Too much markets power

We said it before; we’ ll say it again. Canada’s business and legal communities should pay close attention to the Capital Markets Act ( CMA), the new cooperative securities legislation that has been proposed by the federal government and the governments of British Columbia, Ontario, New Brunswick, Saskatchewan, Prince Edward Island and the Yukon. The legislation, which was republished for comment last summer, not only raises virtually all the same issues as the first draft — among them an expansive array of new regulatory powers, prohibitions and regulatory red tape — it introduces some new ones, notably an inexplicable extended extraterritorial reach.

We are personally supportive of the concept of a single securities regulator for Canada, but it is hard to embrace legislation that, in the words of Professor Jeffrey MacIntosh writing in these pages in 2014, “reeks of unabashed opportunism”.

The move to a new regulatory model should not be used as an opportunity to introduce major substantive changes to Ontario securities law. That was the promise when this project began in 2009. But that promise was replaced by a plan to “modernize” the legislation, and, in the guise of modernization, the drafters went on a shopping spree, picking and choosing from among the various provincial acts the most expansive powers and the most encompassing prohibitions. To introduce substantive law changes of this magnitude, the participating jurisdictions should have followed the long- established consultation process of the Ontario Securities Commission and the Canadian Securities Administrators, where each change is identified, explained and justified. The consultative process for the CMA fell well short of this approach.

Many of our concerns flow from the initial decision made by the drafters of the legislation to model it on British Columbia rather than Ontario securities legislation. The Ontario Securities Act governs the largest portion by far of Canada’s capital markets, and Ontario has a vigorous and involved securities bar and investment community, both of which have contributed over the years to a robust dialogue on the evolution of securities legislation and have kept a check on the expansion- ist tendencies of legislative drafters.

The choice to model the CMA on the legislation of British Columbia, where the capital market comprises smaller issuers and which has historically faced very different securities regulatory issues than Ontario, is difficult to defend. By proceeding on the wrong foot from the outset, the drafters of the CMA will impose legislation on Canada’s key financial and capital markets that will be disruptive to well-established transaction mechanics and compliance practices and will impose significant costs on market participants to adapt to a new regime.

One of the most significant changes is the extension of the extraterritorial reach of Canadian securities law by: regulating sales of securities by Canadian issuers made entirely to foreign investors, adopting a British Columbia approach that is both dated and impractical and will be an impediment to Canadian issuers’ access to the United States and other international capital markets; extending the jurisdiction of the capital markets regulatory authority to Canadian entities listed only on foreign exchanges that have not sought and are not seeking to access Canadian capital markets; and applying the insider trading prohibitions extraterritorial-ly,, so that persons in a partici pating jurisdiction who trade in foreign securities listed outside Canada may contravene the CMA, even though the foreign entity has no connection to Canada and even though the conduct may be lawful in the foreign jurisdiction. This is a real risk in the insider trading area, where Canada’s laws are more stringent than those of the United States and many other jurisdictions.

This extraterritorial approach to regulation goes well beyond the stated purposes of the CMA: namely, to protect investors in Canada.

Additionally, the CMA gives sweeping powers to the cooperative regulator. Just one example — and there are many: the regulator can require directors, officers and control persons of an issuer to hand over anything in their possession or control that relates to the adminis- tration or enforcement of capital markets laws or the regulation of capital markets. This power extends not only to reporting issuers and market participants but to any person who has issued or proposes to issue securities, from the tiniest private entity to the largest publicly held one. The participating jurisdictions defended the power on the basis that it exists under the British Columbia Securities Act without explaining the policy rationale for its inclusion.

Two critical pieces of the cooperative regime have not yet been seen. The first is the nature of the interface with the non- participating jurisdictions. The quality of that interface is critical, and we would expect that a seamless interface will be a precondition to the implementation of the new regime. The second critical omission is the regulation of prospectus-exempt distributions. There are differences in the regulation of exempt offerings among the participating jurisdictions. Unifying these rules across the jurisdictions will be important to ensure the efficiency of the exempt market.

It is vital that the drafters of the CMA get it right the first time. Once the legislation has been passed by the participating jurisdictions, it will be exceedingly difficult to change. By proceeding on the wrong foot from the outset, the drafters of the CMA ended up in the wrong place. We would urge the participating jurisdictions to step back and rethink the wisdom of their approach. Even among those who have wholeheartedly endorsed a national, federal or cooperative securities regulator, the question is being asked: Is this too high a price to pay?

CAPITAL MARKETS ACT OVERREACHES IN CANADA AND EXTENDS EXTRATERRITORIALITY.