NATIONAL CAPITAL MARKETS POLICY MAKING IN CANADA 1st Annual Securities Law Symposium Association of Corporate Counsel Lawrence E. Ritchie October 1, 2014.

1

NATIONAL CAPITAL MARKETS POLICY MAKING IN CANADA

1st Annual Securities Law SymposiumAssociation of Corporate CounselLawrence E. RitchieOctober 1, 2014Osler, Hoskin & Harcourt LLP

2

Legislators and Governments

Courts

Securities Regulators

Stock Exchanges and

Self-Regulatory Organizations

Laws and Regulations

Interpretative Principles of

Common Law

Rules, National and Multi Lateral

Instruments and Policy Statements

Rules and Conditions of

Membership or Participation

Where Does Regulation Come From?

Interpretations of “Public Interest”

The current Canadian legal and regulatory framework reflects our Federal System

• 13 securities regulators accountable to 13 governments

• Partially harmonized securities statutes and approaches to regulation

• Different strategic directions and priorities

• Cooperation through the Canadian Securities Administrators, but no national accountability

• Not able to easily and effectively address rapidly changing environment

3

Canadian Securities Administrators

Chair, Vice-Chair and Secretariat

Manitoba Securities

Commission

Autorité des marchés financiers

British Colombia Securities

Commission

Financial and Consumer Affairs

Authority of Saskatchewan

Nunavut Securities Office

PEI Office of Superintendent of

Securities

Nova Scotia Securities

Commission

Newfoundland Office of the

Superintendant of Securities &

Financial Services Regulation Division

Alberta Securities Commission

Ontario Securities Commission

Office of Superintendent of Securities, Yukon

Northwest Territories

Securities Office

New Brunswick Financial and

Consumer Services

Commission

The current Canadian Capital markets regulatory framework “co-ordinated” by the CSA

4

Passport System

• MI 11-102 – Passport System was adopted by the ‘passport jurisdictions’ in 2008 (being all the provinces and territories except ON) pursuant to a 2004 memorandum of understanding among the passport jurisdictions with a goal to “move ahead with a passport system for an improved securities regulatory framework, to develop highly harmonized securities laws..., and to explore further options to consolidate and/or strengthen coordination and consistency of securities laws among provinces and territories...”.

• Basics: prospectus materials, a request for exemptive relief, or a submission to become a registrant is reviewed by the principal regulator (so for a BC company, the BCSC etc). There is a deemed receipt, a deemed decision, or a deemed registration from the non principal regulators once a receipt is issued, a decision made, or a firm or individual registered by the principal regulator.

• According to 11-102CP – Passport System, the passport system “gives each market participant a single window of access to the capital markets in multiple jurisdictions.” The single window of access being the market participant’s principal regulator.

5

Autorité des marchés financiers

Canadian Securities Administrators

Chair, Vice-Chair and Secretariat

Manitoba Securities

Commission

British Colombia Securities

Commission

Financial and Consumer Affairs

Authority of Saskatchewan

Nunavut Securities Office

PEI Office of Superintendent of

Securities

Nova Scotia Securities

Commission

Newfoundland Office of the

Superintendant of Securities &

Financial Services Regulation Division

Alberta Securities Commission

Ontario Securities Commission

Office of Superintendent of Securities, Yukon

Northwest Territories

Securities Office

New Brunswick Financial and

Consumer Services

Commission

The Passport System

6

Non-harmonization of securities legislation

• As of 2012:– Approximately 120 carve-outs in the National

Instruments– 3 Multilateral Instruments– More than 800 local rules

7

Continued Disharmony

• Proposed Amendments to NI 58-101 Disclosure of Corporate Governance Practices

• OSC Staff Notice 15-702 Revised Credit for Cooperation Program• Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-

Counter Markets• Proposed Multilateral Instrument 45-107 Listing Representation and

Statutory Right of Action Disclosure Exemptions• Proposed OSC Rule 24-503 Clearing Agency Requirements and Related

Companion Policy• Proposed New Crowdfunding Exemptions• Proposed Changes to Prospectus Exemptions

8

The Ontario enforcement “mosaic””

9

“As an investment banker and a securities regulator, I’ve seen the inefficiency that flows from our current system of each of our 13 provinces and territories having its own securities commission. It leads to not only inefficiency, but it leads to an impact on enforcement and on the oversight of systemic risk.”

Honourable Joe OliverMinister of Finance, Canada

(Globe & Mail, April 23, 2014)

10

11

If only we could have a SINGLE regulator ….

