Canada: Proposal For Canadian Cooperative Capital Markets Regulator: The Provincial Capital Markets Act

On October 9, 2015, the Canadian federal government's latest initiative to develop a cooperative capital markets regulatory regime continued to progress with the addition of Prince Edward Island as the fifth province to join in on this proposal.

We have previously discussed the infrastructure and governance proposed for the "Capital Markets Regulatory Authority" (CMRA) that would be created under the proposed cooperative regime. As detailed in that post, the CMRA would administer the federal Capital Markets Stability Act (CMSA) as well as the uniform provincial/territorial Provincial Capital Markets Act (PCMA), which would be adopted by each participating province or territory. In this post we take a closer look at the proposed PCMA.

Under the proposal, the PCMA would be enacted by each participating province and territory and takes a platform approach to capital markets regulation. It sets out the fundamental provisions of capital markets law and leaves detailed requirements to be addressed in regulations.  Where the CMSA, aimed primarily at the regulation of systemic risk, introduces a number of new regulatory concepts, the PCMA in contrast has been drafted to closely follow existing provincial securities legislation. While it most closely resembles the current securities legislation of Ontario and British Columbia, elements from other provinces' legislation are also incorporated throughout. Similar to current securities laws, the PCMA is comprised of different parts relating to different aspects of securities regulation, such as recognition or designation of self-regulatory organizations, registration, prospectus, take-over bid requirements, etc. 

Parts 2 and 3 address recognized and designated entities, respectively. Part 2 requires recognition by entities that perform core market infrastructure or subordinate regulatory functions and establishes a framework for the CMRA's oversight of recognized entities consistent with current provincial securities legislation. These include exchanges, self-regulatory organizations, auditor oversight organizations and clearing agencies. Under Part 3, certain entities that provide specific services within the capital markets are permitted to apply to the CMRA for a designation order. These include trade repositories, credit rating organizations, investor compensation funds, dispute resolution service providers, and information processors or marketplaces.

Part 4 of the PCMA, which contains the framework for registration, is essentially unchanged from current provincial legislation and requires that firms and individuals engaged in the business of dealing or advising, or acting as investment fund managers, register in accordance with the regulations.  

The PCMA's prospectus provisions, which are contained in Part 5, are also largely consistent with current provincial legislation. The CMRA is also given broad powers to make regulations prescribing alternative disclosure documents that must be filed, receipted, and sent to purchasers as an alternative to a prospectus.

Part 6 of the PCMA addresses derivatives regulation. This Part adopts a platform approach and draws off yet to be proclaimed provisions in the Ontario Securities Act.  Consistent with the proposed approach in Ontario (and other provinces), registration requirements would extend to those dealing in or advising with respect to derivatives whereas the type and scope of other regulatory aspects will depend on various factors and categorizations. The proposed definition of "security" under the PCMA allows the CMRA to prescribe classes of derivatives to be securities (and regulated accordingly).

While trades in derivative will generally be exempt from the prospectus requirement, the PCMA also generally prohibits a person from trading in a "designated derivative" unless a prescribed disclosure document has been filed and, where required by the regulations, a receipt has been issued. It is anticipated that designated derivatives will include derivatives that raise investor protection concerns, but for which traditional securities regulatory requirements are not appropriate. The regulations may prescribe varying levels of disclosure depending on the specific circumstances, including the nature of the product and the identity of the parties. Certain instruments, including commodity contracts entered into for purely commercial physical delivery purposes or contracts that are otherwise regulated (e.g., electricity contracts in some provinces), are not intended to be regulated under the PCMA. These contracts may be excluded from the definition of "derivative" by order or regulation.

Part 7 of the PCMA adopts the platform approach to continuous disclosure and proxy requirements, based largely on the British Columbia Securities Act, supplemented by extending these requirements beyond reporting issuers to other issuers in a prescribed class, such as those engaged in crowd-funding.

Take-over bids are addressed in Part 8, which remains largely unchanged from current take-over bid regulation. An interested person can enforce compliance with this Part by making an application to the Superior Court of their respective province or the tribunal established under the PCMA. 

The Tribunal is an independent body designed to enforce the PCMA through adjudicatory and administrative proceedings. The appropriate body to which a person will make an application depends on the type of relief being sought. The Tribunal can grant relief related to specific requirements under the PCMA, such as requiring an amendment to a record, restraining the distribution or a record, or varying a time period. More general orders can also be sought through the Tribunal, including a direction that a person comply with Part 8, an order restraining a person from contravening this Part, and an exemption from compliance.

