The story of the Canadian Securities Administrators’ attempts to establish rules for dealing with underwriting conflicts is a long one. Ever since the big banks acquired the major investment dealers in the late ‘80s, the CSA has been concerned about securities offerings where the underwriter might have a conflict because of the existence of other ties to the issuer. The paradigm where this was of concern is when the issuer owes money to the underwriter’s parent bank and the proceeds of the financing being underwritten are to be used to pay back the bank loan. A task force in the 1990s which looked at the issue created much controversy including a dissenting view from one of the panel members.
The current regulatory situation is a jumble of regulation. There is a regulation which is largely superceded by a blanket order (now a deemed rule in Ontario), but exemption orders are routinely granted by the securities commissions where the requirements under the 1998 proposed rule on the subject are met.
On June 22, 2001, the CSA proposed a new draft Rule 33-105 to deal with the issue. With so few independent dealers of any size left, there may be less controversy this time.
Some highlights of the proposal are set out below:
- Requirement for Independent Underwriters:
- Disclosure:
- Calculations:
Currently, where the issuer of securities is a "related issuer" or "connected issuer" to an investment dealer, that dealer is generally prohibited from acting as an underwriter unless there is also an independent underwriter who is not connected or related. Under the proposal, the independent underwriter requirements will only apply to special warrant or prospectus offerings where the issuer or selling securityholder is "related" to the dealer. In order to be "related" there must be significant ownership between the dealer and the issuer. The various tests start at a 10% ownership threshold. As before, the independent underwriter must underwrite a portion of the offering equal to the lesser of 20% and the largest portion underwritten by a non-independent underwriter.
What this change means is that vastly fewer offerings will be caught by the requirement for an independent underwriter since the requirement has been eliminated where the issuer and underwriter are "connected". This is a much broader concept than "related" and was what caught the paradigm example referred to above. The change has also meant that the extensive provisions regarding connected issuers and whether they could be considered to be in financial difficulty have also been eliminated.
Disclosure is the new paradigm. In all cases where the issuer is connected or related issuer of the underwriter, disclosure of the relationship must be provided.
The proposal contains provisions which clarify that, for offerings entirely in Canada, the calculations for independent underwriter involvement are based on a cross-Canada basis, not province-by-province. On cross-border offerings by Canadian issuers the independent underwriter requirement is intended to apply only to the Canadian portion of the offering. Non-Canadian issuers are more or less exempt as long as more than 85% of the dollar value of the distribution is made outside.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
