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

EXECUTIVE SUMMARY

INTRODUCTION

Several themes emerged in the course of our deliberations. These themes, described below, are reflected in this Report and our recommendations.

  1. Regulation should support clearly identified public policy objectives and be proportionate to the objective. The benefits of regulation (and changes to regulation) must outweigh the costs imposed by it.

  2. Canada competes with other jurisdictions around the world for capital and for investment opportunities. Our regulatory regime must be part of our competitive advantage. This requires that our regulators be able to operate efficiently and that our regulatory requirements not be more onerous than those existing in other jurisdictions (particularly the U.S.), except as may be required to satisfy our public policy objectives. It also requires that the markets have confidence in the enforcement powers of our regulators and that our regulators have the resources necessary to exercise those powers.

  3. Increased harmonization of securities regulation nationally and internationally is imperative to ensure that Canadian capital markets are competitive with other jurisdictions.

  4. Securities regulation must be flexible enough to allow regulators to react to changing circumstances on a timely basis.

  5. Securities regulation in Canada must be sensitive to the nature of our capital markets and the participants who inhabit it, the large proportion of small cap issuers, and the significant number of public companies with controlling shareholders. In other words, a "one size fits all" approach may not work in all instances in Canada.

The recommendations resulting from our deliberations are set out below, along with a reference to the page of the Report on which the particular recommendation can be found. You will find it helpful also to consider the reasons for each recommendation, which are set out in the part of the Report accompanying the recommendation.

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RECOMMENDATIONS

PART 1 THE ROLE OF THE COMMISSION IN CAPITAL MARKETS REGULATION

  1. We recommend that the provinces, territories and federal government work towards the creation of a single securities regulator with responsibility for the capital markets across Canada. To this end, we strongly encourage the Government of Ontario to actively support the Wise Persons' Committee recently established by the Federal Finance Minister.

  2. In the meantime, we recommend that certain steps be undertaken by securities regulators to simplify the current regulatory regime in Canada: (i) We recommend that securities regulators continue to harmonize securities regulation across Canada; (ii) We recommend that securities regulators be given the authority to delegate any power, duty, function or responsibility conferred on them to another securities regulatory authority within Canada, and that they actively engage in delegation among themselves. We therefore recommend the Act be amended to give the Commission this delegation authority, and that the necessary consequential amendments to the immunity provisions in the Act be made; (iii) We recommend that securities legislation across the country be amended to provide for 'mutual recognition' so that the rules of the jurisdiction having the closest connection to a transaction or market participant will govern that transaction or market participant, and other affected jurisdictions will recognize and allow those rules to be applied in place of their own.

  3. We strongly encourage the move by both Canadian regulators and standard setters to International Accounting Standards and hope that Canada will continue to play a role in this area with the ultimate goal of permitting both domestic and foreign issuers to report under IAS without a reconciliation to Canadian GAAP.

  4. We recommend that the Commission and the CSA permit both foreign and Canadian companies to prepare their financial statements in accordance with U.S. GAAP. Issuers who prepare their financial statements in accordance with U.S. GAAP should be required to reconcile the statements to Canadian GAAP during a transitional period. The duration of the transitional period should be determined by the regulators taking into account whether significant comparability issues will arise if no reconciliation is provided.

  5. We strongly encourage the Commission and the CSA to continue developing securities transfer legislation modelled on revised Article 8 of the Uniform Commercial Code in the U.S. and we urge governments across Canada to ensure that such legislation is adopted on a uniform basis as soon as possible.

  6. We encourage the Commission to continue its ongoing participation in IOSCO initiatives and urge the Commission to adopt, in a timely fashion, changes to its rules to implement the international standards emanating from IOSCO.

  7. We recommend that the CSA, provincial and territorial governments and the federal government move to adopt a system of harmonized functional regulation across Canada, whereby all Canadian capital market activities, products and conduct are regulated in a similar fashion and are subject to similar standards despite the differences between the various institutions or market participants offering the products or services to the marketplace. In the interim, we encourage continued regulatory co-operation and co-ordination in the financial services area through participation in endeavours such as the Joint Forum of Financial Regulators.
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PART 2 FLEXIBLE REGULATION

  1. We recommend that the Minister of Finance and the Commission consider whether studies of specific aspects of the Commission's operations, similar to those conducted of the SEC by the General Accounting Office in the U.S., should be undertaken.

