Five year review committee final report reviewing the Securities Act (Ontario)

APPENDICES

Appendix A Glossary

1934 Act-the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq.

1990 Proposals-the set of proposals entitled Proposals for Amendments to the Securities Act (Ontario) in the Areas of Investigations, Enforcement and Remedies, (1990) 13 OSCB 405.

1994 Amendments-the Securities Amendment Act, 1994, S.O., c. 11, which gave the Ontario Securities Commission rulemaking power.

2002 Amendments-the Keeping the Promise for a Strong Economy Act (Budget Measures), 2002 (formerly Bill 198).

Act-the Securities Act (Ontario), R.S.O. 1990, c.S.5.

AcSB-the Canadian Accounting Standards Board.

AIF-annual information form.

Alberta Act-the Securities Act (Alberta), R.S.A. 2000, c. S-4.

Allen Committee-The Toronto Stock Exchange Committee on Corporate Disclosure established in June 1994 to review and comment on the adequacy of continuous disclosure by public companies in Canada and to determine whether additional remedies should be available to injured investors or regulators if companies fail to comply with the rules.

Allen Report-the report issued in March 1997 by The Toronto Stock Exchange on Corporate Disclosure entitled Responsible Corporate Disclosure, A Search for Balance.

Analysts Standards Committee-the Securities Industry Committee on Analysts Standards formed in 1999 by the IDA, TSX and TSX Venture Exchange.

AcSOC-the Accounting Standards Oversight Council.

ATS-alternative trading system.

Bank Act-the Bank Act, S.C. 1990, c. 46.

BCSC-the British Columbia Securities Commission.

Blue Ribbon Committee-the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees sponsored by the NYSE and the NASD at the request of the SEC.

British Columbia Act-the Securities Act (British Columbia), R.S.B.C. 1996, c. 418.

Bulletin-the Ontario Securities Commission Bulletin.

CBCA-the Canada Business Corporations Act, R.S.C. 1985, c. C-44.

CBO-the Canadian Banking Ombudsman.

CDN-the Canadian Dealing Network.

CDNX-the Canadian Venture Exchange Inc.

CD Team-the Continuous Disclosure Team of the Ontario Securities Commission.

CEO-chief executive officer.

CFO-chief financial officer.

CICA-the Canadian Institute of Chartered Accountants.

Civil Liability Amendments-the draft amendments published by the CSA proposing a statutory civil liability regime in CSA Notice 53-302 - Proposal for a Statutory Civil Remedy for Investors in the Secondary Market and Response to the Proposed Change to the Definitions of 'Material Fact' and 'Material Change' ((2000), 23 OSCB 7383).

Commission-the Ontario Securities Commission.

Committee-the Five Year Review Committee.

CSA-the Canadian Securities Administrators.

CUB-the Canadian Unlisted Board.

CVMQ-the Commission des valeurs mobilières du Québec.

Daniels Committee-the Joint Task Force on Securities Regulation established by the Ministry of Finance and the Ontario Securities Commission in October 1993 to review and make recommendations regarding the legislative framework for the development of securities policy in Ontario.

Daniels Report-the report by the Task Force on Securities Regulation, Responsibility and Responsiveness - Final Report of the Ontario Task Force on Securities Regulation (1994), 17 OSCB 3208.

Dey Committee-the TSE Committee on Corporate Governance in Canada established in September 1993 to conduct a study of corporate governance in Canada and to make recommendations to improve the manner in which Canadian corporations are governed.

Dey Report-the report issued by the Dey Committee in 1994 entitled Where Were the Directors? Guidelines for Improved Corporate Governance.

ECA-the Electronic Commerce Act, 2000 (Ontario), S.O. 2000, c. 17.

FCAC Act-the Financial Consumer Agency of Canada Act, S.C. 2001, c. 9.

FSA-the Financial Services Authority of the U.K..

FSCO-the Financial Services Commission of Ontario.

GAAP-generally accepted accounting principles.

G-7-the group of seven countries consisting of the U.S., Japan, Germany, France, Italy, Britain and Canada.

IAS-international accounting standards promulgated by IASC.

IASC-the International Accounting Standards Committee.

IDA-the Investment Dealers Association of Canada.

IDS-the Integrated Disclosure System.

IFAC-the International Federation of Accountants.

IFIC-the Investment Funds Institute of Canada.

Insurance Act-the Insurance Act, R.S.O. 1990, c. I.8.

IOSCO-the International Organization of Securities Commissions.

Joint Forum-the Joint Forum of Financial Market Regulators which was established by the CSA, Canadian Council of Insurance Regulators and Canadian Association of Pension Supervisory Authorities and is made up of representatives of those organizations. Its goal is to co-ordinate and streamline the regulation of financial products and services across Canada.

Joint Forum Task Force on Dispute Resolution-the Task Force on Dispute Resolution created by the Joint Forum of Financial Market Regulators in Canada.

Kimber Report-the Report of the Attorney General's Committee on Securities Legislation in Ontario (Ontario: Queen's Printer, 1965).

LSUC-the Law Society of Upper Canada.

MFDA-the Mutual Fund Dealers Association.

MJDS-Multi-Jurisdictional Disclosure System.

MD&A-Management's Discussion and Analysis.

NASD-the National Association of Securities Dealers.

NASDAQ-the National Association of Securities Dealers Automated Quotations system.

NRD-National Registration Database.

NYSE-the New York Stock Exchange.

OBCA-the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.

OSFI-the Office of the Superintendent of Financial Institutions.

QTRS-a Quotation and Trade Reporting System.

Quebec Act-the Securities Act (Quebec), R.S.Q. c. V-1.1.

Reformulation Project-the process began in 1994 by the Ontario Securities Commission to review all of its existing policy statements, notices and blanket rulings in order to either reformulate them as rules, policies or staff notices or eliminate them.

RS Inc.-Market Regulation Services Inc.

Saskatchewan Act-the Securities Act (Saskatchewan), R.S.S. 1988-89, c. S-42.2.

Saucier Committee-the Joint Committee on Corporate Governance sponsored in July 2000 by the TSX, TSX Venture Exchange and CICA, and chaired by Guylaine Saucier.

Saucier Report-the Final Report of the Joint Committee on Corporate Governance: Beyond Compliance: Building a Governance Culture (November 2001).

SEC-the U.S. Securities and Exchange Commission.

SEDAR-System for Electronic Document Analysis and Retrieval.

SEDI-System for Electronic Disclosure by Insiders.

SRO-self-regulatory organization.

TSE-The Toronto Stock Exchange (now known as the 'TSX').

TSX-The Toronto Stock Exchange (formerly referred to as the 'TSE').

TSX Guidelines-the guidelines in section 474 of the TSX Company Manual for Effective Corporate Governance.

TSX Venture Exchange-the TSX Venture Exchange and its predecessor, the Canadian Venture Exchange, or 'CDNX.'

UCC-the Uniform Commercial Code.

Wallman Report-the Report of the Advisory Committee on the Capital Formation and Regulatory Processes dated July 24, 1996.

Zimmerman Committee-the committee of the Investment Dealers Association of Canada established in 1996 to review take-over and issuer bid time limits.

