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Ontario – Draft Capital Markets Act
Letter Summary:
The Ministry of Finance (Ontario) has released a new Capital Markets Act (the “Act”) that would replace the current Ontario Securities Act and Commodity Futures Act, and is responsive to many of the recommendations made in the final report of the Capital Markets Modernization Taskforce (the “Taskforce”) released in January. The new Act sets out a platform framework for the legislation governing capital markets participants, the OSC’s powers (both regulatory and enforcement), and the new Capital Market Tribunal’s (the “Tribunal”) adjudicative powers, which will be separate from the OSC’s regulatory powers which are to be exercised by its board or the Chief Regulator / CEO. The Chief Adjudicator will be responsible for directing the Tribunal’s operations. Further to other legislation released earlier this year, the current Chair and CEO functions at the OSC will also be separated into two positions. It is intended that detailed requirements will be left to rules and not set out in the Act itself in order to promote flexibility and allow the OSC to respond to market developments in a more timely manner. The purposes of the Act will be expanded as suggested by the Taskforce, to include fostering capital formation and competition in capital markets. If the Act goes forward, commodity futures contracts and commodity futures options would be regulated as derivatives under the Act.
In addition to the requirements for recognized entities, designated entities and other marketplaces, the CMA will outline a regulatory regime for benchmarks and benchmark administrators. Similar to how the Securities Act is organized today, the Act will set out the basic registration requirements for dealers, advisers and investment fund managers, as well as the basic requirements for the distribution of securities, while leaving the detailed requirements for the content of documents, filings and exemptions for the relevant rules. A new section in the Act will regulate trading in derivatives, including permitting the OSC to make rules imposing registration requirements on OTC derivatives dealers and advisers. The Act will continue to prescribe disclosure requirements for reporting issuers, but will be expanded somewhat to include specifics regarding the composition of the board, code of conduct, and procedures to regulate conflicts and meeting requirements. The market conduct provisions of the Act would be expanded to include specific references to promotional activities and prescribed requirements relating to those activities. Many of the changes proposed to be included in the Act relate to the investigation and enforcement powers of the new Tribunal, Chief Regulator and Superior Court of Justice, including with respect to orders to provide information such as data found in electronic format. It is proposed that decisions of the Tribunal be appealed to the Divisional Court, and that most (not all) decisions of the Chief Regulator may be appealed to the Tribunal. OSC decisions that are final and not subject to Tribunal appeal would be subject to judicial review by a court. Other changes regarding enforcement actions include a new provision allowing the Tribunal to make disgorgement orders and the Chief Regulator to apply to a court to appoint persons to administer and distribute the disgorged amounts, including to investors that suffer direct financial losses.
It is also proposed that the OSC must publish a proposed rule for public comment for at least 60 days (currently 90 days), and the Act will provide for more flexible rule making and transitional matters from the current legislation. The Act also increases the maximum administrative penalty that can be imposed by the Tribunal to $5 million and fine for offences imposed by a court to $10 million. The Ministry has set out 30 consultation questions throughout its commentary on the new Act, seeking feedback on matters ranging from the appropriate statutory civil liability for distribution of ETF securities, to the impact of including the independent review committee of a private fund to the definition of a “market participant”, to the appropriate requirements for managing conflicts of interest.
Overview of the Council’s Comments:
The CAC has been publicly supportive of several recommendations made by the Capital Markets Modernization Taskforce (the “Taskforce”) to modernize securities legislation and rules in Ontario. The inclusions relating to the regulation of benchmarks, cryptocurrency, and derivatives in the legislation itself provides important legislative direction and structure for additional future regulatory initiatives.
While the CAC appreciates the platform approach taken by the Consultation Draft and the myriad proposals embedded in the draft Act, additional investor-friendly defining principles for the Act, including an expanded legislative best interest standard to registrants with discretionary authority over client assets, would make the proposed Act worth the immense prospective effort of implementation for capital markets participants, investors, and regulators.
Given that a new Act in form of the Consultation Draft was the chosen course of action, publishing of the cost-benefit analysis prepared in connection with this decision would be of interest for stakeholder review. There may be room for additional forward-thinking policy innovation (particularly given that ‘facilitating innovation’ is one of the stated principles of the Consultation Draft) and additional legislative provisions regarding topical issues in securities regulation such as sustainability and diversity. We believe consideration should be given to enshrining these important concepts in securities legislation while providing meaningful guidance as to how the regulator should balance them with the other purposes of the Consultation Draft, including protecting investors from unfair, improper, or fraudulent practices.
The CAC encourages legislative support for a wider definition of diversity, and more robust action on diversity, equity, and inclusion in the capital markets. The capital markets have a role to play in the realization of Indigenous reconciliation, and this may need to be addressed in legislation to be then effectively promulgated into regulatory initiatives.
Several important topics were left either partially or wholly unaddressed in the Consultation Draft that taken collectively could be seen as the meaningful step forward for Ontario investors that would reasonably justify the introduction of a new Act. The first and most important of these topics is the introduction of an expanded legislative best interest standard. The Consultation Draft with respect to other registrants (including with respect to derivatives transactions) only references a duty to act fairly, honestly and in good faith with the registrant’s clients and meet such other standards as may be prescribed.
With respect to the draft new prohibitions on misleading statements, the CAC is concerned that s. 94 of the Consultation Draft does not contain a materiality qualifier—there is no requirement that the misstatement or omission make the statement materially misleading. This introduces a test that differs from many similar prohibitions in the Consultation Draft which contain a materiality qualifier, such as the general prohibition on false and misleading statements set out in section 93. As drafted, almost any statement intended to affect a reasonable investor’s view about an issuer could breach section 94 of the Consultation Draft.
Finally, there may be some comments made on the former 2015 draft CMA as part of the CCMR initiative that have not been addressed in the Consultation Draft or the Consultation Summary. Absent a blackline or hyperlinks to the existing Securities Act or the former 2015 draft CMA, the CAC commentary was somewhat limited, nonetheless, we look forward to the opportunity to engage on such matters in future.