  2. We recommend that the current structure of the Commission as a multi-functional agency be given further thought and study by the Commission and the Minister on a priority basis.

  3. We recommend that section 2.1 of the Act be amended to include the following additional principles to be considered by the Commission in pursuing the purposes of the Act:

    • Effective and responsive securities regulation should promote the informed participation of investors in the capital markets.

    • Capital markets are international in character and it is desirable to maintain the competitive position of Ontario's capital markets.

    • Innovation in Ontario's capital markets should be facilitated.

    • The administration and enforcement of Ontario securities law should not unnecessarily impede or distort competition among persons carrying on regulated activities.


  4. We recommend that the Act be amended to the extent necessary to ensure that the basic principles relevant to securities legislation are contained in the Act.

  5. We recommend that the Commission, together with the Government of Ontario, seek to streamline the Act by incorporating detailed requirements in the rules. In addition, we believe that the Act should accurately reflect current law. This may result in certain exemptions being removed from the Act altogether where they have been superseded by a rule.

  6. We recommend that the Act be amended to give the Commission 'basket' rulemaking authority that is substantially identical to that conferred on the Lieutenant Governor in Council pursuant to clause 143(2)(b) of the Act. The Commission should be given the authority to make rules respecting any matter that is 'necessary or advisable for carrying out the purposes of the Act.'

  7. We recommend that the Minister indicate the names of commenters who have raised concerns about a particular proposed rule during the Ministerial review period and the nature of the concerns raised. This, in turn, will permit the Commission to satisfy its statutory obligation to make public the fact that a rule has been rejected or returned by the Minister and why.

  8. We recommend that the Act be amended to require that the Commission republish for comment a proposed rule where the Commission proposes material changes to the rule, having regard to:

    1. the nature of the changes proposed to the rule as a whole; and

    2. whether the final rule is a logical outgrowth of the rulemaking process when viewed in light of the original rule proposal and request for comments. We further recommend that a similar test be adopted for republication of proposed policies.


  9. We recommend that the Commission publish black-lined versions of its rules and policies when (i) making changes to existing rules and policies; and (ii) republishing for comment a proposed rule or policy.

  10. We recommend that the Commission limit the number of projects that it takes on and focus its resources on fewer critical policy issues. We further recommend that the Commission streamline its internal rulemaking process by establishing internal standards for the development of rule and policy proposals, including benchmark timeframes for reviewing and responding to comments on a rule or policy proposal. We recommend that the Commission publish these internal standards and report on its performance against such standards.

  11. In order to enhance the timely implementation of policy changes, we encourage the Commission and the CSA to be willing to adopt practical, if not perfect, solutions.

  12. When the Commission is conducting cost-benefit analyses of proposed rules, as required under the Act, we recommend that the Commission conduct or commission empirical studies to assess the effectiveness, costs and benefits of the proposed rule.

  13. We recommend that each cost-benefit analysis which the Commission conducts concerning a proposed rule should specify whether a proposed rule contributes to harmonizing securities laws across Canada and should discuss the expected effect of the new rule on harmonization and co-operation. If adoption of the new rule is expected to lessen harmonization or co-operation, the Commission should describe why it should nevertheless be adopted.

  14. We recommend that the Act be amended to allow the Commission to issue blanket rulings and orders that provide exemptive relief only.

  15. We recommend that the Commission publish exemption orders granted from the requirements of securities rules. We also recommend that the Commission provide notice when applications for exemptive relief are not granted, and of the reason for the refusal, subject to keeping the name of the applicant confidential.

  16. We recommend that the Act be amended to require that future review committees be appointed five years after the date of delivery of the final report of the previous committee. We also recommend that Committee membership represent a diversity of backgrounds and interests relevant to the capital markets.

  17. We recommend that the CSA consider whether NP 11-201 Electronic Delivery of Documents and NP 47-201 Trading Securities Using the Internet and Other Electronic Means conflict with provincial legislation such as the ECA. We believe that the CSA should ensure that its guidance continues to be relevant and should issue a communiqué to market participants setting out its views.

  18. In light of investor protection concerns, we believe that it would not be prudent to eliminate the need for dealer registrant involvement in Internet offerings.

