Consultation: New Ontario capital markets legislation

Introduction 

The Ontario government recently published for public consultation a draft Capital Markets Act (the CMA). The CMA, together with the recently published Securities Commission Act (Ontario) (the SCA), will, if passed into law, provide the foundation for capital markets regulation and enforcement in Ontario. Publication of the CMA comes less than a year after the release of the Capital Markets Modernization Taskforce’s final report (the Taskforce Report) on January 22, 2021. It incorporates many of the Taskforce Report’s recommendations with the anticipation that other taskforce recommendations will be effected by rule-making authority granted to the Ontario Securities Commission (the OSC) under the CMA.

Comments on the Consultation Paper accompanying the draft CMA and responses to specific questions regarding the CMA and potential rules made under the legislation are requested by January 21, 2022.

The legislation

The CMA is platform legislation that sets out the elements of regulation with detailed requirements to be set out in rules made under the legislation. The CMA provides broader and more general rule-making authority than the current legislation. This approach enables the OSC to be flexible and quick to respond to a rapidly changing marketplace and new financial products. The CMA, if enacted by the legislature, will replace the Securities Act (Ontario) (the OSA) and the Commodity Futures Act (Ontario). Commodity futures contracts and commodity futures options will be regulated as derivatives under the CMA. The CMA also introduces changes that harmonize Ontario’s regime with legislation in other Canadian jurisdictions.

The CMA and the SCA introduce changes to securities regulation in the following areas, among others:

• the regulatory structure of the OSC and the establishment of an independent adjudicative tribunal (Capital Markets Tribunal);
• distribution relief and expansion of exemptions;
• expansion of the civil liability regime;
• treatment of cryptoassets;
• derivatives trading;
• corporate governance, proxy and mergers and acquisition requirements; and
• enhanced enforcement and investor protection.

This update summarizes the key changes.

Regulatory structure

The legislation supports the Taskforce Report’s recommendation to split the OSC chair and CEO positions and separate the OSC’s adjudication and regulatory roles.

The regulatory role of the capital markets will be undertaken by the OSC, which will be supervised by a board of directors appointed by the Lieutenant Governor in Council. The OSC will be reorganized by appointing a CEO who will be the chief regulator responsible for managing and supervising the OSC. The chief regulator will exercise policy and regulatory authority by delegation of duties by the OSC’s board of directors or directly by the CMA. The chief regulator may grant recognition orders (e.g., of exchanges, clearing agencies, trade repositories and SROs), designation orders (e.g., benchmarking organizations, credit rating organizations, investor compensation funds, information processors and marketplaces), exemption orders, information disclosure orders, compliance orders and cease trade orders in certain circumstances. More serious breaches of the CMA will be addressed through enforcement and the Capital Markets Tribunal.

The Capital Markets Tribunal will be established, which is independent from the OSC. Capital Markets Tribunal members will be appointed by the Lieutenant Governor in Council. The specialized tribunal will make adjudicative decisions (e.g., orders in the public interest) and review decisions of the chief regulator of the OSC. Currently, the OSC undertakes this adjudicative function. A chief adjudicator will be appointed to manage and supervise the Capital Markets Tribunal operations.

Review of legislation and consultation periods

The CMA adopts the recommendation contained in the Taskforce Report and requires a review of capital markets legislation and rules every five years. In addition, the minimum consultation period for proposed rules under the CMA will be reduced to 60 from 90 days, aligning it with other Canadian jurisdictions. A longer period can be provided for in appropriate circumstances.

Distribution relief and expansion of exemptions

The CMA introduces rule-making authority to allow a well-known seasoned issuer (WKSI) to access the markets through a less burdensome process. If the rules are introduced, they will allow WKSIs that have a prescribed public float or a certain amount of debt securities outstanding and are in compliance with the continuous disclosure requirements to offer securities automatically upon filing a prospectus or prescribed offering document (i.e., without OSC review). The government is seeking input under what the prescribed circumstances of such an offer should be.

The CMA will move all categories of accredited investors (AIs) to the rules on prospectus exemptions (NI 45-106 Prospectus Exemptions) and will in the future introduce new categories of AIs in such rules. The government is seeking public comment on what such new categories should be. The taskforce has recommended expanding the definition of an AI to include persons who meet requisite proficiency standards in order to increase capital raising opportunities for issuers.

Expansion of civil liability

The CMA expands the civil liability regime for offering memorandum misrepresentations issued under the offering memorandum exemption to include not only against the issuer but also its directors, promoters, experts and other influential persons. These investors would also have a right of rescission against the issuer. This brings Ontario in line with other Canadian jurisdictions where such liability already extends to those persons.

The CMA also closes the regulatory gaps in the current OSA regarding statutory civil liability recourse for purchasers of convertible securities and securities of other financing methods that are currently often addressed by contractual rights.

Cryptoassets 

The CMA provides the chief regulator of the OSC power to determine if certain cryptoassets are (or are not) securities or derivatives. The Consultation Paper recognizes that many cryptoassets are already securities or derivatives. Greater flexibility is provided in the CMA to tailor requirements for new platforms and assets, as technology evolves. The provisions are similar to those provided in BC securities legislation.

Derivatives trading

The CMA outlines specific requirements for a dealer, adviser, counterparty to a trade or other prescribed persons related to derivatives transactions, including disclosure requirements.

Corporate governance / M&A and proxy transactions

The Consultation Paper is seeking comment on introducing a requirement in OSC rules to require an annual shareholder say-on-pay vote on the board’s approach to executive compensation. It is recommended for issuers by the Taskforce Report. In addition, the Canada Business Corporations Act has recently introduced upcoming amendments to that legislation requiring distributing corporations to conduct such a vote.

The CMA also anticipates providing the Capital Markets Tribunal with a broader order of powers when exercising its public interest jurisdiction over merger and acquisition and related-party transactions. The taskforce recommends that such new powers be similar to BC securities legislation and allow the Capital Markets Tribunal to order rescission of the transaction, or the disposal of securities in connection with certain transactions and prohibit the voting of securities in certain circumstances. The OSC rules adopted under the CMA may mandate the use of special committees to oversee material conflict of interests transactions.

The Ministry of Finance consultation paper also contemplates modernizing the private issuer take-over bid exemption.

Enforcement and investor protection

The CMA enhances the OSC’s enforcement powers. In addition to increasing administrative and offence fines and penalties, it introduces new potential offences such as aiding, abetting or counselling a breach of securities laws and front running. The CMA provides that the OSC may prescribe requirements and restrictions for persons engaging in promotional activities that encourage trading securities and derivatives. The CMA also specifically prohibits false or misleading statements about issuers in connection with promotional activities. New information gathering tools, including greater search powers, have been introduced, together with other stronger investigative powers.

Next steps

Comments are due by January 21, 2022.