Appendix B List of Commenters on Draft Report

Robert E. Lamoureux, PricewaterhouseCoopers
Michael Mackenzie
Power Corporation of Canada
Ontario Association of Unlisted Reporting Issuers (OAURI)
Patricia Cosgrove
Certified General Accountants of Ontario (CGA - Ontario)
Resolution Capital Inc.
FundSERV Inc.
Independent Financial Brokers of Canada (IFBC/CISFC)
Association for Investment Management and Research (AIMR)
New Democratic Party of Ontario
Small Investor Protection Association (SIPA)
Canadian Association of Insurance and Financial Advisors (CAIFA)
Fasken Martineau DuMoulin LLP
Robert Kyle
The Investment Funds Institute of Canada (IFIC)
Lawrence P. Schwartz
Ontario Teachers' Pension Plan
Canadian Investor Relations Institute (CIRI)
The Canadian Institute of Chartered Accountants (CICA)
Ken Kivenko
PricewaterhouseCoopers LLP
Nicholas LePan
Investment Counsel Association of Canada (ICAC)
Ogilvy Renault
Simon Romano (Stikeman Elliott)
BMO Nesbitt Burns
Canadian Bankers Association (CBA)
Office of the Superintendent of Financial Institutions Canada
Certified General Accountants Association of Canada (CGA)
Nova Scotia Securities Commission (NSSC)
Royal Bank of Canada
TSX Venture Exchange
Investment Dealers Association of Canada (IDA)
Gowling Lafleur Henderson LLP (Gowlings)
CBAO Securities Law Subcommittee
TSX
Davies Ward Phillips & Vineberg LLP
BCSC
Torys LLP
British Columbia Minister of Competition, Science & Enterprise
Canadian Capital Markets Association
Joint letter of Investment Dealers Association, Mutual Fund Dealers Association and RS Inc.

In addition, two comment letters were filed on a confidential basis.

Appendix C Issues List

Five-Year Review Of Securities Legislation In Ontario -Securities Review Advisory Committee's Request For Comments

Introduction:

The Securities Act (Ontario) (the 'Act') provides that, every five years, the Minister of Finance will appoint an advisory committee to review the legislation, regulations and rules relating to matters dealt with by the Ontario Securities Commission ('OSC' or the 'Commission') and the legislative needs of the Commission. Finance Minister Ernie Eves has established the first such committee (the 'Securities Review Advisory Committee' or the 'Committee') to conduct this review. Minister Eves has directed the Committee, in discharging its mandate, to ensure that securities legislation in Ontario is up-to-date and that it properly enables the Commission to proactively enforce clear standards to protect investors and foster a fair and efficient marketplace. The full text of Finance Minister Eves' press release announcing the formation of the Committee is contained at Appendix 1 to this Request for Comments.

The Chair of the Committee is Purdy Crawford Q.C., counsel to Osler, Hoskin & Harcourt LLP. Other members of the Committee are Carol Hansell, partner with Davies, Ward & Beck; William Riedl, president and CEO of Fairvest Securities Corporation; Helen Sinclair, CEO of BankWorks Trading Inc; David Wilson co-chairman and co-CEO at Scotia Capital; and Susan Wolburgh Jenah, Commission general counsel. The Committee has retained Anita Anand, Assistant Professor, Faculty of Law, Queen's University and Janet Salter, lawyer with Osler, Hoskin & Harcourt LLP to assist the Committee in its review. They will be assisted by Rossana Di Lieto, Legal Counsel, Commission.

Request for Comments:

The Committee is seeking input from market participants in connection with its review of the legislation, regulations and rules relating to matters dealt with by the Commission. To stimulate input, the Committee has prepared an illustrative set of questions (the 'Issues List') which it proposes to consider. The Issues List is published in the April 28, 2000 edition of the Ontario Securities Commission Bulletin and can be accessed at the Commission's website at www.osc.gov.on.ca.

The Issues List is intended as a catalyst for discussion only. Commenters are welcome to raise other matters that they believe fall within the Committee's mandate to consider. The Committee recognizes that certain matters may currently be under consideration by regulators or other entities but welcomes input on such matters as well.

By its very nature, the Issues List might give the impression that the Committee intends to recommend a more complex and comprehensive regulatory regime than currently exists. This is not the intention of the Committee. The Committee believes that it is necessary to find compelling public policy grounds to justify regulation. The Committee believes that where regulation is necessary, in many instances, self-regulation is desirable.

Draft Report:

The Committee proposes to prepare a report outlining the results of its consultation process and its recommendations. The report will be based in part on matters raised in the Issues List, but the Committee is not bound to address all items raised on the List, and may address other matters raised by commenters. The Committee will first publish the report in draft for comment.

Comments:

Interested parties are invited to make written submissions with respect to the Issues List or other matters which commenters wish to raise. Submissions received by June 9, 2000 will be considered by the Committee. The following guidelines provide general information about making submissions to the Committee and the manner in which the Committee will handle the submissions.

Form of Submissions

Submissions should be sent in duplicate to:

Purdy Crawford
Osler, Hoskin & Harcourt LLP
Barristers & Solicitors
Box 50, 1 First Canadian Place
Toronto, Ontario M5X 1B8

A diskette containing the submissions should also be submitted.

All submissions should indicate a contact person and contact details (return address, telephone and fax numbers, e-mail address), who would be available to respond to inquiries from the Committee in connection with the submission.

Comment letters submitted in response to the Request for Comments will be placed on the public file and form part of the public record, unless confidentiality is requested. Since the Committee wishes to carry out its responsibilities in an open and accessible manner, requests for confidentiality are discouraged and should be limited to situations involving only highly confidential information where disclosure could be detrimental. Persons submitting comment letters should be aware that the press and members of the public may be able to obtain access to any comment letter, even if the Committee does not put the letter on the public file.

Consultation Process

The Committee does not intend to hold formal public hearings concerning the Issues List. Persons or entities making submissions may be approached by the Committee or its staff to expand upon their submissions or to enable Committee members to make further inquiries.

Dated: April 28, 2000.

Securities Review Advisory Committee Issues List

Commenters are encouraged to refer to the Commentary and Additional Questions (the 'Commentary') attached to this Issues List for background information and elaboration on certain of the issues outlined below.

Principles Underlying Securities Regulation
Fundamental Principles
The Closed System
Focus and Scope of Legislation
General
Regulation of Registrants
Self-Regulatory Organizations and Other Market Intermediaries
Tiered-Holding System
Continuous Disclosure Obligations
Mutual Funds
Shareholder Communications and Take-over Bids
Enforcement
Impact of Regulatory Harmonization and Globalization Trends
Impact of Technology
Mandate and Role of the Commission

Principles Underlying Securities Regulation

Fundamental Principles
1. Does the current statutory regime effectively balance the dual objectives of protecting investors and fostering efficient capital markets?
2. Securities regulation could be based on a statute that sets out broad principles and standards of market behaviour, as well as powers to deal with contravention of these standards. In this model, any detailed rules that might be required would be reflected in subordinate instruments, such as rules. Such a model would be flexible in its ability to adapt to market changes and trends. Is such a model desirable? If so, what broad principles and standards of market behaviour should be included in the legislation?
3. Does the Act¹ adequately account for the marketplace shift from trade execution towards 'assets under management' and 'advice giving'? Should these activities be regulated differently than they are now?
  
  The Closed System
4. Is there a simpler approach that could replace the closed system but which would still protect investors, foster fair markets and maintain an appropriate balance between private and public offerings?
5. What exemptions from the prospectus and/or registration requirements of the Act should be added or removed?
6. Securities transactions are often artificially structured to avoid hold periods under the Act which result from the closed system. Should another approach be adopted to prevent sophisticated persons from being able to structure transactions to avoid control block restrictions?
7. The legending of security certificates to indicate and give notice of restrictions on resale is a concept that is incompatible with the holding of securities in book based form. In view of this reality, as well as the fact that securities are fungible, legends on certificates may not be transparent or effective. What alternatives exist, assuming the closed system continues in effect?
Focus and Scope of Legislation

General
1. The regulation of financial services in Canada is structured around the nature of the institution (bank, insurance company, dealer) which is providing the service, rather than around the service itself. This has produced a rising number of circumstances where similar activities or products are regulated in a different fashion, depending on the nature of the financial conglomerate offering the product or service.
  1. Should securities regulation be amended to reflect the shift in the way financial markets are structured? For example, are the current exemptions from regulation of securities based on the issuer still appropriate?
  2. Should legislation include some formal requirement to facilitate the coordination between financial services regulators?
2. Should financial services regulators, including self-regulatory organizations ('SROs'), have the ability to handle consumer complaints through ombudsman or arbitration schemes? If so, what type of complaint handling schemes would be desirable in Ontario?
3. Should the Act be integrated with the Commodity Futures Act² and the Commission be given explicit jurisdiction over derivatives?
  