• One statute and approach to regulation

• One board of directors and executive team

• One strategic direction and set of priorities

• One voice internationally

• Integrated, empowered local offices applying national standards

• Designed to address rapidly changing environment

12

History - Recommendations for Change

• Royal Commission on Price Spreads• Proposes federal “Investment Securities Board’1935

• Royal Commission on Banking and Finance• Proposes cooperative regulatory body 1964

• Ontario Securities Commission• Proposes joint body called “CANSEC”1967

• Federal government• Proposals for a Securities Market Law for Canada1979

• Federal draft MOU• Proposes “Canadian Securities Commission” 1994

• Wise Persons’ Committee• Proposes comprehensive federal securities legislation2003

• Crawford Panel (Ontario)• Proposes a common regulator & common securities law2006

13

Path to a Cooperative System

• Expert Panel on Securities Regulation• Proposes “Canadian Securities Commission” and a Path to get there (“Transition

Office” established2009• Proposed Federal Securities Act tabled in ParliamentMay 2010• Transition Plan

• Vision and process for Canadian Securities Regulatory AuthorityJuly 2010• Supreme Court Reference hearing on proposed act

• All provinces but Ontario argue it would be unconstitutionalApril 2011• Supreme Court opinion on proposed act

• Not within Parliament’s jurisdiction as currently drafted• Both levels have authority; cooperative approach available Dec 2011

Proposed Canadian Securities Act (2010)

Comprehensive securities legislation covering

All matters currently included in provincial securities laws

Derivatives (both exchange-traded and over-the-counter)

Systemic risk Criminal offences related to capital markets

14

The Question: “Is the proposed Canadian Securities Act within the

legislative authority of the Parliament of Canada?”

Argument’s Focus: General branch of the trade and commerce power

The answer: No The Securities Act as presently drafted is not valid under the

general branch of the federal power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867.

15

Supreme Court Reference (2011)

“In sum, the proposed Act overreaches genuine national concerns.

“While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry which is the ultimate consequence of the proposed federal legislation.”

16

Supreme Court — Overreach

Supreme Court — Federal Jurisdiction

Areas of federal jurisdiction: Fair, efficient and competitive markets (para. 117) The integrity and stability of Canada’s financial

system (para. 123) National data collection (para. 121) Prevention of and response to systemic risks

(para. 128) Other matters that are “genuinely national in

scope and qualitatively distinct from those falling under provincial heads of power.” (para. 70)

17

Supreme Court — Provincial Jurisdiction

Areas of provincial jurisdiction: Investor protection (para. 128) Trades or occupations within a province (para.

117) Local markets (para. 115) Day-to-day, routine and/or administrative

aspects (para. 125)

18

Supreme Court — Cooperative Approach

“It is open to the federal government and the provinces to exercise their respective powers over securities harmoniously, in the spirit of cooperative federalism.

“The experience of other federations in the field of securities regulation, while a function of their own constitutional requirements, suggests that a cooperative approach might usefully be explored, should our legislators so choose, to ensure that each level of government properly discharges its responsibility to the public in a coordinated fashion.”

(para 9)

19

20

Path to a Cooperative System

• Government reiterates cooperative proposal• Announces plan for federal-only initiative if no timely

agreement

Mar 2012

Mar 2013

• Government proposes cooperative approach•Consulting interested provinces and territories

21

• Agreement in Principle for cooperative system• British Columbia, Ontario & Canada• Others invited to join

Sep 2013

• Amended Agreement in Principle for cooperative system• Saskatchewan and New Brunswick join

July 2014

22

Proposed Cooperative Capital Markets Regulator

Administering both federal and provincial legislation and a single set of regulations

Operationally independent

Self funded through a single set of fees

Directed by an expert board of independent directors

Overseen by a Council of Ministers

23

Structure of Regulator

Executive head office in Toronto

Regulatory office in each participating jurisdiction

Nationally integrated executive management team

Effective leadership and international voice

Adjudicative tribunal with capital markets expertise

Responsive to investors, regions and market sectors

Structure of Regulator

Board of Directors

Regulatory Division Chief Regulator

Deputy Chief Regulators

Adjudicative Division Chief Adjudicator

Associate Chief Adjudicators

25

A uniform act adopted by each participating province and territory • addresses all areas currently addressed by

provincial and territorial securities legislation

A complementary federal act • applies throughout Canada• addresses criminal matters and matters

relating to systemic risk

Proposed Cooperative Legislation

26

Consultation Draft: Provincial Capital Markets Act

•Consultation draft released on September 8, 2014

• Comment period ends November 7, 2014

•Notable Features:– Intended to promote flexibility in responding to market developments

• Leaves detailed requirements to regulations

– Consolidation and enhancement of enforcement tools under the Authority

27

Provincial Capital Markets Act: Structure

• Part 1 Interpretation• Part 2 Recognized Entities• Part 3 Designated Entities and Other Market Participants• Part 4 Registration• Part 5 Prospectus Requirements• Part 6 Trading in Derivatives• Part 7 Disclosure and Proxies• Part 8 Take-Over Bids and Issuer Bids• Part 9 Market Conduct• Part 10 Orders, Reviews and Appeals• Part 11 Administration and Enforcement• Part 12 Civil Liability• Part 13 Civil Liability for Secondary Market Disclosure• Part 14 General• Part 15 Regulations, Forms and Policies

