From the Regulators

Amendments adopted for AI, MA and short-term debt prospectus exemptions

By James Langton |

In a bid to bolster investor protection and limit a possible source of systemic risk, Canadian securities regulators are introducing new curbs on the use of certain prospectus exemptions.

The Canadian Securities Administrators (CSA) Thursday announced the adoption of two sets of amendments to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

Among other things, the reforms will limit the so-called minimum amount (MA) exemption to non-individual investors; and, require a new risk acknowledgement form for clients that are relying on the accredited investor (AI) exemption. The CSA is also providing expanded guidance on the steps that dealers should take to ensure that an investor qualifies for the AI exemption.

In Ontario, the definition of accredited investor is also being amended to allow fully managed accounts to purchase investment fund securities. This will harmonize that category of the AI exemption throughout Canada.

The CSA says that the amendments are intended to address investor protection concerns, which emerged following a review of these exemptions, a review of enforcement cases, and data from exempt distribution reports.

"The changes to the AI and MA exemptions strengthen investor protection while continuing to provide a cost-effective means for issuers to raise capital," said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).

At the same time, the regulators are also adopting a second set of amendments to the short-term debt prospectus exemption, which the CSA says are the result of its review and analysis of investor protection and systemic risk concerns in the Canadian short-term credit market. Back in 2007, a segment of that market seized up amid turmoil in global credit markets.

Specifically, the CSA is making the exemption unavailable for short-term securitized products such as asset-backed commercial paper (ABCP); instead, it is creating a new exemption for short-term securitized products; and, the CSA is also modifying the credit ratings required to distribute short-term debt under the exemption.

"The changes to the short-term debt exemption enhance market efficiency and fairness in the commercial paper market, while the new short-term securitized products exemption will support improved practices in the ABCP market and its continued stability," Rice notes.

The new amendments are to come into force on May 5, assuming that all of the required ministerial approvals are obtained. While in Ontario, the amendments to the AI and MA exemptions will come into force either on May 5, or when certain legislative measures are proclaimed, whichever comes later.