Introduction to the Capital Markets Act
On October 12, 2021, the Government of Ontario published the draft Capital Markets Act ("CMA"), which is designed to streamline and modernize the regulatory framework of the province's capital markets. If approved, the CMA will replace both the Securities Act (Ontario) (the "Securities Act") and the Commodity Futures Act (Ontario) ("CFA") in the province.
The CMA is a direct response to the recommendations of the Capital Markets Modernization Taskforce (the "Taskforce") contained in its final report, released in January 2021, aimed at strengthening the validity and competitiveness of Ontario's capital markets. The CMA proposes to do this through various mechanisms, including the rule-making authority and structure of the Ontario Securities Commission ("OSC"), modernizing enforcement and enhancing investor protection, issuer obligations and regulation as a competitive advantage. The CMA is also responsive to the Government of Ontario's 2021 Budget, which announced several changes seeking to advance the recommendations made by the Taskforce.
This article summarizes some of the key changes to the CMA and the reasons for such changes guided by the Taskforce's recommendations. The information outlined below is discussed in more depth in the Consultation Commentary, published by the Ministry of Finance, which accompanies the CMA.
Key Changes and the CMA Approach
Platform Approach – OSC Responsible for Rule-Making
In efforts to advance the objective of regulatory flexibility, the CMA adopts a "platform approach" to capital markets regulation. Through this, the CMA establishes the fundamental provisions of capital markets law, with more specific requirements to be included in the rules implemented by the OSC. This approach enables the OSC to respond efficiently in the future to the ever-changing capital markets. In contrast to the current prescriptive approach of the Securities Act, which stipulates each head of rule-making, the CMA provides a general rule-making authority permitting the OSC to "make rules for carrying out the purposes and provisions of this Act."
Decision Making and Order Making Authority – Chief Regulator
Under the CMA, the Chief Regulator is now responsible for the regulatory decision-making and decisions previously made by the "Director" and "Executive Director" under the Securities Act. The Chief Regulator would also be responsible for recognition and designation orders, moving that authority away from the OSC's board of directors as it is under the Securities Act. In addition, the Chief Regulator will be able to make various orders to facilitate investigations and compel disclosure of information. Subject to approval by the OSC's board of directors, the Chief Regulator will have the authority to make cease trade orders in extraordinary circumstances. These changes aim to contribute to the efficiency of the OSC's governing capabilities and are consistent with approaches in other provinces.
Regulation of Commodities – No More CFA
The CMA replaces the CFA, and all commodity futures contracts and options currently regulated under the CFA would be regulated as derivatives under the CMA. As the CFA would no longer apply, neither would the registration exemptions under the CFA that apply to commodity futures contracts and commodity futures options. Instead, the dealer registration requirements under the CMA would apply, but only for market participants in the business of trading. Under this regime, registration exemptions under National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations that apply to exchange contracts may also be available. The new rule-making authority described above would also apply, meaning over-the-counter derivatives dealers and advisers who are not otherwise subject to registration exemptions in the CMA could nonetheless be subject to registration requirements imposed by the OSC.
Responses to Taskforce Report
The Consultation Commentary, released in tandem with the CMA, identifies 25 of the Taskforce's recommendations that will be implemented by the CMA. In addition to the changes to the regulatory structure and rule-making authority identified above, some of the key recommendations that have been incorporated into the CMA, as outlined in the Consultation Commentary, are as follows:
- OSC Tools for Disclosure and Exemption Compliance – Section 125 of the CMA contains provisions that would allow the Chief Regulator to make compliance orders, including a cease trade order, to address situations where an issuer is non-compliant with requirements, such as in circumstances that relate to continuous disclosure requirements and adherence to the terms of prospectus exemptions. This provision is intended to provide a more efficient approach to resolving compliance issues.
- Seasoned Issuer Model – Section 45(3) of the CMA would allow for the automatic issuance of prospectus receipts for issuers that meet certain requirements to be established by OSC rules.
- Accredited Investor Categories – Sections 266(5) and 127(2)(n) of the CMA would allow the OSC to introduce additional accredited investor categories under the prospectus exemption. This approach is similar to the legislation of other Canadian jurisdictions and is intended to promote harmonization by transferring the accredited investor provisions currently found in the Securities Act into National Instrument 45-106 Prospectus Exemptions. This will allow increased flexibility for the OSC to adjust accredited investor exemptions and ensure they can adapt efficiently as the capital markets evolve.
- Expanded Civil Liability for Offering Memorandum Misrepresentation – Section 183 of the CMA proposes broader civil liability recourse for investors, allowing for recourse for damages when there is a misrepresentation in a prescribed disclosure document against (i) the issuer, (ii) the directors of the issuer, (iii) promoters of the issuer, (iv) influential persons, (v) experts and (vi) every person who signed the prescribed disclosure document.
- Liability Recourse to Address Regulatory Gaps – Sections 177-179 of the CMA provide additional options for statutory civil liability recourse for investors. Situations in which recourse may now be available to investors include when an investor has purchased securities through a prescribed offering document that contains a misrepresentation, when convertible or exchangeable securities are distributed under a prospectus, in multi-stage financings, and in restructuring or financing transactions.
- Broader Designation Power for the OSC – Sections 3 and 127 of the draft legislation include broader designation powers and rule-making authority for the OSC, allowing the OSC the power to designate crypto assets as securities and/or derivatives and the power to prescribe them to be such. Similar to the current Securities Act (British Columbia), this proposed provision would allow the Chief Regulator to make designation orders to determine how securities or derivatives are regulated.
- Additional Requirements for Independent Directors – The rule-making authority contained in section 82 of the CMA would allow for additional requirements to be placed on independent directors of issuers in material conflict of interest transactions, such as business combinations eliminating public shareholders, issuer bids and significant related-party transactions.
- Annual Advisory Shareholders' Vote Regarding Executive Compensation – Section 74 of the CMA requires that issuers comply with requirements prescribed in OSC rules regarding meetings of security holders. The rule-making authority allows the OSC to impose requirements for meetings, such as the requirement to have an annual advisory shareholders' vote on executive compensation.
- Broader Range of Remedies Relating to M&A for the Tribunal – Similar to the current powers afforded to the British Columbia Securities Commission, tribunal powers contained in section 85 of the CMA would provide market participants with an alternative to initiating court proceedings. On application by an interested person, the designated tribunal may make certain orders, for various reasons including if a person has acted or is acting contrary to the public interest, related to take-over bids, issuer bids, going-private transactions, related party transactions, business combinations or similar transactions. An order may include rescinding a transaction with any interested person and requiring any person to dispose of securities acquired in connection with a transaction, including a business combination or similar transaction.
The CMA has the potential to modernize Ontario's capital markets, provide greater harmonization of securities regulation across Canada and give the Province of Ontario a competitive edge, with the potential to attract global investment and support economic growth and innovation. The draft legislation has been published for public consultation and will remain open for comment until January 21, 2022. The public, including sector experts and market participants, are invited to share their input on the draft legislation.
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