A court can provide for more robust orders, including orders that award damages, rescind transactions, require a person to dispose of securities, or require a person to not exercise voting rights attached to securities. The chief executive officer of the CMRA's Regulatory Division (the Chief Regulator) must be given notice of an application, and is entitled to appear as a party. A notable provision is s. 51, which enables the Chief Regulator to vary any time period in Part 8 upon application by an interested person.

Part 9 contains the market conduct provisions, which set out the fundamental obligations and prohibitions that apply to persons who participate in the capital markets in the participating jurisdictions. The provisions are largely consistent with current securities legislation, such as the provisions providing for the record-keeping duties of all market participants and the duties of registrants and investment fund managers. Consistent with the British Columbia and New Brunswick securities legislation, the PCMA imposes a disclosure obligation in connection with investor relations activities. This Part also includes obligations to identify, disclose, and manage conflicts of interest that are platform in nature and apply to both registrants and to offerors, issuers, and offerees.

The prohibitions under Part 9 are also consistent with current provincial legislation, including the provisions on prohibited representations, insider trading, and fraud. With respect to insider trading, the definition of "special relationship" in s. 7 of the PCMA has been expanded from the current definitions in provincial securities statutes to include circumstances prescribed by regulation. Other prohibitions include market manipulation and attempted market manipulation, including market manipulation in connection with the underlying interest of a derivative. Unfair practices are also prohibited, including putting unreasonable pressure on a person to purchase, hold, or sell a security or trade in a derivative. Consistent with British Columbia, New Brunswick, and Saskatchewan securities legislation, s. 76 of the PCMA prohibits the actual or attempted destruction or concealment of evidence in connection with a compliance review, an investigation, or a proceeding. Prohibitions against front-running, which are based on British Columbia's securities legislation, have also been incorporated.

Part 9 also includes several new provisions relating to market conduct. These include prohibitions against benchmark manipulation that forbid the submission of false or misleading information as well as conduct that may improperly influence a benchmark's determination or produce or contribute to a false or misleading determination. In addition to fraud, s. 63 prohibits unjust deprivation, while other provisions address conspiracy, aiding and abetting, and counseling a contravention of capital markets law. The prohibitions in ss. 63 to 65 also include attempts to engage in prohibited conduct. Part 9 also introduces a whistle-blower protection, prohibiting employers from retaliating against their employees for providing information to the CMRA or a law enforcement agency or testifying in a related proceeding, or for expressing an intention to do so. A breach of the provisions in Part 9 may give rise to an administrative proceeding or the prosecution of a regulatory offence under Part 11.

Orders, reviews, and appeals are covered in Part 10, which contains provisions enabling the Chief Regulator or anyone affected by a decision to appeal a final decision of the Tribunal to a court. Part 11 deals with administration and enforcement. This Part introduces new evidence gathering tools to facilitate the investigation of criminal and quasi-criminal offences. For example, this Part contains provisions enabling peace officers and certain CMRA staff to apply to a court for production orders relating to entities operating in the capital markets.

Parts 12 and 13 set out the PCMA's civil liability provisions. These Parts are less platform-based than the other Parts of the PCMA and are based on the substantially harmonized primary and secondary market statutory civil liability regimes of current provincial securities legislation.

A notable addition to Part 13 is s. 171(2), which suspends the limitation period for commencing a statutory secondary market civil liability claim when the plaintiff files a notice of application seeking leave to commence the action. This provision is similar to the recently amended s. 161.9 of the New Brunswick Securities Act and s. 138.14 of the Ontario Securities Act. Another notable provision is s. 118, which introduces a right of action relating to misrepresentations in a prospectus or a prescribed disclosure document for a person who exercises special warrants to purchase securities.

Some elements in these Parts, however, have been drawn from particular provinces' securities legislation. For example, s. 129 of the PCMA mirrors s. 136 of the British Columbia Securities Act in its provision of a private right of action to all persons who purchased or traded a security during the period described, regardless of whether they purchased the securities from, or sold them to, the defendant.

Other choices have also been made between different approaches in provincial securities legislation. For example, the PCMA does not include the specific rights of action for misrepresentation in sales literature or for verbal misrepresentations that appear in New Brunswick's and Saskatchewan's securities legislation. Further, the PCMA opts for the British Columbia and Ontario limitation period for primary market claims other than actions for rescission, which is six months from the plaintiff's first knowledge of the facts giving rise to the action and three years after the transaction or contravention. The securities legislation in New Brunswick and Saskatchewan, by contrast, provide for double those time periods.

A number of general provisions appear in Part 14. Part 15 will contain provisions outlining the powers and process for making regulations for areas of provincial jurisdiction, and Part 16 will contain transitional provisions.

This is the second in our series of posts  on the proposed cooperative capital markets regulatory system. Comments on the proposal, including both the CMSA and the PCMA are being accepted until November 7, 2014.

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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