  Regulation of Registrants
4. Currently, securities legislation requires dealers to be registered when they 'trade in securities in the capacity of principal or agent.'³ Rather than focusing on whether or not a dealer is 'trading,' should the requirement to be 'registered' be based on whether the dealer is engaged in, or is holding itself out as being engaged in, the business of buying, selling or otherwise advising with respect to securities?
5. Largely as a result of the Internet and related technological developments, investors have direct access to the markets today.
  1. What is the role of an 'intermediary' in the context of disintermediated markets? For example, are there activities or transactions that should be exempt from the need to involve a regulated intermediary? If so, what are they?
  2. To what extent do traditional obligations of registrants such as assessment of suitability and 'know-your-client' need to be re-examined in the context of a disintermediated and electronic trading environment? In this context, do distinctions need to be drawn between registrants that are under a fiduciary obligation to their clients versus those that are not?
6. Should the concept of universal registration be eliminated? Alternatively, how might the current multiple categories of registration be simplified and streamlined?
  
  Self-regulatory Organizations and Other Market Intermediaries
7. The Act recognizes the important role played by recognized SROs and establishes that the Commission should, subject to an appropriate system of supervision, rely on these SROs. In view of the critical role played by these recognized SROs:
  1. Should the legislation be more explicit in recognizing that SROs have the authority to enforce their own rules and ensuring that they have the necessary tools to do so?
  2. Should recognized SROs have the authority and obligation to enforce compliance not only under their own rules but also Ontario securities law?
  3. Should securities law permit or prohibit an SRO from acting as a trade association?
8. Currently stock exchanges are precluded from carrying on business in Ontario unless recognized by the Commission.⁴ Should other SROs, clearing agencies, and quotation and trade reporting systems be required to obtain recognition from the Commission?
9. Does the Act need to address in a more comprehensive fashion the SRO regulatory oversight function and provide for the necessary tools to ensure that such oversight remains effective?
10. Should the provision of custody services be a registrable activity or be subject to express requirements under the Act?
  
  Tiered-Holding System
11. Canadian law governing transfers and secured lending transactions involving investment securities relies upon concepts of possession and delivery of security certificates to complete a transfer or to perfect a pledge. The use of these concepts reflects an era when actual physical delivery of security certificates was the normal method of settling transactions and perfecting pledges. The concepts of actual or deemed possession and delivery work less well, however, when applied to the modern indirect holding system which now exists in Canada. How should Ontario and other Canadian provinces modernize laws that govern the holding, transferring and pledging of securities held through the indirect holding system? How closely should Article 8 of the U.S. Uniform Commercial Code ('Revised Article 8') be followed?⁵
  
  Continuous Disclosure Obligations
  General
12. In response to the increasing importance of the secondary markets, the Commission has taken action on a number of fronts as outlined in the Commentary.
  1. Does the present structure of the Act adequately respond to the increasing importance of the secondary market? For example, a successful continuous disclosure monitoring system requires effective regulatory tools to deal with misleading or inappropriate disclosure practices to encourage issuer compliance. Are additional powers or remedies needed to facilitate the Commission's enhanced role in monitoring continuous disclosure?
  2. Are there any changes which should be made to the Act to improve the content, quality and timing of continuous disclosure?
  3. Should there be statutory civil liability for misrepresentations in continuous disclosure documents?
  Materiality
13. Securities legislation currently focuses on 'material facts' and 'material changes' for various purposes such as prospectus disclosure and continuous disclosure obligations, insider trading rules and proxy solicitation rules.
  1. Is the existing standard of materiality for purposes of triggering continuous disclosure obligations appropriate?
  2. Would a focus on 'material information' be more appropriate regardless of whether or not there has technically been a 'change' in the issuer's affairs?
  3. Should Ontario securities law require the reporting of specified events rather than attempting to specify whether information meets a certain standard of materiality?
  Financial Disclosure
14. The Act requires financial statements of reporting issuers to be prepared in accordance with generally accepted accounting principles (GAAP) and audited and reported upon in accordance with generally accepted auditing standards (GAAS).⁶ The Act also provides the Commission with specific rulemaking powers with respect to the accounting and auditing standards to be applied in financial statements and auditors' reports filed with the Commission.⁷ To date, the Commission has chosen not to exercise its rulemaking powers in any manner that overrides the standards set out in the CICA Handbook.
  1. Are traditional GAAP/GAAS financial statements adequate in today's markets? For example, should the current accounting principles applicable to compensation options be reviewed to ensure that the accounting treatment of options conforms to standards of good corporate governance?
  2. What reforms should be adopted to facilitate uniform international accounting standards?
  Selective Disclosure
15. Is the practice of 'selective disclosure' an issue that should be addressed by regulation? If so, what regulation would be appropriate? Is the approach of the U.S. Securities and Exchange Commission (the 'SEC') one that should be adopted?
16. How do concerns with respect to selective disclosure impact on traditional views with regard to 'road show' presentations?
  
  Mutual Funds
17. Are any reforms necessary under the Act to improve fund governance? Should there be a requirement for an independent board? If so, what responsibilities should be attributed to the board? What should the powers of the board be in the event it does not agree with management?
18. Should fund managers be regulated or be required to be registered?
19. As part of the proposal to introduce statutory civil liability for misrepresentations in continuous disclosure documents, the CSA is proposing to change the definition of 'material change' when used in relation to mutual funds to parallel the definition of 'significant change' in National Instrument 81-102 Mutual Funds.⁸
  
  Should this revised standard for mutual funds be reflected in the Act?
20. Since 1997, the CSA have been working with the Investment Dealers Association of Canada and The Investment Funds Institute of Canada to facilitate the establishment of a self-regulatory organization for distributors of mutual funds in Canada. Moreover, in May, 1998 the CSA promulgated rules governing mutual fund sales practices. More recently, the CSA published a position paper which sets out acceptable ways in which securities firms will be expected to structure themselves for the purposes of distributing securities to the investing public. Are there additional reforms that are necessary or desirable in the area relating to the distribution of investment funds?
  