  19. The CSA should monitor the success of the limited form of access-equals-delivery contemplated by proposed National Instrument 51-102 Continuous Disclosure Obligations with a view to determining whether the access-equals-delivery model can be expanded to encompass additional documents which securities legislation requires be delivered to investors.
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PART 3 REGULATION OF MARKET PARTICIPANTS

  1. We recommend that the registration requirement relating to trading in securities should be moved to a model requiring the person or company to be 'in the business' of trading. However, we would only support such a change if it were to be adopted across the country.

  2. We believe that the Act should continue to distinguish between the requirement to be registered to advise concerning securities and the requirement to be registered to trade in securities (or, as we propose in our earlier recommendation, to be in the business of trading in securities). However, we recommend that the Commission and CSA carefully review the proficiency, experience and suitability requirements applicable to dealers and employees to ensure that they are sufficiently flexible to permit various models for delivering advice while at the same time ensuring that they are sufficiently rigorous to match the increasingly important role of 'incidental advice' provided by dealers and salespersons.

  3. We encourage the Commission, together with the CSA, to continue to monitor the use of financial portals by market participants, and to facilitate their development where appropriate. Where portals conduct activity in violation of the requirements of the Act, regulators can address this conduct through enforcement proceedings where appropriate.

  4. We recommend that securities legislation in the provinces be amended to provide consistent substantive registration requirements across the country. We further recommend that the NRD be modified following its launch to permit investors to access relevant information about registrants, including industry experience, any previous disciplinary proceedings to which the registrant was subject, and the products which the registrant is licensed to sell.

  5. We recommend the Act be amended to eliminate the universal registration requirements.

  6. We recommend that the Act be amended to authorize the Commission to require SROs to apply for recognition where an SRO is taking on activities which are properly discharged by, or subject to the oversight of, the Commission if the SRO has not otherwise applied to be recognized.

  7. We recommend that clearing agencies should be required to obtain recognition through an amendment to section 21.2 of the Act to provide that 'No person or company shall carry on business as a clearing agency unless recognized by the Commission.' We also recommend that the Commission re-examine the definition of 'clearing agency' in section 1(1) of the Act to ensure that it properly captures the activities which should trigger the requirement to be recognized. In this regard, we suggest that consideration be given to the definition of 'clearing agency' under U.S. legislation.

  8. We recommend that the Commission and the CSA consider whether to require quotation and trade reporting systems to obtain recognition under securities legislation and to develop a harmonized approach to quotation and trade reporting systems, including re-examining the current definition of a quotation and trade reporting system in the Act.

  9. We believe that the Canadian Unlisted Board merits regulatory review and urge the Commission to complete its review of the Canadian Unlisted Board as soon as possible, focusing particular attention on concerns relating to transparency and reducing the Canadian Unlisted Board's exposure to abuse.

  10. We recommend that the Commission study whether the Act should be amended to give SROs the following statutory powers:

    • jurisdiction over current and former members or 'regulated persons' and their current and former directors, officers, partners and employees;

    • the ability to compel witnesses to attend and to produce documents at disciplinary hearings;

    • the ability to file decisions of disciplinary panels as decisions of the court;

    • statutory immunity for SROs and their staff from civil liability arising from acts done in good faith in the conduct of their regulatory responsibilities;

    • and the power to seek a court-ordered 'monitor' for firms that are in chronic and systemic non-compliance, close to insolvency or for other appropriate public interest criteria.


    In considering these issues, the Commission should consider what checks and balances, if any, are necessary to ensure procedural fairness and protections are available to those who will be subject to the new statutory powers.

  11. We recommend that stock exchanges and recognized SROs be required to report to the Commission any breaches or possible breaches of securities law that they believe have occurred or may have occurred.

  12. We recommend that the IDA consider whether improvements can be made to certain of its structures, such as the composition of its disciplinary panels and the membership of its board of directors, to lessen perceptions of conflict of interest in self-regulation.
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PART 4 REGULATING ISSUERS: DISCLOSURE, THE CLOSED SYSTEM AND CORPORATE GOVERNANCE

  1. We strongly support the CSA's initiative to harmonize Canadian continuous disclosure requirements and encourage the CSA to assign a high priority to this proposal to ensure its timely adoption across Canada.

