Ontario Capital Markets taskforce aims to modernize securities law, make competitiveness a pillar

A recommendation that competitiveness is one of the three pillars holding up Ontario securities laws is a welcome addition to capital markets regulation, says John Wilkin, partner with Blake, Cassels & Graydon LLP.

“The concept of putting that principle into the purpose of the Securities Act is an important addition to the existing provisions, which include investor protection and fostering the fair and efficient operation of our capital markets,” Wilkin says, commenting on recommendations of the Ontario Capital Markets Modernization Taskforce.

The taskforce recently delivered its final report, which updates and expands on the recommendations in its July 2020 initial report to the finance minister. The latest report reflects feedback received by the taskforce from more than 130 stakeholder comment letters on the initial report.

The minister of finance created the taskforce a year ago to propose changes to improve Ontario’s regulatory structure for securities to ensure a level playing field and foster innovation, and enhance enforcement and investor protection.

The taskforce recommends implementing its proposals through a “modern” piece of legislation, such as the draft Capital Markets Act, developed in connection with the proposed Cooperative Capital Markets Regulatory System. The report also recommends expanding the OSC mandate to include “fostering capital formation and competition in the markets.”

Among the taskforce’s recommended changes are:

• Adopting a “well-known seasoned issuer” model. This recommendation would allow the Ontario Securities Commission to automatically issue, without regulatory review, a receipt for a shelf prospectus filed by an issuer with a public float of at least C$500-million. It is like a model that the United States uses.

• Expanded ability to “test the waters.” The taskforce recommends a loosening of restrictions on marketing activities before issuing a receipt for a preliminary prospectus to allow reporting issuers to market transactions to “institutional accredited investors” before the receipt for a preliminary prospectus has been issued.

• Prohibition on short-selling in connection with public offerings and private placements. This rule would prohibit the participation of issuers who have previously sold short securities of the type offered under the prospectus or in the private placement.

• Access equals delivery. Reporting issuers would be able to satisfy their obligations under securities law to deliver disclosure documents (including prospectuses, financial statements, and management information circulars) to shareholders by providing shareholders with electronic access to such records. No separate notification of their availability should be required.

• Moving towards the elimination of the hold period for securities distributed under the accredited investor exemption. Those issuers with a continuous disclosure record of at least 12 months would only be subject to a hold of 30 days rather than four months. The reduced hold period would be eliminated after it has been in force for two years.

• Reducing the “early warning” reporting threshold. The threshold for applying “early warning” disclosure requirements of Canadian securities laws would be reduced to five per cent from the current level of 10 per cent. This rule would be in line with reporting requirements in other jurisdictions, including the United States.

• Initiatives to increase diversity. The taskforce suggests reporting issuers set goals and implementation timelines for diversity among directors and executive management and report annually on the representation of those identifying as women, BIPOC, a person with a disability, or LGBTQ+. The appropriate target levels for representation at the board and executive management levels are 50 per cent for women and 30 per cent for BIPOC, persons with disabilities and LGBTQ+. Other proposals aimed at increasing diversity include adopting a maximum term limit of 12 years for directors of public companies, with certain exceptions.

• Mandatory disclosure on ESG matters. In response to increased investor interest in environmental, social and corporate governance (ESG) disclosure, issuers would disclose material ESG information.

• Use of universal proxies in contested meetings. There is no requirement to include all director nominees’ names on a proxy form in a contested election. When a dissident shareholder nominates directors, such nominees are typically not included on the proxy form distributed by an issuer’s management. The taskforce proposes the OSC consult with stakeholders on this, with a target to implement by Sept. 2022.

• Consolidating IIROC and the MFDA. The Investment Industry Regulatory Organization (IIROC) and the Mutual Fund Dealers Association (MFDA) have suggested that the two organizations be consolidated into a single self-regulatory organization. The taskforce also recommends that the OSC eventually consider delegating its registration functions to the consolidated SRO.

Wilkin says the “seasoned issuer” recommendation is an important one for levelling the playing field. “Regulatory review can add time, cost, and uncertainty to the financing process,” he says. “Allowing a senior issuer with an established disclosure record to bypass the current process and go directly to the market would put us on par with the US system, which allows this.

Likewise, reducing and ultimately eliminating the hold period allows for a more effortless capital flow. As part of a private placement, the investor often gets a discount to compensate for taking the risk during the hold period. Reducing or cutting it would provide a pricing advantage to the issue, Wilkin says.

The recommendation on diversity is another important recommendation. It “shines a light” on the need to have boards reflect Canadian society’s makeup, including women, people of colour, those with disabilities, and the LGBTQ+ community. At this point, Wilkin says, it is a recommendation meant to encourage diversity, not a regulatory response, “but the message is clear that more diversity is needed.”

The Canadian Securities Administrators also released an open letter in response to the report. The letter emphasized the significance of effectively harmonized securities regulation across Canada and highlighted the overlap between some taskforce recommendations and CSA initiatives already being considered.

The CSA also expressed openness to a number of the recommendations, such as a broader “testing the waters” exemption, the shortening and eventual elimination of hold periods on securities distributed in reliance on the accredited investor exemption, prohibiting short-selling in connection with a prospectus offering or private placement, reducing the threshold for early-warning reporting, and mandating ESG disclosure.

Wilkin says that with the taskforce recommendations now with the minister, he expects some changes to securities laws and regulations. Some of the “low hanging fruit” — changes that can be made within the existing rules — could come relatively soon. These would likely be the recommendations noted by the CSA in its open letter. Others, such as the recommendation to update the OSC mandate, would need an update to the Securities Act.

Lawyers who deal with clients on securities issues may want to discuss the recommendations of the taskforce to prepare them for potential changes, Wilkin says, especially those related to board diversity and environment, social and corporate governance issues.