  Shareholder Communications and Take-over Bids
21. Proposed amendments to the Canada Business Corporations Act⁹ have been introduced which are intended to encourage and facilitate communications among shareholders. The SEC has also amended its proxy rules to foster more open communication among shareholders.¹⁰ Are there complementary reforms that are necessary or desirable under the Act or Business Corporations Act (Ontario)?¹¹
22. Recently the Committee of the Investment Dealers Association of Canada to Review Take-Over Bid Time Limits (the 'Zimmerman Committee') issued a report which recommended a number of changes in the regulation of take-over bids. Many CSA jurisdictions, including Ontario, have now enacted legislation, subject to proclamation, which would implement the recommendations of the Zimmerman Committee.¹²
  1. Are additional reforms necessary or desirable in the area of take-over bid or issuer bid regulation?
  2. Does the current legislation properly capture those transactions that should be subject to take-over bid regulation?
  Enforcement
23. Are the current detection and disclosure provisions with respect to insider trading sufficient? Does the Commission need additional enforcement authority in dealing with insider trading?
24. Securities legislation in many jurisdictions includes fraud and market manipulation as specific contraventions against which securities regulators have the power to act. Should such offences be expressly included in the Act?
Impact of Regulatory Harmonization and Globalization Trends
1. While securities regulation continues to be administered provincially, there has been an increasing trend towards inter-provincial co-operation and harmonization in the administration of securities regulation across Canada.
  1. Is the mutual reliance review system an effective means of achieving inter-provincial co-operation and harmonization?
  2. Are there other areas of securities regulation where it would be beneficial to have a more 'seamless' form of regulation between provincial securities regulators?
  3. Should the Act explicitly recognize the ability of the Commission, in appropriate circumstances, to delegate functions to other securities regulators in Canada or elsewhere?
2. Capital markets are becoming more international in character but regulation still exists only at the domestic level. The transnational nature of global trading has removed securities transactions from the full jurisdictional reach of domestic regulation. As discussed in the Commentary, this is an issue that the European Community has recently addressed. How does one ensure proper regulation from a domestic perspective without compromising global competitiveness for issuers and investors?
Impact of Technology
1. The Act is 'paper-based' and is oblivious to the emergence of the Internet and E-commerce transactions. Are changes to the legislation necessary in view of technological developments for instance with respect to continuous disclosure obligations, insider trading reporting, prospectus offerings etc.?¹³
2. Is any new regulation required to address the use of the Internet as a means for issuers to communicate with their shareholders? For example, is regulation required to enable shareholders to vote online and similarly to receive on demand, or access from a central website, electronically-transmitted press releases and public filings?
3. The Internet has made it possible for issuers to sell shares directly to the public without the use of an underwriter. Direct purchase plans allow individuals to contribute through a monthly bank account debit to the purchase of an issuer's shares. In the U.S., Home Depot has currently adopted this practice. A simplified prospectus in plain English is online and incorporates by reference its annual and quarterly financial reports. If Canadian issuers begin to raise a portion of their financing in this way, should the Act and regulations be changed to account for this type of offering?
4. The current shareholder communication model reflected in the Act mandates that a reporting issuer 'deliver' to security holders specific corporate information. In light of the communication opportunities presented by the Internet and the availability of corporate disclosure through SEDAR is this communication model still appropriate? For example, should securities regulators go further than National Policy 11-201 Delivery of Documents by Electronic Means¹⁴ and shift the onus on to shareholders to request information, in the absence of which they will be deemed to have requested that such information not be delivered?
5. In the Internet age, determining the limits of jurisdiction raises significant issues relating to the scope of the Commission's jurisdiction. Do changes need to be made to the Act to address issues of extra-territoriality that arise in the context of disclosure, offerings and transactions completed on the Internet?
Mandate and Role of Commission
1. The Commission received rulemaking authority approximately five years ago.
  1. Is the rulemaking process an effective way of regulating?
  2. In light of recent experiences, are there changes that should be made to the rulemaking process? For example, should the Commission be granted flexibility and discretion when republication is warranted?
2. Are the current enforcement powers of the Commission appropriate?¹⁵ Are there any additional enforcement powers that should be granted to the Commission?
3. Is the Commission's mandate as reflected in the legislation appropriate in today's market?¹⁶ Should the Commission's mandate recognize the importance of securing Ontario's place within global and competitive securities markets?
4. The Act sets out 'principles' for the Commission to consider in discharging its statutory mandate¹⁷ In today's market, are these principles appropriate, relevant and sufficient as bases on which the Commission should discharge its responsibilities?

Commentary And Additional Questions

Further explanation, examples and additional questions pertaining to matters raised in the Issues List are outlined below. The numbers of the items in this Commentary follow the numbering adopted in the Issues List.

Principles Underlying Securities Regulation
Fundamental Principles
1. The Act is structured to regulate 'trades' and 'distributions.' Increasingly, however, revenue is gained not only from trade execution, but also from providing advice, unbundling services (i.e., advice, execution, clearing and settlement) and administering assets under management.
  
  The Closed System
2. The closed system governs exempt distributions under the Act. Introduced in 1979, the system was in part intended to replace the concept of 'distributions to the public.' While the closed system introduced more certainty in the area of exempt distributions, it also introduced a level of complexity and lack of flexibility into the regulatory regime. A number of regulations and rules have been adopted to address the inevitable gaps as well as the overreaching impact of the system. In addition, the Commission has had to deal with a proliferation of applications for ad hoc relief from these requirements.
3. There have been several recommendations and proposals that have been made in an effort to better assist the capital-raising process. For example, the Final Report of the Task Force on Small Business Financing recommended recasting the current registration and prospectus exemptions.¹⁸ More recently, Commission staff recommended adopting new categories of exemptions in place of the existing ones - see 'Revamping the Regulation of the Exempt Market - A Concept Paper prepared by Staff of the Ontario Securities Commission.'¹⁹
Focus and Scope of Regulation
1. One example of the shift in the way financial markets are structured arises with respect to the number of exemptions in the Act available to various financial institutions for particular types of securities. However, the elimination of the 'four pillars' has enabled issuers that offer substantially similar products to be regulated differently depending on which particular regulator governs the issuer.
2. For example, the Investment Dealers Association (the 'IDA') recently launched an arbitration process for disputes which cannot be resolved through regular administrative channels within the investment dealer. The process has been developed for Ontario resident clients of IDA member firms that are registered to undertake business in Ontario. The events in dispute must have originated after June 30, 1998 and the claimed amount must exceed $6,000 but cannot exceed $100,000, excluding costs. If the investor decides to utilize this process, the investment dealer is obliged to do so also.
  
  The banking and life insurance sectors in Canada also provide consumer redress mechanisms. Since 1996, the Canadian Banking Ombudsman assisted in resolving complaints from small businesses about bank services. Its mandate was expanded in 1997 to encompass personal banking complaints. In 1998, the Canadian Life and Health Insurance Association introduced an ombudservice to provide informal conciliation for consumers with a complaint about a life insurance company. More recently, the Report of the Task Force on the Future of the Canadian Financial Services Sector (released on September 15, 1998) recommended that a legislated federal financial sector ombudsman should be established for customers of all financial institutions.
  
  Finally, as part of ongoing regulatory reforms in the U.K. ('UK') the Financial Services Authority (the 'FSA') is required to establish a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between members of the public and FSA-authorized firms.²⁰ The financial services ombudsman will replace the existing eight complaint-handling schemes and will be run by a separate company. The company will be legally and operationally independent of the FSA but will be required to report annually to the FSA on the discharge of its functions.
  
  Regulation of Registrants
3. Registration for trading in securities in the capacity of principal or agent, or registration for being engaged in the business of buying, selling, or otherwise advising with respect to securities, will not capture the activity of all market participants who exert influence over decision-making in respect of the purchase of securities. For example, while portfolio managers must be registered as investment counsel/portfolio managers, and have completed stringent proficiency and experience requirements, equity research analysts, whose opinion often contributes to the investment decisions of portfolio managers, need not be registered and need not have complied with any proficiency or experience requirements.
4. In April, 2000 the CSA announced that relief from suitability and know-your-client obligations will be granted on an application basis to dealers who only provide trade execution services for clients. The relief is subject to the dealer complying with certain conditions including that it be an independent entity or unit which does not provide advice or recommendations; that its representatives not be compensated on the basis of transactional values; and that the client first provide written informed acknowledgement that no advice or recommendations will be given.
  