  2. We support the CSA proposal to create a statutory civil liability regime for continuous disclosure and urge the Government of Ontario to move forward as soon as possible to proclaim the legislation in force. We also encourage the governments of the other CSA jurisdictions to adopt the same regime.

  3. We recommend that the Commission study the appropriateness of amending the existing primary offering civil liability regime to parallel the civil liability regime for continuous disclosure in the following areas:

    • changing the joint and several liability scheme to a proportionate liability scheme;

    • extending a due diligence defence to the issuer;

    • and introducing a safe harbour for forward-looking information.


  4. We encourage the CSA to proceed with further reforms to the prospectus exemptions and the closed system with the goal of harmonizing and simplifying the requirements relating to private placements.

  5. Once other reforms are implemented, such as civil liability for continuous disclosure, enhanced continuous disclosure standards for all reporting issuers, and a more integrated disclosure system overall, we believe hold periods for securities of reporting issuers could be eliminated without sacrificing investor protection while contributing significantly to more efficient capital markets.

  6. We believe the need for seasoning periods in the case of reporting issuers should also be revisited with a view to their elimination if the reforms we contemplate in this Report are implemented.

  7. Hold periods and seasoning periods should continue to apply to non-reporting issuers.

  8. We recommend the Commission examine the practice whereby control block holders reduce applicable hold periods through the use of derivatives and other monetization structures.

  9. We recommend that the Act's timely disclosure provisions not be amended to require disclosure of 'material information.'

  10. We recommend that the Commission study whether the current definition of 'material change' and timely disclosure reporting obligations should be amended to encompass:

    • a broader scope of discloseable events;

    • itemized particular company-specific events requiring timely disclosure similar to the SEC's 8-K approach;

    • and a requirement that agreements relating to the reported disclosure be filed as a schedule to the public report.

  11. We recommend that the existing materiality standard should be changed for all purposes under securities legislation to a reasonable investor standard which is consistent with the materiality standard in the U.S.

  12. Except as noted in Recommendation 51, we do not believe that legislative change is required in Ontario to address the issue of selective disclosure and we support the CSA's policy statement and an increased emphasis on enforcement in this area.

  13. We recommend that the CSA introduce a 24-hour safe harbour for 'unintentional' selective disclosures along the lines of the safe harbour that exists in the U.S. under Regulation FD.

  14. We support the CSA's proposal to reduce the filing period for filing annual financial statements to 90 days after the fiscal year end for senior issuers, and 120 days for junior issuers. We also support the CSA's proposal to reduce the filing period for filing interim financial statements to 45 days after the quarter end for senior issuers, and to maintain the current 60-day deadline for junior issuers. We recommend, however, that the CSA reconsider whether to use the TSX non-exempt company criteria to separate senior issuers from junior issuers. Instead, we recommend that the CSA consider classifying senior issuers as those issuers whose securities are listed on the TSX and junior issuers as those issuers whose securities are listed on the TSX Venture Exchange.

  15. We recommend that in due course the CSA consider shortening even further the filing deadlines for annual and interim financial statements to 60 and 35 days respectively to parallel recent rule changes made by the SEC.

  16. We recommend that Ontario securities legislation be amended to require that quarterly financial statements must be reviewed by the issuer's external auditor. We endorse in principle providing junior issuers with an exemption from this requirement. The nature and scope of the exemption should be determined by the Commission, taking into account the costs and benefits associated with the requirement with particular attention being paid to the type of issuer and the stage of development of the issuer. We also recommend, however, that any issuer subject to an exemption from the requirement should be required to disclose that its quarterly statements have not been reviewed by an external auditor.

  17. We recommend that Ontario securities law be amended to require that all news releases of reporting issuers must be filed on SEDAR.

  18. We recommend that the GAAP exemption available to banks and insurance companies in subsection 2(3) of the Regulation to the Act be removed.

  19. We urge the Commission and the Public Interest and Integrity Committee of the Canadian Institute of Chartered Accountants to adopt auditor independence standards on a priority basis, to proactively monitor ongoing U.S. developments relating to auditor independence and to consider what further reforms are necessary to ensure that Canada does not fall behind international standards.

  20. We recommend that the Commission adopt amendments to proxy disclosure rules to require public companies to disclose in their proxy statements their expenditures for both audit and non-audit services. Amendments to proxy disclosure rules should be undertaken once the Public Interest and Integrity Committee of the Canadian Institute of Chartered Accountants has finalized its proposed independence standards and should take into account those standards as well as recent proposed SEC rule changes for auditor independence.

