On March 6, 2014, the Investment Industry Regulatory Organization of Canada (IIROC), which is responsible for regulating Canada's stock exchanges and investment dealers, published proposed guidance for underwriters conducting due diligence in connection with a securities offering. Although IIROC indicates that the proposed guidance is not intended to create new legal obligations or modify existing ones, market participants are expected to understand and follow the proposed guidance once it is finalized.  

Proposed guidance

  • The proposed guidance is based on nine principles which contemplate, among other things, that underwriters will:
  • have written policies and procedures in place relating to all aspects of the underwriting process and to have effective oversight of these activities
  • have a due diligence plan for each offering
  • hold due diligence Q&A sessions at appropriate points during the offering process with the issuer and all syndicate members
  • perform business due diligence sufficient to ensure that the syndicate understands the issuer's business and the key internal and external factors affecting the issuer's business
  • clearly understand the boundary between business due diligence and legal due diligence and ensure matters that should be reviewed by the underwriters are not delegated to underwriters' counsel
  • consider, in the relevant context, the extent to which an underwriter should rely on an expert opinion
  • satisfy themselves that the lead underwriter on an offering has performed appropriate due diligence  
  • document the due diligence process to demonstrate compliance with all applicable requirements
  • have a comprehensive and effective supervisory and compliance framework in place to ensure compliance with all applicable requirements and participation in the due diligence process through appropriate personnel and internal processes

Objective and impact of proposed guidance

IIROC's proposed guidance is intended to describe common practices and offer suggestions to market participants to promote the primary goals of securities regulation: protecting investors, fostering fair and efficient capital markets, and creating and maintaining confidence in capital markets.  

The proposed guidance, if adopted, could have a significant impact on the due diligence process. Such impact may be especially pronounced in cases where the issuer has international or emerging market operations.

Comment deadline June 24, 2014

IIROC has requested written comments on the proposed guidance by June 24, 2014. IIROC has requested responses on a number of questions including, in particular, whether the guidance should apply to private placements as well as prospectus-qualified offerings.

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