Too Many Changes, More Consultation Required: Comments on Proposed Cooperative Capital Markets Legislation

by Blake, Cassels & Graydon LLP

Comments on the consultation drafts of the uniform provincial capital markets legislation, Provincial Capital Markets Act (PCMA), and new federal capital markets legislation, Capital Markets Stability Act (CMSA), (Consultation Drafts) by capital markets stakeholders suggest that additional “robust” consultation is required for the PCMA and CMSA, particularly given the significant changes to securities and capital markets laws that such proposed legislation contemplates.

The PCMA and CMSA arise from the memorandum of agreement (Agreement) entered into by the Canadian government and the British Columbia, Ontario, Saskatchewan, New Brunswick and Prince Edward Island governments (Participating Provinces, and with the Canadian government, the Participating Jurisdictions) relating to the principal components of a proposed cooperative capital markets regulatory system (Cooperative System) and establishing a markets regulatory authority (Authority) under the Cooperative System.

Given the scope of the Consultation Drafts and comment letters, Blakes is publishing a number of bulletins reviewing issues raised by the comments received. This bulletin addresses comments on the consultation process and structure of the legislation. Other bulletins will address other issues, including those relating to the proposed CMSA and civil, regulatory and criminal liability and enforcement.

For more information on the Cooperative System, please see our various bulletins posted on our website.


A number of commenters indicated that further significant consultation on the PCMA and CMSA legislation would be appropriate. The comment period on the Consultation Drafts was 90 days, which was relatively short given the number of significant and substantive proposed changes to provincial securities legislation and the broad scope of the new proposed federal CMSA. One commenter noted that numerous changes were “buried in an avalanche of draft legislation in the context of a fundamental regime change.” Many commenters also noted that they were hindered in fully commenting on the Consultation Drafts, given the lack of both a clear exposition of the changes and rationales being provided for them. Many commenters noted the difficulty of commenting on the Consultation Drafts without also being able to review and comment on the initial regulations that would replace all existing national securities rules in the Participating Provinces. The Participating Jurisdictions announced that draft initial regulations were expected to be published for public comment in early spring 2015.


The most common comments related to the extent to which the Consultation Drafts include numerous and, in many cases, significant changes to existing securities legislation, especially that of Ontario. Many commenters argued that in order to facilitate the transition to the Cooperative System, the PCMA should be based on existing securities laws, in particular those of Ontario in which 80 per cent of Canadian capital markets activity takes place, and only introduce changes that are absolutely necessary to achieve the harmonization of securities laws across the Participating Provinces. The comments indicated that any substantive changes to securities laws should be addressed after the Cooperative System is established so that such changes may be fully considered within the proposed consultation and approval process for the Cooperative System.

Such commenters noted several provisions in the Consultation Drafts do not appear to be drawn from existing securities laws, such as a new “obstruction” offence. Commenters remarked there were many changes to the wording of important definitions, such as “misrepresentation,” which is a key concept for both prospectus and secondary market issuer and personal liability. It was noted that a change in the definition of “investment manager” would appear to significantly change the current regime in many provinces by requiring registration of investment fund managers in each province where there are investors. It was noted no rationale was provided for these and other changes. Inconsistencies in certain definitions between the PCMA and CMSA, including terms such as “security,” “trade,” “investment fund” and “underwriter,” were also noted.


A number of commenters acknowledged that a “platform approach” to regulation, which involves setting out certain fundamental provisions of capital markets law in the legislation while leaving most requirements and exceptions to be addressed in regulations, may be a necessary feature of the legislation given the difficulty of arranging for the amendment of the legislation by all Participating Provinces. Other commenters noted, however, the potential negatives associated with effectively removing responsibility and accountability from provincial legislatures for capital markets legislation.

