On October 12, 2021, the Government of Ontario released a draft his proposal Capital Markets Law (the CMA), ambitious new legislation that aims to both restructure the Ontario Securities Commission (OSC) and replace the Securities Law and Commodity Futures Act. The draft CMA, released for stakeholder consultation, contains a number of recommendations and aims to strengthen the enforcement powers of OSC staff in an effort to modernize the system of capital markets regulation in the Ontario.
Proposed Legislative Change in Ontario as a Result of the Task Force’s Final Report
The government’s release of the draft AMC responds to recommendations made by Ontario’s Capital Markets Modernization Task Force (Task Force) at its January 22, 2021 meeting final report [PDF] (the final report). Indeed, the first recommendation in the final report was to replace Ontario Securities Law with the CMA sponsored by the Cooperative Capital Markets Regulatory System (CCMR). Osler has already reported the final report of the working groupgiving our perspective on its 74 far-reaching recommendations.
While it was initially unclear what the impact of the final report would be, the Ontario government released its 2021 budget [PDF] on March 24, 2021, where it announced its intention to implement certain recommendations of the task force. Osler has already reported proposed changes to Ontario’s capital markets sector provided for in the 2021 budget.
March 2021 also saw the introduction of the Securities Commission Act 2021 (the SCA), which describes the governance and accountability functions of the OSC. Also reflecting some of the task force’s recommendations, the SCA would reconstitute the OSC as the regulator, separating its tribunal and regulator functions. The legislation would also establish a board of directors to oversee the operations and regulatory activities of the regulator. In addition, the SCA would create separate positions of Chairman of the Board and Chief Executive Officer, as well as a specialized and separate Capital Markets Tribunal overseen by an appointed Chief Arbitrator. This model is reminiscent of the one developed for the Financial Services Regulatory Authority of Ontario (which Osler Previously reported on) and pan-Canadian initiatives proposed and sponsored by CCMR in securities regulation prior to that. The SCA is expected to be proclaimed in force in 2022.
Overview of the application of the CMA and related provisions reflecting the recommendations of the working group
The draft CMA builds on and incorporates the governance and organizational reviews detailed in the SCA. The proposed CMA is divided into several parts. Although some articles are generally consistent with existing provisions of current law Securities Law, others show significant changes. A fundamental distinction from the Securities Law is the extent to which the CMA takes a “platform approach” to regulation. This approach sets out the fundamental provisions of capital markets legislation while leaving the detailed requirements to be addressed in the rules, thereby promoting regulatory flexibility and enabling the OSC to respond to market developments in a timely manner. The CMA also differs from the Securities Law regarding its distribution of decision-making power. Under the CMA, the making of regulatory decisions and the decisions of the “Director” and “Executive Director” under the Securities Law were entrusted to the “Chief Regulator”.
As suggested above, several provisions included in the draft CMA reflect the proposals originally put forward in the final report of the working group. Many of them relate to investigation and enforcement under the Securities Law. Some of the relevant task force recommendations reflected in the CMA are:
- Recommendation 5: Ensure that the securities regulatory framework and regulatory functions are subject to periodic review. To better ensure that the regulatory regime does not become outdated and misaligned with Ontario’s evolving marketplace, CMAs . 276 would require a periodic review of capital markets legislation and OSC rules every five years. A similar provision is included in the current Securities Law. Despite this, the Task Force’s review represented the first comprehensive review in 17 years since the 2003 report [PDF] issued by the Crawford Committee.
- Recommendation 13: Provide the OSC with additional tools for continuous disclosure and exemption compliance. Particularly with the rise of alternative forms of financing in the exempt market, there is increasing emphasis on the importance of full and ongoing disclosure. CMA s. 125 would allow the Chief Regulator to issue compliance orders to expeditiously address specific instances of issuer non-compliance, including issues related to continuous disclosure obligations and compliance with the terms of the exemptions. prospectus.
- Recommendation 30: Extend civil liability for misrepresentation of an offering memorandum to parties other than the issuer. In its final report, the task force recognized that Ontario issuers were less exposed to misrepresentation claims than issuers in other Canadian jurisdictions. CMA s. 183 would solve this problem by expanding civil liability remedies for exempt market investors by extending potential liability to issuers, directors of issuers, promoters of issuers, influential persons, experts and anyone who signs the prescribed information documents.
- Recommendation 32: Give the regulator additional designation powers. In recent years, the presence and influence of new products has skyrocketed in capital markets. OSC staff faced new challenges with limited and somewhat rudimentary tools, such as traditional application processes (as seen in the crypto asset trading platform initiative). LMC art. 3 and 127 would provide the regulator with broader designation powers and regulatory authority in this developing area, including the power to designate crypto assets as securities and/or derivatives.
- Recommendation 57: Create a ban on [more] effectively deter and prosecute misleading or false statements about public companies and attempts to make such statements. Citing the example of “short and skewed” campaigns, the task force highlighted the need for more effective tools to combat abusive practices designed to inappropriately manipulate the stock price of public companies. CMA s. 94 would allow the regulator to prescribe requirements and restrictions for persons engaging in promotional activities, including communications that encourage or could reasonably be expected to encourage the purchase and trading in securities and derivatives. It would also prohibit false or misleading statements about public companies in promotional activities and any attempt to make such statements.
- Recommendation 58: Increase the maximum administrative monetary penalties to $5 million and increase the maximum fine for violations to $10 million. Relying on a dubious presumption that the current levels of authorized penalties do not have a sufficient deterrent effect, ss. 119(2), 171 and 174 raise the quantum of administrative monetary penalties and fines for contraventions to $5 million and $10 million, respectively.
- Recommendation 59: Modernize investigative tools by empowering the Provincial Court to issue production orders in financial markets. In order to improve quasi-criminal investigations, ss. 154–62, 164, 166, and 169–71 would allow regulators to obtain capital markets production orders. Instead of limiting OSC staff to physically seizing computers or servers, a production order could authorize staff to ask businesses and individuals who are not under investigation, but who hold relevant information, to collect or prepare information to give to an investigator. These new investigative powers also include related preservation powers.
- Recommendation 66: Create prohibitions to effectively prosecute those who facilitate violations of Ontario securities law. In an effort both to harmonize Ontario’s enforcement provisions with those of other CSA jurisdictions and to modernize the OSC’s enforcement tools, ss. 114-15 would include new prohibitions on aiding, abetting or advising a breach of capital markets laws and conspiring with any other person to breach capital markets laws.
- Recommendation 73: Provide for automatic reciprocity of sanction orders, cease trade orders and regulations from other Canadian securities regulators and grant the regulator a simplified power to issue reciprocal orders in response to orders from a criminal court, foreign regulator, SRO and stock exchange. As noted in the final report, Ontario is one of the few Canadian jurisdictions that does not have automatic reciprocal sanction orders. Proposed LMC art. 116 to 18 would provide automatic and simplified reciprocity provisions, which would promote a consistent approach to the enforcement of orders and settlements across the country.
While the task force reports risk becoming an academic exercise, with many thoughtful and thoughtful questions set aside for future consideration, the events of the past year demonstrate the Ontario government’s desire to use the final report of the task force as a springboard for change. From the new SCA, through the support outlined in the province’s 2021 budget, to the release of the CMA’s consultation draft, the Ontario government has demonstrated its commitment to reform. financial market regulation. The CMA appears to reflect a significant effort to modernize Ontario’s capital markets regulatory framework, including in the area of enforcement. However, it is still too early to assess the reaction of market participants and investors to some or all of the proposed changes. the law Project was released for comment, initially until January 21, 2022, which has since been extended until February 18, 2022.