28

Provincial Capital Markets Act:Designation Order

• Additional regulatory tool in addition to “recognition” or “registration”

• Allows certain entities to apply for a designation order to be designated as a trade repository, credit rating organization, investor compensation fund, dispute resolution service, information processor or marketplace

• This designation will be required for certain market activities – e.g., in connection with issuing a credit rating

• Designated entities are not required to regulate their members or participants, but it is expected that the Authority will impose requirements through designation orders and the regulations

29

Provincial Capital Markets Act:Takeover Bids

• Will be dealt with in the regulations

• Harmonizes Ontario’s regime with the other CSA jurisdictions

30

Provincial Capital Markets Act:Derivatives Regulation

• “Derivatives” broadly defined to allow for a flexible regulatory framework

• Not all derivatives and derivatives trading is regulated

• Certain derivatives will fall within the definition of “security”; others will not

31

Provincial Capital Markets Act:Civil Liability

• Reverses the burden of defence for certain defences in primary market actions, including the reasonable investigation defence

• Civil right of action for insider trading and related offences

32

Provincial Capital Markets Act:Auditor Oversight Organizations

• Provisions are similar to current BC, Sask and NB legislation

• Anticipated that Ontario would repeal the Canadian Public Accountability Board Act (Ontario), 2006

• Decisions of auditor oversight organizations are subject to review by the Tribunal

33

Provincial Capital Markets Act: Strengthening Enforcement

• Common database will contain information from surveillance, complaints, reviews and investigations

• Facilitate better cooperation with law enforcement agencies and other regulatory authorities

• Enhanced powers to obtain production orders and compel records and information from market participants

• Relaxes Ontario’s confidentiality requirement for compelled evidence and instead permits the Chief Regulator to prohibit the communication of information related to the investigation for a specified period

34

Provincial Capital Markets Act:Whistleblower Protection

• Prohibits employers from retaliating against employees for providing information to the Authority, testifying in a related proceeding or expressing an intention to do so

35

Consultation Draft: Federal Capital Markets Stability Act

• Consultation draft released September 8, 2014

• Comment period ends November 7, 2014

• Notable Features:– Enhanced powers for data collection

• To be prescribed in regulations

– Regulation of market infrastructure entities, credit rating organizations, and intermediaries

– Intended to monitors and address systemic risks

36

Capital Markets Stability Act:Approach

• National data collection powers to monitor activity in capital markets and detect and mitigate systemic risks

– Regulations regarding information collection and retention

– Coordinate data collection with other regulatory authorities

• Empowering the Authority to take decisive action across Canada to address threats to financial stability

• Cooperate with coordinate with other regulatory authorities to reduce the burden on market participants

37

Capital Markets Stability Act:Addressing Systemic Risk

• Allows Authority to designate market entities – e.g., trading facilities, clearing houses, intermediaries, etc. – as systemically important market infrastructure entities

• Allows Authority to designate products and practices as systemically risky

• Thereafter empowered to make regulations and, in certain cases, orders, to address the systemic risk posed by the entity, product or practice

38

Capital Markets Stability Act:Addressing Systemic Risk

• Empowers Authority to make a temporary order of national application to prohibit a practice or activity, suspend or restrict trading in a security or derivative, or suspend or restrict trading on a trading facility.

• Subject to the oversight of the Minister of Finance of Canada

39

Target Milestones

•Draft initial regulations•Publish for commentDecember 19 2014

•Enact cooperative legislation• Uniform provincial/territorial legislation by each province/territory• Complementary federal legislation by Parliament

June 30 2015

•Capital Markets Regulator•Target launch date

Fall 2015

Ongoing Debate

Quebec has indicated an intention to challenge the proposed legislation.

Alberta has announced its own proposed model for securities regulatory reform which would retain provincial commissions and agencies.

“Today’s announcement confirms our long-standing fear that Ottawa will proceed with changes to Canada’s securities regulation system without the support of two of its largest markets, Alberta and Quebec. This will leave Canada with a more fractured system than the one we have today.”

Honourable Doug Horner Minister of Finance, Alberta

Statement on National Common Securities Regulator, July 9, 2014

40

Reason for Optimism?

• Proposed New Rules for Hostile Takeover Defences– CSA Notice 62-306

• Announced September 11, 2014

– Harmonized Proposal• Eliminates competing AMF proposal

– Notable Features:• 50% Minimum Tender Condition• 10 Day Automatic Extension• 120 Day Bid Period

41