Ontario Capital Markets Modernization Taskforce Outlines Proposed Regulatory Changes

On July 9, 2020, the Ontario Capital Markets Modernization Taskforce (Taskforce) published its initial consultation report (Initial Report), which contained nearly 50 proposals aimed at modernizing the regulation of the province’s capital markets.

The Minister of Finance of Ontario struck the Taskforce in February 2020. The Taskforce was mandated to propose changes to improve Ontario’s regulatory structure and reduce duplicative regulatory burden, while promoting investor protection and building a level playing field for a competitive economy.

The Taskforce met with more than 110 stakeholders and has engaged a panel of expert advisers. The proposals in the Initial Report are intended to promote discussion among stakeholders that will inform a final consultation report expected to be submitted to the Minister of Finance by the end of 2020.

HIGHLIGHTS

Highlights of the Taskforce’s recommended changes to the regulation of Ontario’s capital markets include:

Expanding the OSC’s Mandate

• The Taskforce suggests expanding the OSC’s legislated mandate to include “fostering capital formation and competition in the markets,” in addition to the OSC’s current mandate, which is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.

Separating the OSC’s Regulatory and Adjudicative Functions

• The Taskforce reports that many stakeholders indicated the joint regulatory and adjudicative roles of the OSC were inappropriate for a modern, globally competitive regulator. The Taskforce recommends splitting the regulatory and adjudicative functions of the OSC, either by creating a distinct tribunal within the current OSC structure or by establishing a new capital markets tribunal as a separate entity.

Adopting a “Well-Known Seasoned Issuer” Model

• The Taskforce proposes considering whether the “well-known seasoned issuer” model used in the United States would be appropriate for the Ontario capital markets. This would allow the OSC to automatically issue, without regulatory review, a receipt for a shelf prospectus filed by an issuer that had a certain minimum value of securities—including debt securities—outstanding so long as the issuer has established an appropriate disclosure record.

Access Equals Delivery

• The Taskforce proposes moving to an “access equals delivery” model, which would allow reporting issuers to satisfy their obligations under securities law to deliver certain documents (such as prospectuses and management information circulars) to shareholders by providing shareholders with electronic access to such documents to reflect issuers’ and investors’ increased reliance on internet communication. In January 2020, the Canadian Securities Administrators (CSA) also published a consultation paper on a proposal to move to an access equals delivery model, which received a generally positive reception from participants who submitted comment letters on the proposal.

Eliminating the Four-Month Hold Period for Securities Distributed Under the Accredited Investor Exemption

• The Taskforce proposes permitting immediate resales of securities that are currently subject to a four-month hold period because they were distributed under the accredited investor exemption, provided the issuer has been a reporting issuer for a specified time period. The Taskforce also invites comments on whether this change should apply to other exemptions that carry with them a four-month hold, such as the “friends and family” and asset acquisition exemptions.

Reducing the “Early Warning” Reporting Threshold

• Currently, the “early warning” requirements of Canadian securities laws apply when a shareholder acquires beneficial ownership of 10 per cent or more of a class of outstanding voting or equity securities. The Initial Report proposes lowering the threshold to 5 per cent, which is in line with reporting requirements in other jurisdictions, including the United States.
• The Taskforce also invites comments on how to structure and implement a proposed new “13F”-type reporting requirement that would require “institutional investors” to disclose their holdings in certain Canadian reporting issuers on a quarterly basis. A similar system is currently in place in the United States.

Mandating the Use of Universal Proxies in Contested Meetings

• The Taskforce proposes to mandate the use of “universal proxies,” which list the names of all nominees for election to a board in a contested election. Currently, there is no requirement to include the names of all director nominees on a proxy form and, when a dissident shareholder nominates directors, such nominees are typically not included on the form of proxy distributed by management of an issuer. The Taskforce is also considering mandating disclosure of voting tallies to both management and dissident shareholders ahead of meetings that involve contested elections.​

Initiatives to Increase Diversity

• The Taskforce suggests requiring Toronto Stock Exchange (TSX)-listed issuers to set targets for, and provide data on an annual basis in relation to, the representation of Black, Indigenous and people of colour on boards and in executive officer positions, and to adopt a policy addressing the identification of candidates from such groups during director nomination processes, with the stated aim of increasing diversity in director and executive officer positions.

Consolidating IIROC and the MFDA

• A number of capital markets participants are subject to regulation by both the Investment Industry Regulatory Organization (IIROC) and the Mutual Fund Dealers Association (MFDA). The Taskforce states that having two self-regulatory organizations (SROs) for various advisory activities was “outdated and confusing to investors” and recommends moving to a single self-regulatory organization for all registered capital markets firms.

NEXT STEPS

The Taskforce will accept comments until September 7, 2020. Following the Taskforce’s receipt and review of comments, the Taskforce will prepare a final report containing its final recommendations, which will be submitted to the Minister of Finance.

The Ontario government is, along with the federal government and the governments of British Columbia, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island and Yukon, working towards establishing a cooperative capital markets regulator that would replace the securities commissions of the participating jurisdictions and have additional authority from the federal government to manage systemic risk in Canadian capital markets. Although certain of the recommendations made by the Taskforce, such as the separation of the regulatory and adjudicative functions of the OSC, are reflected in the proposal for a cooperative regulator, the extent to which other changes proposed by the Taskforce for Ontario might be adopted in the cooperative system remains to be seen.

For further information, please contact:

John Wilkin                   416-863-2785
Tim Phillips                  416-863-3842
Liam Churchill             416-863-3057

or any other member of our Capital Markets group.