  21. We endorse the recent amendments to the Act that, when proclaimed in force, will give the Commission rulemaking authority to address all aspects of the certification regime recently adopted by the SEC. In this regard, we urge the Government of Ontario to proclaim the rulemaking amendments in force on a timely basis to permit the Commission to embark on rulemaking in this area.

  22. We endorse the recent amendment to the Act that, when proclaimed in force, will give the Commission rulemaking authority to prescribe requirements relating to the functioning and responsibilities of audit committees of reporting issuers. We encourage other CSA jurisdictions to give their commissions similar powers, and we urge the CSA to work together on an expedited basis to establish standards for audit committees that will make Canadian audit committees 'best in class' internationally. We also encourage the CSA to be sensitive to the needs and resources of small-cap issuers in crafting any rule proposals.

  23. We recommend that the Act be amended to give the Commission rulemaking authority over corporate governance matters more generally. For example, we would support giving the Commission rulemaking authority to make rules relating to the composition, functioning and responsibility of boards of directors and nominating and compensation committees.
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PART 5 ENHANCING FUNDAMENTAL SHAREHOLDER RIGHTS

  1. We support the reforms to the CBCA relating to proxy solicitation. We strongly recommend that Part XIX of the Act be similarly amended to ensure that shareholders are able to communicate with each other in prescribed circumstances without having to file an information circular. We also recommend that the Commission co-ordinate with the provincial government so as to ensure that amendments adopted under the OBCA and the Act are uniform. We further urge the Commission to consider whether it has the authority to incorporate by reference the requirements of another Canadian statute such as the OBCA or CBCA with respect to proxy solicitation, rather than stating the rules explicitly in the Act.

  2. We recommend that the Commission, together with the CSA, undertake further study to determine whether amendments to securities law to relax the requirements relating to communications with and among shareholders in the context of a take-over bid should be enacted.

  3. Nothing has come to our attention that would support the need to regulate arrangements and take-over bids in an identical fashion. We believe that, as a matter of public policy, parties to commercial transactions should have the freedom to structure transactions to achieve their business purposes as long as these transactions, and the legislation that governs these transactions, are fair to all interested parties.

  4. We recommend that the Commission prepare a policy statement setting out guidance as to the factors to consider in determining when, in the context of take-over bid, a poison pill should be terminated.

  5. We recommend that the Commission and the CSA introduce a requirement for all publicly offered mutual funds to establish and maintain an independent governance body. When, in the reasonable opinion of the independent directors, the manager has placed its interests ahead of those of unitholders of a mutual fund through self-dealing, conflict of interest transactions or other breach of its fiduciary obligations, this body should have the right either to terminate the manager or to tell the unitholders about the manager's actions and provide unitholders with a period of time within which to redeem their units at no cost.

  6. We recommend that the process by which potential directors of mutual fund governance bodies are identified and nominated be expanded so as to include a broader range of potential directors. We further recommend that the majority of directors be independent of the management company. Lastly, the potential liability and defences available to directors of fund governance agencies needs to be settled in the legislation.

  7. We believe that the mutual fund governance body should have certain characteristics, including: independence from the manager; a majority of independent directors; the right to retain counsel and other independent advisers; the right to set its compensation and establish the obligation of each member to disclose annually all fees received from the fund and all affiliated funds; and the right to terminate the manager in specified circumstances.

  8. We believe that it is important to identify certain fundamental responsibilities of the mutual fund governance body. We believe these responsibilities should include, at a minimum, overseeing the establishment and implementation of policies related to conflict of interest issues; monitoring fees, expenses and their allocation; receiving reports from the manager concerning compliance with investment goals and strategies; reviewing the appointment of the auditor; meeting with the fund's auditor; and approving material contracts.

  9. We urge regulators and the mutual fund industry to work together to determine what standards or requirements should be satisfied by mutual fund managers before they are permitted to establish, promote and run a publicly offered mutual fund; who is best positioned to establish those standards or requirements and to monitor compliance with them; and whether registration of mutual fund managers is necessary and justifiable, from a cost-benefit point of view, as a means of imposing and monitoring compliance with the applicable standards or requirements for mutual fund managers.