  Self-Regulatory Organizations and Other Market Intermediaries
5. Part VIII of the Act prohibits any stock exchange from carrying on business in Ontario unless recognized by the Commission. However, with respect to SROs other than stock exchanges and with respect to clearing agencies and quotation and trade reporting systems, there is no mandatory recognition requirement. Moreover, the Act does not deal with central depositories and rating agencies. By contrast, in the U.S., central depositories and rating agencies are subject to explicit recognition and oversight by the U.S. Securities and Exchange Commission (the 'SEC').
6. In 1997 the custody of investments (consisting of safeguarding and administration services) became an 'authorisable' activity in the UK. More specifically under the Financial Services Act 1986, it is an offence to carry on custody business in the UK without being an authorised or exempted person. Among the reasons identified by the UK government for making custody an authorisable activity were the considerable risks for investors if the enormous amounts of assets held in custody were not properly controlled.
  
  In particular, the UK government identified the following main hazards: (i) misappropriation through fraud; (ii) delivery otherwise than in accordance with authorised instructions; (iii) the improper use of one customer's investments to settle or secure another's obligations; (iv) failure to maintain adequate records identifying an individual customer's entitlement to, and the status of, investments; (v) unauthorised use of customers' investments for a firm's own purpose or commingling of customers' investments with a firm's investments in such a way as to place customers' investments at risk in the event of the firm's insolvency; and (vi) deficiencies in documentation such that the division of responsibilities in the event of loss as between a customer, an authorised firm and any third parties is unclear. Moreover with the dematerialization of securities there was a growing recognition that the role and responsibilities of custodians were becoming increasingly important yet less clear in law.²¹
  
  Tiered-Holding System
7. Current Canadian law governing transfers and secured transactions involving securities and other financial products is found in various federal and provincial corporate statutes, federal legislation governing financial institutions, such as the federal Bank Act, Bills of Exchange Act, Depository Bills and Notes Act and provincial personal property security acts.
  
  In the indirect holding system, in the case of registered securities, the beneficial owner is not shown on the issuer's records. In the case of unregistered securities such as bearer bonds, the beneficial owner does not have actual possession of a negotiable certificate. Instead, the securities are registered or in the possession of a securities depository/clearing agency such as the Canadian Depository for Securities. The records of the depository evidence the securities held on behalf of its various participant brokers, banks and trust companies. The records of each participant show the securities held on behalf of their individual customers (typically, the beneficial owners).
  
  In 1994, Article 8 of the U.S. Uniform Commercial Code was revised ('Revised Article 8'). The objective of Revised Article 8 was not to change securities holding practices, but to provide a clear and certain legal foundation for the indirect holding system. The approach was to reform the rules to more accurately describe the special property interest of one who holds a book-entry security position through an intermediary. Revised Article 8 defines a relationship between an intermediary and entitlement holder by establishing a package of rights and obligations called 'security entitlements' which is itself a unique form of property interest and not merely a personal claim against an intermediary.²²
  
  In early 1998, the CSA established a task force whose mandate is to develop a uniform set of Canadian settlement rules and secured lending rules. The intention is for the Canadian rules to be harmonized with Revised Article 8.
  
  Continuous Disclosure Obligations
  General
8. In January 1999, the Commission created a Continuous Disclosure Team which is responsible for monitoring and assessing the continuous disclosure record of reporting issuers. The Continuous Disclosure Team intends to review the continuous disclosure record of all reporting issuers in Ontario on a periodic basis through a combination of targeted and random reviews.
  
  In January 2000, the Commission, together with other members of the CSA, published for comment a concept paper relating to the proposed Integrated Disclosure System.²³ The Integrated Disclosure System would integrate the information which reporting issuers are required to provide to investors in both the primary and secondary markets. The goal is to make it simpler for companies to access the market while providing enhanced disclosure for investors. The foundation of the system would be an upgraded 'continuous disclosure base' that offers the public information relating to an issuer and its business. The information would be comparable to the information that is currently provided in a prospectus.
  
  More recently, the Commission published for comment two proposed rules that will upgrade current quarterly reporting requirements. Proposed Rule 52-501, Financial Statements, introduces a new requirement for all public companies to include in interim financial statements an income statement and a cash flow statement for the current quarter in addition to the currently required year to date information.²⁴ Companies will also be required for the first time to provide an interim balance sheet and explanatory notes to the interim financial statements. A company's board of directors and its audit committee will be required to review the interim financial statements before they are filed with the Commission and distributed to shareholders. The proposed Companion Policy urges Boards, in discharging their responsibilities for ensuring the reliability of interim financial statements, to consider retaining external auditors to conduct a negative assurance review.
  
  Proposed Rule 51-501 reformulates existing OSC Policy 5.10 and introduces a new requirement for management to provide a narrative discussion and analysis (MD&A) of interim financial results with the interim financial statements ²⁵This will enable investors to gain an understanding of past corporate performance and future prospects on a more timely basis. The proposed Rule will replace OSC Policy 5.10 and give the Commission greater ability to enforce compliance with annual and interim MD&A content requirements.
  
  On May 29, 1998 the Commission and other members of the CSA published for comment proposed legislative amendments to the Act which would result in the creation of a limited statutory civil liability regime enabling investors that purchase securities in the secondary markets to bring a civil action against issuers and other responsible parties for misrepresentations in disclosure documents and other statements relating to the issuer or its securities (the 'Proposal').²⁶ The Proposal arose out of the CSA's review and support of the Final Report of the Toronto Stock Exchange Committee on Corporate Disclosure (the 'Allen Committee') issued in March, 1997.²⁷ The Allen Committee was established to review continuous disclosure by public companies in Canada and assess the adequacy of such disclosure. The Allen Committee was also asked to consider whether additional remedies ought to be available, either to regulators or to investors, if companies fail to observe the rules.
  
  Materiality
9. CSA National Policy Statement No. 40 ('NP40') and the TSE's Timely Disclosure Policy (the 'TSE Policy') are examples of attempts to expand the current concepts of materiality. In November 1997, the Commission published for comment a proposal to amend the definitions of 'material fact' and 'material change' that would significantly alter the standard of materiality.²⁸ Under the proposed new standard, facts or changes would be 'material' if 'substantially likely to be considered important to a reasonable investor in making an investment decision.' Neither the Commission nor CSA has pursued these changes. The Allen Committee reviewed the distinction between a 'material change' and 'material information.'
  
  The Allen Committee concluded that the distinction was 'an exercise in sophistry' but had practical implications insofar as issuers are bound by law to disclose 'material changes' and not 'material information.' In its interim report, the Allen Committee concluded that NP40 and the TSE Policy are examples of successful attempts to expand current concepts of materiality.²⁹ They recommended that material change reporting obligations should be triggered not only when material changes occur but also when material information comes to light. The May 1997 Final Report of the Allen Committee did not refer to these recommendations in the Interim Report.
  
  Financial Disclosure
10. As noted above in commentary 19, the Commission has recently released for comment two rules which will upgrade current quarterly reporting requirements. Under the rules, interim financial statements would be required to include a balance sheet and enhanced note disclosure. Quarterly MD&A would have to be provided; boards of directors, and audit committees where they exist, would be required to review interim financial statements before they are sent to shareholders.
  
  In the U.S., concern about corporate audit practices prompted the SEC to appoint a blue-ribbon panel to determine ways to improve the effectiveness of audit committees. The panel's report, released in 1999, outlined a 10-point plan that included a revised definition of what constitutes an independent director, requirement of an independent audit committee for large listed companies, and criteria governing the size, responsibilities, and financial literacy of audit committees. The Financial Accounting Standards Board in the U.S. has also proposed eliminating the ability of issuers to use 'pooling of interests' accounting principles.
  
  In 1999 the International Accounting Standards Committee ('IASC') completed its work in the development of a core set of international accounting standards for international use. Presently, the International Organization of Securities Commissions is undertaking an assessment of the acceptability of these standards. Since the IASC standards are copyrighted, we have not reproduced them as part of this notice. However, summaries of the IASC standards are available from the IASC website at www.iasc.org.uk.
  
