Ontario Capital Markets Modernization Taskforce Issues Final Report

The Ontario Capital Markets Modernization Taskforce (Taskforce) recently delivered its final report (Report), which updates and expands on the recommendations contained in its July 2020 initial consultation report (Initial Report), to the Minister of Finance. See our bulletin on the Initial Report here. The Report includes wide-ranging recommendations relating to the regulation of Ontario’s capital markets and reflects feedback received by the Taskforce from more than 130 stakeholder comment letters on the Initial Report.

The Minister of Finance struck the Taskforce in February 2020. The Taskforce was mandated to propose changes to improve Ontario’s regulatory structure, ensure a level playing field, foster innovation and enhance enforcement and investor protection.

HIGHLIGHTS

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

Adopting a “Well-Known Seasoned Issuer” Model

• The Taskforce recommends adapting a version of the “well-known seasoned issuer” model used in the United States for Ontario’s capital markets. This would allow the Ontario Securities Commission (OSC) 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.

Expanded Ability to “Test the Waters”

• The Taskforce recommends a loosening of restrictions on marketing activities prior to the issuance of 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

• The Report recommends that the OSC adopt rules prohibiting participation in a prospectus offering or private placement by market participants that have previously sold short securities of the type offered under the prospectus or in the private placement.

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 disclosure documents (including prospectuses, financial statements and management information circulars) to shareholders by providing shareholders with electronic access to such documents. The Taskforce recommends that the provision of electronic access to such disclosure documents on the internet should be sufficient and that 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

• The Taskforce recommends that securities sold in reliance on the accredited investor exemption by reporting issuers that have a continuous disclosure record of at least 12 months be subject to a hold period of only 30 days, rather than the current hold period of four months. The Taskforce also recommends considering eliminating hold periods entirely after the reduced hold period has been in force for two years.

Reducing the “Early Warning” Reporting Threshold

• The Report proposes lowering the threshold for the application of the “early warning” disclosure requirements of Canadian securities laws from the current level of 10 per cent to 5 per cent, which is in line with reporting requirements in other jurisdictions, including the United States.

Initiatives to Increase Diversity

• The Taskforce suggests requiring reporting issuers to set goals and implementation timelines for diversity among directors and executive management and to report annually on the levels of representation at the board and executive management levels of those identifying as women, BIPOC, a person with a disability, or LGBTQ+.

• The Taskforce further recommends that 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.

Mandating the Use of Universal Proxies in Contested Meetings

• The Report recommends mandating 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. Noting that there are practical implications of such a requirement, the Report proposes that the OSC undertake further consultations in this regard, with a target implementation date of September 1, 2022.

Mandatory Disclosure on ESG Matters

• In response to increased investor interest in environmental, social and governance (ESG) disclosure, the Taskforce recommends that issuers be required to disclose material ESG information, in particular on climate change.

• The Taskforce endorses certain standards of the Taskforce on Climate-Related Financial Disclosures, which was established by the Financial Stability Board, and recommends a transition period of between two and five years depending on an issuer’s market capitalization at the time of the adoption of such requirements.

Consolidating IIROC and the MFDA

• The Report reiterates the recommendation that the Investment Industry Regulatory Organization and the Mutual Fund Dealers Association be consolidated into a single self-regulatory organization (SRO) and also suggests that the OSC eventually consider delegating its registration functions to the consolidated SRO.

Expanding the OSC’s Mandate

• The Taskforce recommends that the mandate of the OSC be expanded to include “fostering capital formation and competition in the markets”.

New Legislation

• The Taskforce recommends its proposals be implemented in a “modern” piece of legislation such as the draft Capital Markets Act, which was developed in connection with the proposed Cooperative Capital Markets Regulatory System.

The Taskforce also made a number of significant proposals relating to enforcement of Ontario securities law, including the separation of the regulatory and adjudicative functions of the OSC and establishment of separate chair and chief executive positions.

CSA RESPONSE

The Canadian Securities Administrators (CSA) other than the OSC released an open letter in response to the Report, emphasizing the significance of effectively harmonized securities regulation across Canada, and highlighting the overlap between certain Taskforce recommendations and ongoing CSA initiatives, including the ongoing review of the SRO structure. The CSA also expressed openness to a number of the Report’s 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.

NEXT STEPS

The Report has been submitted to the Minister of Finance, who will consider the recommendations.

For further information, please contact:

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

or any other member of our Capital Markets group.