  10. We recommend that subsection 143(31) of the Act be amended, if required, to give the Commission the necessary authority to address mutual fund governance reform through its rulemaking power.
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PART 6 ENFORCEMENT

  1. We recommend that the Commission provide guidance, in the form of a set of principles or guidelines, setting out the considerations that may be taken into account in determining the appropriate sanction to be applied in the context of administrative proceedings under section 127 of the Act.

  2. We suggest that consideration be given to whether it would be appropriate for the Commission to have rule-making authority to deal with issues relating to the administration and distribution of money ordered by the Commission to be disgorged.

  3. We recommend that a new offence be created under section 122 of the Act, for failing to fulfil, or contravening, a written undertaking to the Commission or the Executive Director. We also recommend that the Commission ensure that persons giving written undertakings to the Commission or the Executive Director are made aware that contravening or failing to fulfil such undertakings is an offence.

  4. We recommend that the Commission monitor the exercise by the Manitoba Securities Commission and the FSA of their respective new restitution powers and consider the practical implications of the exercise of this power, with a view to revisiting in the future whether a power to order restitution would be an appropriate remedy for the Commission.

  5. We encourage the Commission to consider exercising its discretion, in appropriate cases, to apply to the court under section 128 of the Act for a restitution or compensation order.

  6. We recommend that consideration be given to the desirability and implications of amending section 128 of the Act to permit investors, in certain circumstances, to apply to the court directly for an order for restitution or compensation.

  7. We recommend that, as a condition of its recognition of an SRO, the Commission should require the SRO to require its members to participate in and agree to be bound by any national complaint-handling system that is in place, as well as any industry-sponsored dispute resolution program that may be applicable. We favour transparency in connection with such programs and strongly encourage the publication of statistics relating to the use of the programs as well as particulars concerning the outcomes of cases or the resolution of complaints.

  8. We encourage the financial services industry to monitor the national complaint-handling system, in particular in the first year of its operation, to ensure that it is working as intended. Assuming that the system is successfully implemented, we recommend that the financial services industry then consider establishing a dispute resolution system on a similar, national basis.

  9. We strongly encourage SROs that have or may be contemplating alternative dispute resolution programs to, at a minimum, require their members to advise customers of the availability of such programs.

  10. We recommend that paragraph 127(1)7 of the Act be amended to authorize the Commission to order that a person resign one or more positions that the person holds as a director or officer of an issuer, registrant or manager of a mutual fund (changes in italics).

  11. We recommend that paragraph 127(1)8 of the Act be amended to authorize the Commission to order that:

    • a person be prohibited from becoming or acting as a director or officer of any issuer, registrant or manager of a mutual fund; and

    • a person or company be prohibited from becoming or acting as a manager of a mutual fund or as a promoter fund (changes in italics).

  12. We recommend that a new paragraph be created under subsection 127(1) of the Act, authorizing the Commission to order that a person or company:

    • comply with or cease contravening:

      1. Ontario securities law; or

      2. a direction, decision, order or ruling made under a by-law, rule or other regulatory instrument or policy of a recognized SRO or exchange.

    • comply in the future or take steps to ensure future compliance with Ontario securities law, or a direction, decision, order or ruling made under a by-law, rule or other regulatory instrument or policy of a recognized SRO or exchange.

  13. We recommend that paragraph 127(1)2 of the Act be amended to expressly provide that 'trading' in securities for purposes of that paragraph includes the purchase of securities.

  14. We recommend that section 122 of the Act be amended to include a provision permitting the Ontario Court of Justice to make an order, where appropriate, that the defendant compensate or make restitution to persons who have suffered a loss of property as a result of the commission of an offence by the defendant.

  15. We recommend that the Commission issue a policy statement providing interpretive guidance on the scope of the confidentiality provision in section 16 of the Act and clarifying the process for making an application for disclosure under section 17 of the Act, including the issue of standing to bring such an application.

  16. We recommend that once the provisions of the 2002 Amendments are proclaimed into force, the CSA amend subsection 3.1(2) of National Instrument 23-101 Trading Rules to provide that the anti-fraud and market manipulation provisions in the Act will apply in Ontario.

