As we reported last month, Ontario’s Capital Markets Modernization Taskforce (Taskforce) recently published its final report (Final Report)1. The 74 recommendations cover a wide range of topics, including corporate governance practices, reducing regulatory burdens, improving market access, investigative and enforcement matters and major structural changes.
Although the Taskforce dropped or reworked a few of its more controversial proposals and added some new recommendations, its Final Report is largely consistent with the consultation report (Consultation Report) that it released in July 20202. Some of the Taskforce’s recommendations, if adopted, would significantly affect the structure of the Ontario Securities Commission (OSC) and Canada’s self-regulatory organizations (SROs), as well as aspects of the enforcement process.
In this bulletin, we provide a summary of the Final Report’s most notable recommendations relating to structural changes both at the OSC and SROs, as well as new initiatives targeted at upholding market integrity, enhancing investigation and enforcement processes.
A previously released summary on the Final Report’s most notable recommendations relating to corporate governance, mergers and acquisitions (M&A), capital-raising, and continuous disclosure can be found here.
What you need to know
Some Taskforce recommendations could be adopted relatively quickly because the OSC is already considering them and could implement them without having to coordinate its efforts with other regulators. For example, the Taskforce’s recommendation that the OSC develop and publish guidance on certain aspects of the enforcement process builds on an existing OSC initiative that has been in progress since May 2019.
The Taskforce’s recommendations regarding the OSC’s structure and governance, such as the establishment of a separate adjudicative tribunal within the OSC, are significant and may be more challenging and time-consuming to implement because they require legislative amendments, the establishment or reorganization of entities, and/or the appointment, hiring and/or re-assignment of personnel.
Some of the Taskforce’s recommendations have generated controversy and may not progress as proposed, or at all. For example, the Canadian Securities Administrators (CSA) issued an open letter expressing concern that implementing some of the Taskforce’s recommendations outside of the CSA’s own mechanisms and processes could create inter-jurisdictional friction and add to regulatory burdens for market participants3. The CSA is also concerned that implementing some of the Taskforce’s enforcement-related recommendations would narrow the discretion of enforcement staff at the OSC to oversee capital market interactions and slow down enforcement action, thereby undermining investor confidence and protection.
What’s next: We will be watching to see what reaction the OSC and the Ontario provincial government have to this report. Currently, it is unclear where some of the Taskforce recommendations will lie on the priority list for Ontario’s Minister of Finance. The first indication of the Ontario Government’s reaction to the Final Report may come in the 2021 budget, which is scheduled for release on March 31. In addition, because the Taskforce did not systematically disclose the stakeholder feedback it received on its Consultation Report or how it addressed that feedback in finalizing its recommendations, we expect that the market will be looking to the Ministry of Finance, the OSC and possibly the CSA to conduct economic cost-benefit analyses and assess supplementary data as they consider whether and how to implement the Taskforce’s recommendations.
If market participants find any of the Taskforce’s recommendations problematic, now is the time to express these concerns.
Regulatory structure and governance
Expand the OSC’s mandate to include fostering capital formation and competition in the markets. The Final Report also includes a new recommendation that the OSC be renamed the Ontario Capital Markets Authority to reflect this broader mandate and the more diverse capital markets sector it oversees. The Taskforce’s recommendation to expand the OSC’s mandate has generated some controversy. For example, the CSA has voiced concern that this expanded mandate does not pay adequate attention to investor protection, which could create imbalance resulting in a disconnect across provincial regulators.
Separate the roles of OSC Chair and CEO. The Taskforce recommends that these two positions be separated to support what it believes will be a more effective delivery of the OSC’s mandate. Under this new governance structure, the Chair would lead the board of directors in focusing on the strategic oversight and corporate governance of the regulator, while the CEO would be responsible for the overall management of the OSC and the execution of its mandate.
Separate the OSC’s regulatory and adjudicative functions. The Taskforce recommends creating an adjudicative panel whose members would be appointed on the advice of the Minister of Finance. Although the Consultation Report had contemplated two possible “homes” for the tribunal (either within the OSC or as a separate entity), the Taskforce ultimately recommended that the tribunal be housed within the OSC, so that tribunal decisions would be informed, but not directed by, the OSC’s policy decisions.
Revamp the self-regulatory framework for dealers and advisors. In the midst of the CSA’s review of the oversight framework for the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and their member firms, the Taskforce has come out in favour of a single SRO that can eventually oversee all advisory firms (including those currently regulated directly by the OSC) under a revised accountability framework.
