The Canadian Securities Administrators (CSA) is proposing a set of changes to the registration and prospectus rules that aim to address growing concerns stemming from the sale of syndicated mortgages to retail investors. Specifically, mortgage brokers may be required to become registered as exempt-market dealers (EMDs) and the disclosure requirements for these securities would also be toughened.
The CSA states in a notice outlining its proposals that there has been a “significant increase” in syndicated mortgage offerings, which “potentially raise investor protection concerns, particularly when sold to retail investors,” given that these deals may be financing highly speculative projects, with relatively little security for investors.
In order to address these risks, the CSA is proposing a series of changes that would curb the use of mortgage exemptions for these products in certain jurisdictions, including Ontario, which could require mortgage brokers to become registered as EMDs; prohibit the use of the private issuer exemption for these financings; and introduce new disclosure requirements to the offering memorandum (OM) exemption when it’s used to distribute syndicated mortgages (including a requirement to provide investors with an independent appraisal of the property being financed in the deal).
Under the proposed new regime, syndicated mortgage offerings would have to use other exemptions — such as the accredited investor, friends and family, or the OM — to sell these products to retail investors. In addition, certain firms involved with the distribution of these securities may have to register as EMDs to continue selling these products.
“The purpose of the proposed amendments is to introduce additional investor protections related to the distribution of syndicated mortgages and to increase harmonization regarding the regulatory framework for syndicated mortgages across all CSA jurisdictions,” the CSA’s notice states.
By enhancing the disclosure required under the OM exemption, the CSA says that investors would be able to make informed investment decisions. Meanwhile, the other changes would mean that “investors in syndicated mortgages distributed under other prospectus exemptions would benefit from the potential involvement of a registrant in the distribution, in the same manner as for the distribution of other real estate related securities.”
“The proposed amendments introduce a common regulatory approach for syndicated mortgages across Canada,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers, in a statement. “The measures also enhance investors’ ability to make informed decisions when purchasing these investments.”
The proposals are out for comment until June 6.