  17. We recommend that, in appropriate cases, the Commission consider pursuing alternative enforcement mechanisms available under sections 127 and 128 of the Act as a regulatory response to illegal insider trading.

  18. We recommend that the Government of Ontario consider amending the Act to broaden existing insider trading civil liability provisions by deleting the privity requirement in section 134 of the Act. We further recommend that consideration be given to including a provision that limits liability under this section to the amount of profit gained or loss avoided by the insider as a result of the transaction or transactions in question. Any such liability should also be reduced by the amount required to be disgorged pursuant to an order by the court, or the Commission, if applicable, in a proceeding relating to the same transaction or transactions.

  19. We recommend that the CSA consider further reducing the time period for filing insider reports (from the current requirement to file within 10 days of the date of the trade) once SEDI is operational.

  20. We recommend that Ontario securities law be amended to require insiders to report any effective change in, or disposition of, their economic interest in an issuer.

  21. We recommend that the issues raised with respect to the continuation of freeze orders under section 126 of the Act be studied further with the benefit of public input. In particular, we suggest the following issues, at a minimum, would require consideration:

    • whether the Commission or the court should authorize the continuation of a freeze order; and

    • what is the appropriate test to be applied in determining whether to continue a freeze order.

  22. With respect to the current power to order costs under section 127.1 of the Act, we recommend that the Commission develop policies or guidelines regarding how costs should be established and in what circumstances they may be ordered. We also recommend that costs orders made under section 127.1 should be subject to assessment on the application of a respondent.

  23. We recommend that consideration be given, on any future review of the Act, to whether it would be appropriate for the Commission to have the discretion to order costs payable to a respondent in Commission proceedings, and, if so, in what circumstances.

  24. We support whistle-blower protection in principle, but note that it does not necessarily belong in the Act. Such provisions might more appropriately be included in corporate or employment-related legislation, for example
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INTRODUCTION

  1. Evolution of the Securities Act

    The first securities law statute in Ontario (The Security Frauds Prevention Act 19285) dealt with little more than the licensing of stockbrokers and investigations into securities frauds. In 1945, securities regulation in Ontario was significantly expanded with the enactment of The Securities Act, 19456, which introduced the concept of distributions of securities to the public and required issuers to make certain limited disclosure. The Securities Act, 1947 7 imposed additional disclosure and other requirements for public distributions of securities and introduced statutory civil liability for false statements made in a prospectus.

    Our current Act originated with The Securities Act, 1966,8 which introduced or modified provisions dealing with continuous disclosure, proxy solicitation, take-over bids and insider trading. These amendments were based largely on the recommendations of the Report of the Attorney General's Committee on Securities Legislation in Ontario (informally known as the 'Kimber Report'). The closed system was introduced in The Securities Act, 19789 and in 1983 the take-over bid provisions of the Act were significantly revised as a result of the recommendations of the report of the 'Three Wise Men.' 10

    The most recent significant amendments to the Act were made in 1994, following the release of a report of a joint Ministry of Finance and Ontario Securities Commission Task Force on Securities Regulation, chaired by University of Toronto law professor Ron Daniels.11 The Daniels Committee was established in October 1993, following an Ontario court decision12 declaring a Commission policy statement on the sale of penny stocks invalid on the basis that the Commission had 'exceeded its jurisdiction under its enabling legislation in promulgating it.' As part of the 1994 Amendments, the Commission was given the authority to make rules with binding legislative effect, subject to a process involving both public comment and review of the proposed rule by the Minister of Finance.

    As a consequence of the enactment of the 1994 Amendments, the Commission undertook to review all of its existing policy statements, notices, blanket orders and rulings, and to reformulate them as rules, policies or staff notices or decide they were no longer appropriate or necessary. This process is commonly referred to as the 'Reformulation Project.'

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  2. Establishment of the Committee

    The 1994 Amendments imposed a requirement that the Minister of Finance (the 'Minister') establish an advisory committee every five years to review the legislation, regulations and rules relating to matters dealt with by the Commission and the legislative needs of the Commission. 13 This is the first such committee to be established.

    The Act requires the Committee to:

    • review the legislation, regulations and rules relating to matters dealt with by the Commission and the legislative needs of the Commission;

    • solicit the views of the public in respect of these matters by means of a notice and comment process; and

    • prepare for the Minister a report of its review and recommendations.

