Ontario securities taskforce seeks feedback on modernization report

The Ontario government’s Capital Markets Modernization Taskforce* (the “Taskforce”) is seeking public feedback on the 47 initial, preliminary policy proposals it has outlined in its widely anticipated consultation report [PDF], published on July 9, 2020. The proposals reflect the initial views of the Taskforce members, who have been charged with making recommendations to the Province’s Minister of Finance. If adopted by the Ontario government, some of the Taskforce’s proposals could significantly alter the framework and substance of capital markets regulation in the province.

The initial proposals were prepared by the Taskforce following preliminary consultations with 110 stakeholders, including industry associations, capital markets regulators, public companies, and investor advocacy groups.  The proposals address a wide range of capital markets issues largely covering the province’s regulatory framework, duplicative regulatory burden, market competitiveness for large and small market participants, enforcement, corporate governance and investor protection.

Prior to releasing the report, the Taskforce identified over 70 recommendations, though selected only the “most high-impact policy proposals” to be put forward for public consultation.

Highlights from these proposals are outlined below.

About the Taskforce

The five-member Taskforce was appointed by the Ontario government in February 2020 with a mandate to review, modernize and streamline Ontario’s securities legislation. The members consist of Rupert Duchesne, Former CEO and Director of Aimia, Wesley J. Hall, Founder and Executive Chair of Kingsdale Advisors, Melissa Kennedy, Executive Vice President, Chief Legal Officer and Public Affairs of Sun Life Financial, Cindy Tripp, Founding Partner, former Managing Director, Co-Head Institutional Trading of GMP Securities L.P., and the Taskforce chair, Canadian Chair of Norton Rose Fulbright, Walied Soliman (the “Taskforce Chair”). The breadth and focus of the preliminary recommendations somewhat reflect the diverse backgrounds of the Taskforce members: two lawyers (one in industry and the other with a large international firm), the founder of one of Canada’s largest shareholder advisory firms, an institutional trader and co-founder of a non-bank owned investment banking firm and a former CEO of a public company. In addition, the Taskforce was supported by a 12-person advisory panel of experts who will continue to support the Taskforce through its review process.

By its terms, the Ontario Securities Act requires the Minister of Finance to appoint an advisory committee to conduct this form of review every five years. However, the release of the Crawford Report in March 2003 marked the last time that Ontario’s securities legislation underwent substantial scrutiny. As stated by the Taskforce Chair, through this review the Taskforce aims to satisfy its mandate by producing “bold, innovative recommendations that are not just solving yesterday’s issues but are transformative and forward looking.”

Improving the regulatory structure to foster growth and innovation

Underscoring the role played by the Ontario Securities Commission (the “OSC”) in stimulating Ontario’s economic growth, the Taskforce proposed expanding the OSC’s mandate to include “fostering capital formation and competition in the markets.” This new public policy imperative would build upon the existing OSC mandates and would align with similar directives held by certain foreign securities regulators, including the U.K. Financial Conduct Authority.

The Taskforce also proposed separating the OSC’s regulatory and adjudicative functions to create a bifurcated model that “aligns with proper corporate governance practice”. Whether this would be achieved by carving out a separate tribunal within the OSC’s current structure or by forming a completely independent entity, the Taskforce suggests that a Chief Adjudicator would be appointed to oversee the tribunal’s adjudicative responsibilities.

Continuing to reduce regulatory burden

In coordination with the Ontario government, the OSC established a Burden Reduction Task Force in November 2018 to investigate ways to reduce regulatory burden and to enhance the competitiveness of Ontario businesses. The Taskforce has encouraged continued efforts to reduce regulatory burden and certain proposals in the report complement that effort. For example, the Taskforce has advocated for a single self-regulatory organization (“SRO”) to oversee both investment and mutual fund dealers. This proposal aims to reduce complexity for investment dealers who are currently subject to dual regulation by the Investment Industry Regulatory Organization and the Mutual Fund Dealers Association of Canada.  

Additionally, the Taskforce recommends streamlining form requirements for continuous disclosure documents such as the Annual Information Form, Management’s Discussion & Analysis (“MD&A”) and financial statements, and continuing to press ahead with the OSC’s existing consultation to move to an “access equals delivery” model.

Finally, considering the significant resources required to produce quarterly financial statements and MD&A, the Taskforce has proposed providing issuers with the option to file semi-annual reporting.

Levelling the playing field for small market participants

The Taskforce also tabled initiatives which it suggests would reduce barriers to competition for smaller market participants. One proposal is to increase access to shelf distribution channels for independent, non-proprietary products.  The initiative would require bank-owned dealers to report on their offerings and provide “a detailed rationale when independent products are not added to their open shelves”. In addition, the report has proposed to regulate and restrict tied selling activities involving investment banks and their lending activities.

Modernizing corporate governance and M&A transactions

On issues related to corporate governance and M&A transactions, the modernization report places a particular focus on the current proxy and shareholder voting system. However, the Taskforce also included proposals to:

  • improve corporate board diversity for TSX-listed issuers;
  • codify the best practices for independent committees (currently described in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions);
  • decrease the ownership threshold for early warning reporting disclosure to 5 per cent (consistent with foreign jurisdictions such as the U.S. and U.K.); and
  • broaden the OSC’s remedial toolkit in relation to M&A related matters.

Reforming enforcement and enhancing investor protection

The Taskforce concluded the report by presenting 12 recommendations on changes to enforcement, along with two recommendations to support enhanced investor protection. The recommendations are a mix of proposed enhanced tools for OSC staff, meant to strengthen its ability to better police the capital markets and promote fairness to potential proceeding respondents, both in substance and process. Notably, the Taskforce proposed increasing the maximum administrative penalty to $5 million out of concern that, for some firms, the current $1 million penalty may be an acceptable cost of doing business. Another highlight was the Taskforce’s recommendation to implement a procedural change which would require the OSC staff to discuss its statement of allegations and potential resolution with respondents at least three weeks prior to initiating administrative enforcement proceedings.

Participating going forward

Stakeholders wishing to participate in the consultation process are invited to submit comments to the Taskforce until September 7, 2020. Feedback should be provided electronically by emailing written comments to CMM.Taskforce@ontario.ca. The Taskforce has committed to delivering the final report containing its recommendations to Ontario’s Minister of Finance by year-end.

*One of the authors, Lawrence Ritchie, is a member of the advisory committee of experts to the Taskforce.

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Editors

Lawrence E. Ritchie

Partner, Litigation

Alexander Cobb

Partner, Litigation

Shawn Irving

Partner, Litigation

Kevin O’Brien

Partner, Litigation

Lauren Tomasich

Partner, Litigation

Malcolm Aboud

Associate, Litigation