On August 31 the comment period in respect of the Canadian Securities Administrators'
Proposed Securitized Product Rules ended. About 30
comment letters were submitted. Over the next couple of weeks I
will briefly canvass the comments received on the prospectus
disclosure rules and the exempt market rules. Following is a brief
discussion of the more general comments.
While almost all commentators concurred with the general
principles enunciated by the CSA, a few concluded from the distinct nature of the traditional Canadian
securitization market (no originate-to-distribute
model; good asset performance) and the nature of the financial
crisis that it experienced (liquidity only), that any new rules
should leave traditional ABS alone and concentrate solely on those
transactions which in fact at the root of the financial turmoil of
the past few years. These were identified as those transations
utilizing originate‑to‑distribute model and
those involving synthetic securities. Although this view has much
to recommend it, it does not seem likely that the CSA will abandon
the omnibus approach which they have taken. They will probably feel
that they have already provided sufficient recognition of the
distinct nature of the Canadian market by refraining from applying
the more intrusive Dodd‑Frank and Reg AB II
proposals, an approach otherwise all but uniformly
praised by commentators.
The entry point for the application of the Proposals is the definition of securitized product.
Given the importance of this definition it is perhaps surprising
that comparatively little attention was paid to it by most
commentators. Those who did comment on it did little but indicate
that they believed the definition to be too broad and cite a few
examples of instruments that should not be caught. These included
NHA MBS, Canada Mortgage Bonds,
over‑the‑counter derivatives, corporate loans
secured by pools of assets, innovative Tier 1 capital structures
and structured notes. Apart from our own submission, very little
analysis was provided to the CSA to allow it to structure a
principle‑based definition. And we do not believe that
the solution lies in merely listing the above as exceptions
as, unless the definition itself is refined significantly, there
will be too many classes of securities on the margins or in the
"grey" zone. As illustrated in our submission, there are
a number of other types of securities that could unexpectedly be
caught by the definition and specifically listing included or
excluded securities may not be an effective solution as such lists
may result in further interpretive difficulties.
The extreme breadth of the definition will create a trap for the
unwary issuer which may only become apparent upon receipt of a
comment letter or, more problematically, a claim from an investor
in a private transaction who later, being discontented with the
outcome of his investment, is casting about for grounds for
reimbursement. Indeed any proposed issuance of securities in the
"grey" zone will need to be approached cautiously under
the proposed definition. If the issuance is to be by way of
prospectus, the new rules are tailored almost entirely to fit
traditional ABS and a "grey" zone issuer would be
hard‑pressed to understand what specific disclosure is
required in respect of its issuance. It would be much worse,
however, if the issuance is to be conducted in the exempt market
since the issuer would be caught between the rock of not complying,
and thereby potentially opening itself up to liability for
non‑compliance, and the hard place of complying, and
thereby voluntarily taking on unwarranted liability by operation of
the new disclosure and certification requirements. The uncertainty
surrounding the applicability of the definition of securitized
product could virtually eliminate all issuances of these
"grey" zone securities as it would be difficult to obtain
a legal opinion which would give sufficient comfort on the
applicability of and compliance with securities laws. It is
therefore incumbent upon the CSA to strive for much greater clarity
in this area and we believe that they should submit a new proposal
on this point for comment.
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.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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