Market integrity, investor protection and enforcement reforms
Prohibit misleading and untrue statements about public companies. To enable the OSC to address and more effectively regulate abusive practices such as “pump and dump” or “short and distort” schemes, the Taskforce recommends that securities legislation be amended to prohibit statements about public companies if those statements: 1) are known to be (or there is a reckless disregard for whether those statements are) misleading or untrue; and 2) would be expected either to affect the market price or value of the public company’s securities (or related derivatives) or influence a reasonable investor’s investment decision-making about those securities or related derivatives.
In contrast to existing anti-fraud prohibitions, under this proposal OSC staff would not have to prove in a hearing that the market was in fact distorted by the statement; an intention to impact the market or influence a reasonable investor’s decision-making would be sufficient. British Columbia’s securities legislation includes a similar provision. This proposed provision would not create a civil liability regime, meaning issuers or others could not commence civil proceedings themselves for a breach of the new provision.
Expand civil liability for offering memorandum misrepresentation to parties other than the issuer. Under the current framework, the rights of action for offering memorandum misrepresentations are more limited in Ontario than they are in some other Canadian jurisdictions. In light of this, the Taskforce recommends that the statutory liability in respect of an offering memorandum misrepresentation be expanded to include key actors who are responsible for the issuer’s offering memorandum disclosure including the board of directors, promoters, influential persons and experts.
Provide greater guidance and rights for persons directly affected by an OSC investigation. The Taskforce noted concerns raised by stakeholders that the process for adjudicating disagreements with OSC staff arising in the course of an OSC investigation is unclear and that more transparency is required. As a result, the Taskforce recommends:
Transparency and greater rights for persons or entities affected by an investigation through the publication of guidance by Staff. The OSC’s collaboration with certain stakeholders on the development of guidance of this nature began in May 2019.
A statutory amendment allowing the OSC to develop of separate rules governing claims of privilege that are made by investigation subjects.
Allow tolling agreements between the OSC and respondents to extend limitation periods. Currently, the OSC is subject to a six-year limitation period after which it loses its jurisdiction to commence a proceeding. Tolling agreements suspend the statute of limitations, giving the parties time to respond to document requests, and possibly negotiate and settle disputes, without proceeding to formal enforcement proceedings. One of the typical advantages of tolling agreements is to allow regulators to focus resources on the main target of an enforcement action while preserving their rights against potentially involved parties. Potential investigatory targets can also benefit because, in the absence of a tolling agreement, a regulator may be forced to commence overly broad or unnecessary enforcement actions to preserve their rights.
Enhance the OSC’s powers to obtain court orders that preserve property. The Taskforce recommends that securities laws be amended to allow the OSC to obtain extraordinary relief from the court to protect investors and deal with assets alleged to be related to capital markets wrongdoing:
The OSC should be authorized to obtain a court order that freezes any assets that are being preserved to return money to harmed investors or deprive a respondent of ill-gotten gains. The existing requirement to provide some evidence that the frozen funds or property were obtained through a breach of securities law would be dropped, lowering the burden on the OSC to obtain this form of relief.
The OSC should be given clear powers to obtain a court order freezing and seizing assets that have been transferred below fair market value to a family member or third party, as well as expanded powers to investigate property transfers involving family members or third parties. Recipients of benefits below fair market value could be held joint and severally liable with the respondent to pay the lesser of a) the disgorgement amounts ordered by the OSC or court, or b) the below market value benefit received.
The OSC should have the power to obtain a court order authorizing it to dispose of frozen assets, even before any sanctions have been imposed, to retain value where there is a risk of the assets losing value.
Increase administrative penalties and fines. The Taskforce recommends increasing the maximum administrative penalty from $1 million to $5 million and the maximum fine for quasi-criminal offences from $5 million to $10 million.
Amend securities laws to clarify that compliance with the OSC will not provide a basis for an alleged breach of a non-disclosure agreement. This amendment seeks to enhance to flow of information to the OSC and to protect parties from civil claims for breach of contractual non-disclosure obligations because they responded an OSC requirement.
Empower the OSC to designate a dispute resolution services (DRS) organization that could issue binding decisions. Currently, registered firms are required to take reasonable steps to ensure that the Ombudsman for Banking Services and Investments (OBSI) is available as a DRS to clients to address investor complaints. However, the Final Report notes that since OBSI cannot issue binding decisions, registered firms can refuse to follow OBSI’s recommended resolution. Consequently, the Taskforce recommends that the OSC present a plan to the Minister of Finance within six months of the Final Report recommending either improvements to the existing OBSI or the establishment of a new DRS with the power to issue binding decisions.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.