  Selective Disclosure
11. Recently, the SEC proposed new rules for comment to address the practice commonly known as 'selective disclosure.'³⁰ The SEC's proposed Regulation FD ('Fair Disclosure') provides that if an issuer, or any person acting on its behalf, discloses material non-public information to any other person, the issuer must simultaneously (for intentional disclosures) or promptly (for non-intentional disclosures) make public disclosure of that same information.
  
  The Allen Committee also addressed 'equality of access' issues in both its Interim and Final Reports. The Allen Committee made a number of recommendations designed to equalize access of information among investors and prevent selective disclosure of material information. In particular it recognized that the regulatory concern relating to selective disclosure is that 'access to better information - let alone to material undisclosed information - represents an inequality of access between retail and institutional investors.'
  
  Mutual Funds
12. In her report concerning the investment funds industry (the 'Stromberg Report'),³¹ Glorianne Stromberg made numerous recommendations relating to the operation and regulation of mutual funds in Canada. One of her recommendations was that investment funds should be required to have an independent board of directors.³² In its response to the Stromberg Report, the Investments Funds Steering Group agreed with the recommendation, suggesting that each fund family should have a board of at least five members, the majority of whom are independent of the manager and an audit committee comprised entirely of independent members of the board.³³
  
  Rules in the U.S. currently require boards of directors for investment funds. Recently the SEC has proposed amending the rules to require that: at least half and up to two-thirds of a fund's directors be independent; and that boards have better access to legal counsel unaffiliated with the fund.
13. The Stromberg Report recommended registration of mutual fund managers.³⁴ The Investment Funds Steering Group felt that matters relating to the governance of fund managers as corporate entities should be left to applicable existing corporate and securities laws.³⁵
  
  Shareholder Communications and Take-over Bids
  Proxy Rules
14. The SEC amendments permit communications among shareholders at the following times: before the filing of a registration statement relating to a take-over transaction; before the filing of a proxy statement (regardless of the subject matter or contested nature of the solicitation); and regarding a proposed tender offer without 'commencing' the offer and requiring the filing and dissemination of specified information.
  
  In Canada, proponents of this approach argued before the Senate Committee reviewing proposed changes to the Canada Business Corporations Act that continued, informal communication amongst shareholders would foster a higher quality of corporate governance and enable better communication among institutional investors.³⁶
  
  Take-over Bids
15. For example, the Commission des valeurs mobilières du Québec has advised in a Notice that it will be asking the CSA Take-Over Bid Committee to consider whether the take-over bid provisions should be extended to transactions which are not structured as take-over bids but which achieve the same result, such as arrangements.³⁷
  
  Enforcement
  Insider Trading
16. The use of structured products allows insiders to dispose of economic interests in their securities without disposing of the securities themselves (thereby possibly avoiding insider trading rules). Such products also enable an insider to structure a transaction to deal with his or her holdings without necessarily triggering control block or escrow rules. Should these types of transactions be regulated?
  
  Securities Fraud
17. For example, are additional powers needed to deal with 'pump and dump' behaviour?³⁸
Impact of Regulatory Harmonization and Globalization Trends
1. Recent examples of the trend towards inter-provincial co-operation and harmonization in the administration of securities regulation across Canada include the establishment of the Canadian Securities Regulatory System; the increasingly important role played by the CSA (an informal association representing the Chairs of each of the provincial securities regulators); and the adoption of mutual reliance initiatives. More specifically, the CSA have adopted (or are developing) a mutual reliance review system for filings of prospectuses and AIFs for mutual fund and other issuers; continuous disclosure filings by issuers; applications for discretionary relief; and applications for registration of advisers and members of SROs.³⁹
2. For example, as part of its 1992 common market program, the European Community (the 'EC') adopted the Investment Services Directive (the 'ISD'). Among other things, the ISD grants authorisation to EC investment firms to conduct cross-border operations anywhere in the EC either by physical presence (e.g. branch) or by remote access (i.e., electronic trading) based on a license issued by their respective home states.⁴⁰ In return for safeguarding the basic right to branch into or deal across borders with persons in other European member states, investment firms throughout the EC will be subject to certain minimum authorisation requirements and ongoing supervision. Is the European model an appropriate solution for Canada?
Mandate and Role of the Commission
1. For example, under the Act, the Commission is required to republish for comment a proposed rule where the Commission proposes 'material changes' to the original rule proposal that was published for comment.⁴¹ This requirement has often led to multiple republications of proposed rules and significant time delay. By contrast, SEC proposals are not subject to a second (or subsequent) comment period provided that the final rule is a 'logical outgrowth' of the rulemaking proceeding when viewed in light of the original proposal and call for comments.
2. Many securities regulators in Canada and globally have the power to levy monetary penalties. Should the Commission have such an enforcement power? Moreover, should the number of public interest orders that the Commission can make be expanded to include some of the orders that a court can make under section 128(3) of the Act? For example, should the Commission have the power to make a compliance order as set out under subsection 128(3)1? Similarly, should the Commission have the power to order that a registrant repay to its clients all or any part of the money paid by the client for securities purchased through the registrant where the registrant has behaved inappropriately in that context?
3. The mandate of the Commission is to: (a) provide protection to investors from unfair, improper or fraudulent purposes; and (b) foster fair and efficient capital markets and confidence in capital markets. In the UK, under the Financial Services and Markets Bill, the statutory objectives of the FSA are to: (i) maintain market confidence; (ii) promote public awareness; (iii) protect consumers; and (iv) reduce financial crime.
4. It is useful to note guiding principles that have been proposed or enacted with respect to other administrative bodies. In the UK under the Financial Services and Markets Bill, the FSA in pursuing its statutory objectives must have regard to (i) the need to use its resources in the most efficient and economic way; (ii) the responsibilities of those who manage the affairs of authorized persons; (iii) the principle that restrictions imposed on firms and markets should be in proportion to the expected benefits for consumers and the industry; (iv) the desirability of facilitating innovation in connection with regulated activities; (v) the international character of financial services and markets and the desirability of maintaining the competitive position of the UK; (vi) the need to minimize the adverse effects on competition that may arise from any exercise of its general functions; and (vii) the desirability of facilitating competition between those who are subject to any form of regulation by the FSA.
  
  The Australian Securities and Investments Commission ('ASIC') enforces and administers Corporations Law and consumer protection law for investments, life and general insurance, superannuation and banking (except lending) throughout Australia. The ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system, the provision of financial services, and the payment system. In performing its functions and exercising its powers, the ASIC must strive to: (i) maintain, facilitate, and improve, the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; (ii) promote the confident and informed participation of investors and consumers in the financial system; (iii) achieve uniformity throughout Australia in how the Commission and its delegates perform those functions and exercise those powers; (iv) administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; (v) receive, process, and store, efficiently and quickly, the information given to the Commission under the laws that confer functions and powers on it; (vi) ensure that information is available as soon as practicable for access to the public; and (vii) take whatever action it can take, and is necessary, in order to enforce and give effect to the laws that confer functions and powers on it.⁴²

Appendix 1 [to Issues List]

Advisory Committee Appointed To Review Securities Law

Ministry of Finance News Release - TORONTO, March 2 /CNW/ - Finance Minister Ernie Eves announced he has established an Advisory Committee to review the province's securities legislation. The Committee's mandate is to ensure the legislation is up-to-date and enables the Ontario Securities Commission to aggressively and proactively enforce clear standards to protect investors and foster a fair and efficient marketplace.

'Securities regulation that is firm, fair and effective instills investor confidence which is fundamental to economic growth and job creation,' Eves said.

