The Ontario government’s proposed legislation could reshape securities law and overhaul regulatory structures, resetting the balance between the underlying legislation and the rules crafted by the Ontario Securities Commission (OSC).
On Oct. 12, the provincial government unveiled its proposed Capital Markets Act (CMA), which would replace existing legislation for both securities and derivatives. The new law would adopt many recommendations from the Capital Markets Modernization Taskforce, which delivered its final recommendations in January.
The government has moved at lightning speed by public policy standards, and much of the task force’s work is already reflected in the proposed legislation, which would shift the balance between laws and regulations.
Modelled on work to develop the now-defunct Cooperative Capital Markets Regulatory System, the task force recommended — and the proposed legislation would implement — a shift to so-called “platform” legislation. That model sets out the basic provisions of the law and grants broad rule-making authority, while leaving detailed requirements to regulations.
The chief advantage of the platform approach is that it’s typically easier to change rules than to amend legislation, as rule changes can be crafted quickly and require only the government’s consent. Granting broad rule-making power to the OSC would enable the regulator to deal with novel issues that develop in the future but aren’t yet covered by securities law.
The platform approach could lead to more flexible, responsive regulation. Under Canada’s provincial system, however, the desire for harmonization can bog down local regulatory initiatives, and that still may happen under the new framework.
For example, the task force recommended that publicly traded companies be required to hold annual advisory shareholder votes on executive compensation. The CMA would give the OSC authority to require those votes. However, the rest of the Canadian Securities Administrators have rejected mandating advisory votes on executive pay, and the OSC would be unlikely to go it alone. Just because something can be more easily done via rule-making doesn’t mean it will be.
Nevertheless, investor advocate Ken Kivenko, president of Kenmar Associates, said he has “some real concerns” with the platform model. “This is not principles-based regulation or law because there are not sufficient principles in here to set the direction on regulatory policy, standards of conduct, licensing requirements [or] disclosure requirements,” he said. “It is more like a table of contents than a securities law.”
In Kivenko’s view, the legislation should at least include high-level requirements and principles that set a framework for the development of specific rules and regulations.
“The government should not just state what will be regulated and delegate complete authority to the OSC to perform that regulation. The government should also set out a direction on policy and the types of requirements and standards that must be in place,” Kivenko said. “To say we are uncomfortable with the proposed CMA would be a major understatement.”
In a statement seeking input on the CMA, Finance Minister Peter Bethlenfalvy said that “modernizing capital markets will give our province a competitive edge and play a critical role in attracting global investment, supporting economic growth and innovation, and creating good jobs.”
The draft legislation would facilitate the restructuring of the OSC that the task force recommended. The CMA would establish a separate adjudicative body, divide the role of OSC chair and CEO, and revise the regulator’s mandate to add competition and capital formation as key objectives.
Earlier this year, the government introduced legislation to enact structural changes to the OSC. The CMA would define the authority of both the new adjudicative tribunal and the regulator in its new bifurcated configuration.
The OSC’s proposed new authority would expand the regulator’s power to address emerging regulatory issues. For example, the proposed law would allow the OSC to designate cryptoassets as securities or derivatives, giving the OSC scope to continue developing regulation for an otherwise lawless sector.
The draft law also would prohibit false and misleading statements about public companies, enabling regulators to better tackle “pump and dump” and “short and distort” campaigns. The task force recommended changes in this area, given the increasing power of social media to spread false information and influence trading activity.
Other enforcement-related changes are included in the proposed CMA, including provisions that would enhance the OSC’s investigative powers and its ability to return ill-gotten gains to harmed investors. The maximum regulatory penalty would increase to $5 million and the maximum fine for securities offences would rise to $10 million. In addition, the CMA would enable automatic reciprocation of enforcement orders by other regulators.
The draft law also would enhance private enforcement. The CMA would expand the scope of civil liability in the exempt market, enabling harmed investors to sue not just an issuer that makes misrepresentations in an offering memorandum but also the company’s directors, promoters and others.
The government is seeking feedback on how to treat ETF investors in civil liability claims. This follows a recent court decision that denied class-action certification against a fund manager after the court found that the “hybrid regulation” of ETFs makes it impossible to determine whether an investor in the secondary market bought “creation units” of an ETF or existing units. As a result, the court found the group of investors harmed by an alleged misrepresentation in a fund’s prospectus could not be defined, and the class action couldn’t proceed.
While the draft CMA doesn’t specifically address the issue of civil liability for ETF investors, the government asked for input on whether there should be changes to deal with the implications of the court’s ruling.
The draft CMA is out for comment until Jan. 21, 2022, and the government pledged to consider feedback before deciding on next steps. Many of the task force’s recommendations were adopted quickly, and the government will have to plow ahead if it wants to adopt the proposed changes before the next provincial election, slated for June 2022.