Several commenters argued that certain fundamental provisions, including the 20 per cent take-over bid threshold, the two-day cooling-off period for a prospectus offering and marketing rights under a preliminary prospectus, should be set forth in the legislation as is currently the case in many provincial jurisdictions. In addition, several commenters argued that, in light of the platform approach, greater procedural protections are warranted, including removal of, or limitations on, exceptions in the PCMA from the requirement to publish proposed regulations in certain circumstances.


Commenters expressed concern with respect to the absence of provisions addressing the transition to the Cooperative System and the manner in which the Authority will interface with non-participating provinces. It was noted that, unless there was reciprocal recognition among participating and non-participating jurisdictions, such as through the current “passport” system, the system would in fact be less harmonized and more fractured than is currently the case. Commenters noted that a detailed interface mechanism addressing the interface should be made available for public comment.


Market participants are subject to several obligations under the PCMA, including record-keeping requirements and a duty to disclose such records to the Authority. In light of these significant obligations, commenters suggested that the expanded definition of “market participant” captures market actors who are not sufficiently connected to Canadian capital markets to justify such inclusion. For instance, some noted that the definition of market participant in the PCMA includes those exempted from the requirement to be registered under capital markets law, which would have the effect of including all private issuers and foreign issuers offering employee plans, among others, as market participants. In addition, some objected to the inclusion of “control persons” as market participants given that control persons are often simply passive investors, and as such do not have duties to other shareholders.


A number of commenters expressed concern about the costs of establishing and administering the new regime, noting that it is contemplated that all of the existing staff of the commissions of Participating Provinces will join the Authority, and that under both the proposed PCMA and CMSA the Authority will take on significant new responsibilities. Commenters requested information on who would bear such costs and how such costs will compare to costs under the existing framework.


Commenters noted that the draft legislation establishing the Authority has not been released.

Commenters noted that the Agreement was unclear as to whether the Participating Provinces were agreeing not to enact any securities legislation beyond the PCMA. It was also noted that, while federal government approval is potentially required for changes to the provincial PCMA, the Agreement does not provide for Participating Provinces to approve changes to the CMSA. As well, certain commenters noted that any two of British Columbia, Ontario and the federal government can reject regulations made under the PCMA or CMSA, even if approved by a majority of Participating Provinces, which takes on added significance given the use of the “platform” approach where most of the requirements will be contained in regulations. It was also noted that, although the governing board of directors of the Authority is to be “independent,” there was no definition of that term provided in the Agreement.

Commenters also noted that the addition to the Agreement providing for exceptions from the regime for “specific economic initiatives” for Participating Provinces left open many questions, such as how such initiatives will be balanced relative to the grounds for which the Authority can refuse to approve such exceptions.


The PCMA provides the chief regulator with very broad powers to require a “recognized entity”—including self-regulatory organizations, exchanges, clearing agencies and auditor oversight organizations—to provide the Authority with any information, record or thing in its possession or under its control relating to the administration or enforcement of capital markets law or the regulation of the capital markets. Several commenters considered this power overbroad, in particular expressing concern that the provision does not contain an explicit exception for information subject to solicitor-client privilege. Certain commenters also emphasized the importance of protecting the privilege associated with information received by the Canadian Public Accountability Board from audit firms in the context of audits.


Several comment letters focused on changes in the PCMA relating to a specific exemption from the definition of “security,” which is currently found in provincial securities legislation relating to life insurance contracts that are commonly known as “individual variable insurance contracts” (IVICs). The PCMA provides that IVICs are exempt “unless otherwise provided by the regulations,” which commenters argued creates undue confusion and uncertainty with respect to the regulation of IVICs.


There has been no response as of yet from the Participating Jurisdictions as to how the comments will be addressed, whether in the form of revised draft legislation or an enhanced consultation process. As noted, the Participating Jurisdictions have announced draft regulations will be released for comment in early spring 2015.

Given the scope of the proposed PCMA and CMSA, the number of changes from existing legislation, and the number and breadth of comments on these, readers are cautioned that our bulletins may not summarize all matters that may be of interest or concern to them. Readers are encouraged to review the comments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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