The committee will be chaired by Purdy Crawford Q.C., counsel to Osler, Hoskin & Harcourt, former chairman of Imasco and chairman of AT&T Canada. Other committee members are Carol Hansell, a partner with Davies, Ward & Beck; William Riedl, president and CEO of Fairvest Securities Corporation; Helen Sinclair, CEO of BankWorks Trading Inc; David Wilson co-chairman and co-CEO at Scotia Capital; and Susan Wolburgh Jenah, OSC general counsel.

Minister Eves extended his personal thanks to each of the committee members for agreeing to participate. 'This is a group of highly qualified individuals who will bring to the table a depth of knowledge and diversity of perspectives,' Eves said.

As a result of the Securities Amendment Act, 1994, the government is required to review the legislation, regulations and rules relating to matters dealt with by the Ontario Securities Commission every five years.

Purdy Crawford Q.C., is counsel to the law firm of Osler, Hoskin & Harcourt, former chairman of Imasco and chairman of AT&T Canada. A Harvard Law graduate, and member of the Ontario Bar, Mr. Crawford has received a number of honours including Officer of the Order of Canada and Honorary Doctorates of Laws from Mount Allison University and Dalhousie University. Mr. Crawford is chancellor of Mount Allison University and a director of a number of public companies in Canada and the U.S.. Mr. Crawford has agreed to chair the Advisory Committee.

Carol Hansell, is a partner with the law firm Davies, Ward & Beck specializing in corporate finance and securities, as well as mergers and acquisitions. Ms. Hansell has written a number of papers, articles and commentaries on a variety of corporate governance topics and is the author of Directors and Officers in Canada: Law and Practice.

William Riedl is the president and CEO of Fairvest Securities Corporation, an institutional stock brokerage firm specializing in matters of corporate governance and shareholder rights. He is also a director of the Investment Dealers Association of Canada.

Helen Sinclair is CEO of BankWorks Trading Inc. She was president of the Canadian Bankers Association from 1989 to 1996, and prior to that senior vice president and general manager, planning and legislation for Bank of Nova Scotia. Ms. Sinclair is a governor of York University, past chair of the YMCA of Greater Toronto, and a director of a number of public companies including TD Bank and Stelco.

David Wilson is the co-chairman and co-CEO at Scotia Capital and has an extensive background in corporate finance. Mr. Wilson is a past chairman of the Investment Dealers Association of Canada, and a director of a number of companies, including Rogers Communications Inc.

Susan Wolburgh Jenah is the general counsel for the Ontario Securities Commission, responsible for providing general legal and policy advice and project management support to both the Commission and staff. Ms. Jenah joined the Commission in August 1983 and has held various positions.

Appendix D List of Commenters on Issues List

John Palmer,
Superintendent of Financial Institutions Canada
Smith Lyons
James C. Baillie
Dina Palozzi,
Chief Executive Officer and Superintendent of Financial ServicesFinancial Services Commission of Ontario
Mr. Larry Schwartz, by email (requesting confidentiality)
Investment Counsel Association of Canada
The Investment Funds Institute of Canada
PricewaterhouseCoopers
Canadian Securities Institute
KPMG LLP
BCSC
The Canadian Depository for Securities Limited
Glorianne Stromberg
Investment Dealers Association of Canada
Canadian Institute of Chartered Accountants
Canadian Association of Insurance and Financial Advisors
Torys LLP
Canadian Bankers Association
Ontario Teachers' Pension Plan Board
Alberta Securities Commission
Canadian Investor Relations Institute
Canadian Venture Exchange
Simon Romano, Stikeman Elliott (Personal Comments)
Osler, Hoskin & Harcourt LLP
CBAO Securities Law Subcommittee
Nancy Ross
Montreal Exchange
Aur Resources Inc.
Take-Over Bid Team at the Ontario Securities Commission
Small Investor Protection Association
Torys LLP - James E. A. Turner

In addition, one comment letter was filed on a confidential basis.

Appendix E Presenters to Committee on Issues List

Canadian Institute of Chartered Accountants
Michael Lauber, Canadian Banking Ombudsman
Joe Oliver, Executive Director
Keith Rose, Vice-President, Regulatory Policy
Investment Dealers Association of Canada
Phil Anisman
IFIC

Appendix F Ontario Securities Commission Staff Presentations to the Committee on Issues List

Randee Pavalow
Tracey Stern
Re: Alternative Trading Systems
Stan Magidson
Janet Holmes
Terry Moore
Naizam Kanji
Re: Take-over bids
Michael Watson
Johanna Superina
Hugh Corbett
Greg Ljubic
Re: Enforcement
Max Pare
Re: Tiered Holdings Project
Julia Dublin
Randall Powley
Re: Re-Regulation of Advice Project
John Carchrae
Re: Accounting Matters
Christopher Byers
Re: Globalization

Appendix G Lessons from Australia

Lessons from Australia In trying to address the feasibility of creating a national securities regime in Canada, we considered the historical development of Australia's current system of securities regulation.

By way of background, the Australian constitution, as in Canada, provides for the division of powers between the States and the federal Commonwealth Government. Section 51(xx) of the Australian constitution gives the Commonwealth Government the power to legislate with respect to 'foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth.' Each State and Territory, on the other hand, has power under its own constitution to make laws for the 'peace, order and good government' of that State and Territory.

Prior to 1970, corporate law (and securities regulation) in Australia was administered by individual States and Territories. In 1961, in response to frustrations expressed by market participants regarding the problems of doing business with six different legislative regimes and recognizing the existence of the national character of the Australian economy, the States and Territories passed uniform corporate legislation, similar to the U.S. Commercial Code. In time, however, differences among the States' and Territories' enactments emerged due to amendments of the legislation on a state-by-state basis.¹

In 1970, in the wake of several financial scandals, a select senate committee was formed to consider the Australian securities industry. The Rae Committee, as it came to be known, released a report in 1974 which detailed findings of numerous unfair practices and criticized the various State and Territorial legislators for their inadequate performance in regulating the securities markets.² The committee recommended that a Commission similar to the U.S. Securities and Exchange Commission be established to oversee and regulate the securities market since the national character of the securities industry in Australia made State regulation inappropriate.³

In 1978, as an alternative to direct Commonwealth legislation, the Australian Commonwealth entered into an inter-governmental agreement with the States and Territories to create a co-operative scheme for regulating securities markets in Australia. The new scheme consisted of three administrative tiers. At the top was a Ministerial Council, a body consisting of one minister from each state and territorial government as well as one Commonwealth minister. Directly below was a newly created body, the National Companies and Securities Commission (NCSC), designed as the central administrator of the scheme. Finally, each State and Territory maintained a Corporate Affairs Commission (CAC) to perform the bulk of administrative duties under the scheme. Under the scheme, the Commonwealth passed companies and securities legislation for Australia's federal jurisdiction, and each state and territory, through local legislation, applied the federal legislation by reference.⁴

While the co-operative scheme was successful in establishing uniform companies regulation throughout Australia, it was plagued by problems and was unable to adequately fill the void in Australia's company and securities legislation. In particular, the co-operative scheme suffered from a lack of uniform administration by the State Corporate Affairs Commissions; lack of accountability; and duplication of functions between the State Corporate Affairs Commissions and the National Companies and Securities Commission (NCSC).⁵ Moreover, there were general concerns about the need for more effective national enforcement. In particular, under the scheme, the NCSC could not initiate prosecutions or interfere in enforcement at the state or territorial level. Finally, Australia's securities exchange industry was consolidating, culminating in April 1987 with the establishment of one national stock exchange.

