunswick Securities Commission, and have arguably been a bigger change for some issuers than the move to a national regulator would be.
The new registration regime under National Instrument 31-103 came into effect in September 2009, completing the implementation of the passport system, according to the Canadian Securities Administrators, and providing Canada-wide rules for the conduct of registrants and regulatory procedures they must follow. The project, which was many years in the making, includes fewer registration categories, higher proficiency standards for some registrants, and enhanced rules for consumer disclosure, referral arrangements, handling investor complaints, and disclosing and addressing conflicts of interest, says the Alberta Securities Commission.
Registration reform doesn’t affect everyone, says Zordel, but for those in-house counsel it does, it’s been a tough year. “In some respects, that’s more of a change than the move to a national regulator. Because what you were doing there was you were changing the law. You were changing the structure, you were changing the categories of registration, the requirements; that was a massive change in law,” she says.
As a result, Zordel says it has been a lot of work to implement and is still ongoing, including the technical problems of getting the systems to work. The CSA also recently proposed first-year amendments to NI 31-103, affecting areas such as compliance systems and conflicts of interest. “When we move to a national securities act, we’re hoping not to have as much of a challenge with that area,” she adds. Sean Vanderpol, a partner practising in Stikeman Elliott LLP’s corporate and securities groups, agrees, saying while registration reform made a substantial impact in a smaller area, it was quite comprehensive and the issuers involved are still dealing with it.
Recently, these registration requirements and the changing of the self-regulatory organizations’ views on registration have had a large impact on the broker-dealer world in terms of the handling of client complaints and related issues, says Horton. “The regulatory world, it continues to evolve enormously and I think we’re going to see a lot more changes in the regulation of previously unregulated products,” she says.
Life post-IMAX and other trends
Continuous disclosure is always on the mind of any public company, but the issue was put back into the spotlight again when Silver v. IMAX Corp. became the first class action brought under the 2005 provisions on civil liability for secondary market disclosure — part XXIII.1 of the Ontario Securities Act — to be certified. In a report on trends in Canadian class actions released earlier this year, NERA Economic Consulting noted that the decisions in IMAX and other recent cases “may ultimately prove to be an inflection point for this type of litigation.”
Dimitri Lascaris, a partner with Siskinds LLP in London, Ont., who is representing the plaintiffs in IMAX, says while there is limited jurisprudence to date, the courts are thus far taking a liberal view of the legislation. “If that trend continues, then what I think you’re going to see is a robust civil liability regime, which is going to provide an additional and powerful incentive to issuers and their directors and officers to comply with the disclosure requirements under the securities acts, as long as that trend continues. If however, the barriers to a pursuit of a civil liability claim are set too high, then I don’t think part XXIII.1 is likely to achieve its ultimate purpose,” he says.
Also, the fact that there is now the potential for certification of a global class action against a Canadian company that had its shares listed in the United States is going to raise some interesting jurisdictional issues, he says.
For public companies that aren’t in the investment services business, Inglis says they are paying attention to emerging law in the continuous disclosure area as it relates to transactions, over and above issues such as the national regulator. “It’s a check and balance in the system and corporations and their counsel need to be aware that that’s there, that there’s a possibility of these types of actions, and that they want to do everything they can to protect themselves from that,” says Zordel.
While many companies are undoubtedly watching this case closely, the consensus among many lawyers is that the case itself hasn’t directly resulted in a change in disclosure practices as many issuers have been paying close attention to this matter since the provisions were brought into force several years ago across the country. “I’m not sure if [IMAX] really, from a compliance point of view, did much more than confirm where people thought they were in advance of the decision. That would be the case with most of the companies we deal with,” adds Inglis. While Alan D’Silva, a partner at Stikeman Elliott, says: “More broadly, I would say the secondary-market liability legislation has made people more aware and more cautious about their disclosure obligations and about such things as ensuring that their directors and officers have adequate D&O insurance.”
Pinsky also says the issue of liability insurance, the specifics as to what is or is not covered, for example, is of great concern to directors. “The liability is potentially substantial and all companies have to look at their director and officer liability insurance. It’s not only getting some but making sure that the kind that you get is a) with an insurer that’s not going to have financial difficulties, and b) isn’t full of loopholes,” he says.
He explains his firm and others were very active at the time the legislation was enacted in telling clients how to protect themselves. “One of the things that we did at the time was really pushed that our clients beef up very substantially their forward-looking statements disclaimers, very, very carefully look at each one,” he says.
The harmonized national rules for forward-looking information disclosure, brought forward in late 2007 as amendments to National Instrument 51-102 Continuous Disclosure Obligations, are something Vanderpol thinks regulators are looking at when they do their regular continuous disclosure reviews, in terms of how issuers report forward-looking information and whether they are complying with their obligations. “I think it’s an interesting thing for in-house counsel, it requires them to be a little more involved with the business people in terms of understanding the disclosures,” he says, including what’s implied, what assumptions have been made, and the risks it presents.
In July, the CSA released the results of its 2010 continuous disclosure review program, consisting of 1,351 continuous disclosure reviews of public companies that are reporting issuers. The CSA reports that in the year up to March 31, 72 per cent of issuers reviewed were required to take action to improve disclosure, compared to 80 per cent in the same period last year. Of the most recent reviews, 43 per cent resulted in “prospective changes,” requiring reporting issuers to make enhancements to their disclosure in future filings. At the same time, the CSA identified an improvement in the quality of disclosure by reporting issuers on their upcoming transition to international financial reporting standards, saying that 95 per cent of reporting issuers reviewed disclosed their IFRS changeover plan in their 2009 annual management’s discussion and analysis.
Looking ahead, the adoption of IFRS accounting, which public companies have to follow as of Jan. 1, 2011, is one area Zordel says she would pay a lot of attention to if she was in-house counsel. “One of the challenges with IFRS accounting is it allows flexibility in how things are treated and when you have flexibility it also becomes an area of risk,” she says, not just in terms of whether you can get your accounting statements approved, but whether you’re going to leave yourself open for another form of complaint.
Several recent changes, such as executive compensation disclosure requirements, which Vanderpol says were quite substantial, are also part of the broader move towards a democratization of corporate governance, he explains. “I think there is a general trend in securities regulation and just in the public companies sphere to increase shareholder activism and the democratization then of corporate governance, and so that is a trend that we’re seeing and I think communication with shareholders is part of that.”
Some examples of this are the “say on pay” advisory votes on compensation that more and more issuers are giving to shareholders and the policy of majority voting some issuers are adopting, requiring each director to receive a majority of votes for election. “That you see in the corporate governance sphere. I think you will also see shareholder activism by institutions agitating for change, change in management, change in the board, whether through proxy contests or asking for nominees to be put on the board,” he says.
Indeed, rather than further updates in the area of disclosure obligations, where Desjardins says most people understand what they have to report and when they have to report it, he expects any future changes to centre around public companies in the areas of proxy, perhaps shareholder activism in the context of say on pay, and the regulation of rating agencies. In the United States, for example, following the credit crisis and financial market turmoil, there has been a host of new legislation coming into play relating to over-the-counter derivatives, hedge funds, and credit-rating agencies, says Anand.
In Canada, public companies are likely keeping an eye on similar issues — most recently, the new proposed regulatory regime for credit-rating agencies, which may indirectly affect large issuers who issue debt securities rated by a credit-rating agency. “Canadian securities regulators are likely to be thinking about these issues also, and so on the horizon, it is likely that we will hear something from regulators on these issues if we have not already,” she says.
