Proposed capital markets act allows legislation by regulatory fiat, lacks consultation

The business and legal community should be paying close attention to the controversial Provincial Capital Markets Act (PCMA), legislation proposed under the memorandum of agreement between the provinces of British Columbia, Ontario, New Brunswick, Saskatchewan and Prince Edward Island and the Minister of Finance (Canada) regarding the creation of a Cooperative Capital Markets Regulatory System. The legislation introduces significant substantive law changes without meaningful consultation and adopts a "platform approach" that allows for legislation by regulatory fiat.

The achievement of consensus among the participating provinces is a great accomplishment. That said, we have an overarching concern that makes it difficult to support this legislation. Our concern is with the extent to which the PCMA introduces significant substantive changes to Ontario law and the absence of a meaningful consultation process.

These changes include:

  • change to the long-standing and widely used definition of "misrepresentation";
  • the broadening of the insider trading prohibition to include conduct that stops short of a sale of a security and to include transactions in securities of non-reporting companies;
  • change to the exception to the tipping prohibition;
  • introduction of a novel fiduciary relationship between underwriters and their clients;
  • unprecedented regulation of shareholders holding 20% or more of a public company as if they were "market participants"; and
  • introduction of a novel "obstruction" prohibition prohibiting the withholding of information from the regulatory authority and potentially intruding on the solicitor/client relationship.

As a general principle, the introduction of the PCMA should not be used as an opportunity to introduce major substantive changes to securities law unless the adoption of these changes is preceded by a thorough public consultation and study of the changes. The long-established process of the Ontario Securities Commission and the Canadian Securities Administrators in this regard ought to be followed here. If that process were followed, each change would be identified in a request for comments, and its implications explained and the necessity justified. Comment would be sought from the broad community in a process that is often iterative and sometimes extends for months or years.

Here, the changes are buried in an avalanche of draft legislation in the context of a fundamental regime change, without the benefit of any justification for the change or any explanation as to its expected or intended implications.

We recognize that the PCMA is not based on the Ontario Securities Act (a decision we question given that this Act governs the largest portion of Canada's capital market), and that it reflects various elements of the provincial securities acts. Nonetheless, we believe it is incumbent on the Province of Ontario to identify, in the manner described above, the changes against the Ontario legislative base line and to ensure a robust consultation process.

We are also concerned about the extent to which the PCMA takes a platform approach to legislation. Not only are entire areas of the law proposed to be addressed in regulations, but the legislation omits a number of well-established elements of securities law. We believe that fundamental established elements of the existing law should be enshrined in the legislation itself. The commentary accompanying the release of the draft legislation noted that the platform approach was intended to promote "regulatory flexibility allowing the Authority to respond to market developments in a timely manner".

Originally published in National Post, FP Comment

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