Growing dissatisfaction with the ineffectiveness of the NCSC to properly enforce corporate law led to an inquiry by a select senate committee. In a report released in May 1987, the senate committee, acknowledging the problems with the cooperative scheme, concluded that the cooperative scheme should be replaced by comprehensive national legislation and that a single agency charged with administering such legislation should be established. In May 1988 in response to the criticisms of the cooperative scheme, the Australian Commonwealth government asserted power to enact legislation covering the entire legislative field relating to corporations and securities. The federal legislation established the Australian Securities Commission (the 'ASC') as the sole administrative authority of corporate and securities law throughout Australia. State and territorial corporate authorities were to have no further authority in areas of regulation delegated to the ASC, although the ASC was required to establish a regional office in each Australian state and territory.

In time, certain aspects of the federal legislation were challenged by several states and were subsequently held to be invalid by Australia's High Court.⁶ The High Court's decision meant that comprehensive nation wide companies and securities legislation was impossible without co-operation between the Commonwealth, the States and Territories. Accordingly in 1990, the Commonwealth, States and Territories entered into an agreement under which national legislation was enacted to deal with the entire field relying on combined Commonwealth and State and Territorial powers. Under the agreement:

ASC (now the Australian Securities and Investments Commission) was established as the national regulator to assume full responsibility for the regulation of companies. ASC replaced the State CAC and the NCSC. ASC was responsible and accountable to the relevant Commonwealth Minister and the Commonwealth Parliament.
The Commonwealth would amend its federal legislation so that it would apply in the Australian Capital Territory. Each State and Territory would then apply such federal law as a law of its jurisdiction.
Each state and territory was to legislate so as to require courts and others to treat the applied law as if it were a law of the Commonwealth. For example, the Federal Court was given power to hear matters arising under the State statutes and the investigation and prosecution of offences under the various State statutes would be undertaken by ASC and federal prosecutors.
The Ministerial Council was to continue but under new arrangements giving the Commonwealth more power, the Commonwealth Attorney-General becoming the permanent chair. The Council would have no control over the ASC.
Proposals for new legislation were to be considered by the Council. The Commonwealth when introducing them into Commonwealth Parliament was to table the Council's advice. However, legislative reform on national markets (take-overs, securities, public fundraising and futures) was to be the sole responsibility of the Commonwealth. Other proposals were to be approved by the Council before introduction into the Commonwealth Parliament. But the Commonwealth was not obliged to introduce any proposal of which it did not approve. On such matters the Commonwealth was to have four votes, each state and territory having one vote. The Commonwealth was given a casting vote.

Any amendments that the Commonwealth Government made to its statute would automatically apply in each of the States and Territories without the need for the State and Territorial Parliaments to pass further amendments.

Securities Act, R.S.O. 1990, C. S.5
R.S.O. 1990. Ch. c. 20.
Subsection 1(1) Definition of 'Dealer' and subsection 25(1).
Subsection 21(1).
See Commentary 18, infra.
Securities Act, R.R.O. 1990, Regulation 1015, Section 2.
Clause 143(1)25.
Under the draft legislation 'material change' when used in relation to an issuer that is an investment fund, means,
1. a change in the business, operations or affairs of the issuer that would be considered important by a reasonable investor in determining whether to purchase securities of the issuer, or in determining whether to continue to hold securities of the issuer, or
2. a decision to implement a change referred to in subparagraph (i) made,
  1. by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, or
  2. by senior management of the investment fund manager of the issuer who believe that confirmation of the decision by the board of directors of the investment fund manager of the issuer or such other persons acting in a similar capacity is probable.
R.S.C. 1985, c C-44.
Regulation of Communications Among Shareholders, 17 CFR Parts 240 and 249, Release No. 34-31326170 and Regulation of Takeovers and Security Holder Communications, 17 CFR Parts 200, 229, 230, 232, 239 and 240, Release No. 33-7760, 34-420055.
R.S.O. 1990, c. B. 16.
In Ontario, the amendments proposed by the Zimmerman Committee were included in the More Tax Cuts for Jobs, Growth and Prosperity Act, 1999 which received Royal Assent on December 14, 1999.
See NP 47-201 'Trading Securities Using the Internet and Other Electronic Means' (1999) 22 OSCB 8170.
(1999) 22 OSCB 8156. The substance and purposes of NP 11-201 is to state the views of the CSA on how obligations imposed by securities legislation to deliver documents can be satisfied by electronic means.
Subsection 127(1) and Section 127.1.
Section 1.1.
Section 2.1.
(1996) 19 OSCB 5753.
(1999) 22 OSCB 2829.
The FSA was created in October, 1997 to replace the Securities and Investments Board and will eventually absorb nine front line regulatory bodies (including the Securities and Futures Authority, the Insurance Directorate of the Department of Trade and Industry and the Personal Investment Authority) and have ultimate authority over all financial services in the U.K. The relevant legislation is the Financial Services and Markets Bill which is expected to receive Royal Assent later this year. Pending Royal Assent, the FSA has been operating under interim arrangements with the existing regulatory bodies. Effective June 1998, the FSA also took over responsibility for the supervision of banks, wholesale money markets and the foreign exchange clearing house, from the Bank of England.
The Securities and Investments Board. Consultative Paper 90. Custody (August 1995).
See Eric Spink, Uniform Law Conference of Canada, Report of the Production Committee, Tiered Holding System - Uniform Legislation Project (April 30, 1997).
(2000) 23 OSCB 633.
(2000) 23 OSCB 1793.
(2000) 23 OSCB 1783.
'Civil Liability for Continuous Disclosure' (1998) 21 OSCB 3367.
The Toronto Stock Exchange Committee on Corporate Disclosure, Final Report, Responsible Corporate Disclosure - A Search for Balance (March 1997).
OSC Request for Comment 51-901: 'Material Fact and Material Change' (1997) OSCB 5751.
The Toronto Stock Exchange Committee on Corporate Disclosure, Interim Report, Toward Improved Disclosure - A Search for Balance in Corporate Disclosure (December 1995).
Selective Disclosure and Insider Trading, Release Nos. 33-7787, 34-42259, IC-24209, File No. S7-31-99 (December 20, 1999).
Regulatory Strategies for the Mid-'90s - Recommendations for Regulating Investment Funds in Canada (January 1995).
Ibid., pp. 147 - 154.
Investment Funds Steering Group, The Stromberg Report: An Industry Perspective (November 1996), p. 50.
Stromberg Report, pp. 87 - 90.
Investment Funds Steering Group, p. 50 fn. 29.
Report of The Standing Senate Committee on Banking, Trade and Commerce, Corporate Governance (August 1996).
Bulletin hebdomadaire 2000-02-11 Vol. XXXI no. 06, pp. 4 - 5.
In the classic 'pump and dump' scheme, promoters artificially inflate a stock's price by making false claims about the issuer and by using high-pressure sales tactics to lure investors. After a substantial increase in the share price, the promoters and sometimes the insiders of the issuer take their profits and the stock price plummets.
(1999) 22 OSCB 7293.
Investment services include brokerage, dealing as principal, market making, portfolio management, underwriting, investment advice, safekeeping and administration.
Subsection 143.2(7).
Australian Securities and Investments Commission Act, 1989, subsection 1(2).

Paul von Nessen, The Americanization of Australian Corporate Law, 26 Syracuse Journal of International Law and Commerce 239.
Jeffery Lehman, The Bre-X Stock Debacle: Why the Enactment of Canadian Federal Securities Legislation Would be Good as Gold, 24 Brooklyn Journal of International Law 823.
Alan Shaw and Paul von Nessen, The Legal Role of the Australian Securities Commission and The Australian Stock Exchange.
Supra., note 1.
Ian Ramsay, The Unravelling of Australia's Federal Corporate Law (https://cclsr.law.unimelb.edu.au/Bulletins/ Bulletin0031.htm).
See New South Wales v. Commonwealth (1990) 169 CLR 482, where the Australian high court held that the constitution did not confer on the Commonwealth Government power to deal with the incorporation of companies. Only the state and territorial governments have this power.

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