    In addition to this legislated aspect of our mandate, the Minister directed us to ensure that:

    • securities legislation in Ontario is up to date; and

    • securities legislation in Ontario enables the Commission to proactively enforce clear standards to protect investors and foster a fair and efficient marketplace.

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  3. The Draft Report

    1. Request for Comments on Issues List

      Because our mandate was very broad, our first challenge was to adopt a methodology to guide us. We began by developing an Issues List as a means of soliciting the views of the public. This was prepared with the benefit of input from the Commission. The Issues List was published in the Bulletin on April 28, 2000 and is attached as Appendix C. 14

      The Issues List addressed 42 issues under five broad headings:

      1. Principles Underlying Securities Regulation;

      2. Focus and Scope of Legislation;

      3. Impact of Regulatory Harmonization and Globalization Trends;

      4. Impact of Technology; and

      5. Mandate and Role of the Commission.

      The Issues List was not intended to be exhaustive or to limit in any way the issues which the Committee was prepared to consider. It was intended to focus the Committee on those areas in which the need for legislative change was viewed as being most pressing and to act as a catalyst for public comment. The Draft Report did not address all of the issues on this list. In many cases, no information or concerns came to the attention of the Committee to cause us to believe that any amendment to the Act was necessary. On the other hand, the Draft Report did deal with a number of issues that were not included on our Issues List, but instead were raised with the Committee by commenters. The Draft Report also addressed issues that were included on the Issues List even though we did not recommend any legislative change in these areas. We did this where we believed the issue was significant enough to merit drawing attention to our analysis and conclusions so that others, who might agree or disagree with us, would have an opportunity to do so.

    2. Research

      The Committee's staff prepared memoranda analyzing each of the 42 issues on the Issues List. Additional research was done in response to issues raised by commenters and by the Committee in the course of its deliberations. Much of the work done by the staff was original research. The staff also drew on existing research and analysis by Commission staff and by the staff of other commissions for the CSA. In addition, Commission staff made presentations to the Committee on various issues under consideration by the Committee.

    3. Comparative Analyses

      The research conducted for the Committee went beyond an analysis of Ontario securities laws. The Committee considered the approach used by securities regulators in other Canadian jurisdictions. We also looked for guidance to the regulatory regimes in the U.S., the U.K. and Australia. Each of these jurisdictions has introduced reforms to various aspects of capital markets regulation in recent years and accordingly the Committee had the benefit of some very thoughtful analysis of securities regulators from across Canada and around the world.

    4. Written Submissions and Presentations

      The Committee received 31 written submissions in response to our request for comment on the Issues List.15 Certain organizations and individuals met with us at our request.16 In addition, Commission staff made presentations on topics of particular interest to the Committee.17

    5. Meetings of the Committee

      The Committee met approximately 50 times over a 20-month period prior to the release of the Draft Report.

    6. Release of the Draft Report

      Our Draft Report was released for public comment on May 29, 2002. The comment period expired on August 15, 2002.

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  4. The Final Report

    1. Comments on the Draft Report

      We received written comments from 45 commenters on our Draft Report.18 We met 24 times between September 2002 and January 2003 to review all the comments we received and to reconsider our initial draft recommendations before finalizing the Report.



    2. Submission of the Report to the Minister

      The Committee now submits the Final Report to the Minister. The Act requires that the report be tabled with the Legislature and that a select or standing committee of the Legislative Assembly then be appointed to:

      • review the report;

      • hear the opinions of interested persons or companies; and

      • make recommendations to the Legislative Assembly regarding amendments to the Act.

    3. Future Committees

      The Minister will appoint the next Five Year Review Committee at the end of 2004. We anticipate that, since our Report constitutes such a broad survey of securities legislation, subsequent Five Year Review Committees will be able to focus their mandate more narrowly. We suggest that the Act be amended to require that future committees be appointed five years after the date of delivery of the final report of the previous committee, in contrast to the current provision which requires committees to be appointed every five years.



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  1. S.O. 1928, c. 34.
  2. S.O. 1945, c. 22.
  3. S.O. 1947, c. 98.
  4. S.O. 1966, c. 142.
  5. S.O. 1978, c. 47. The closed system was drawn from recommendations of the Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (Toronto: Department of Financial and Commercial Affairs, 1970) [hereinafter the "Merger Report"].
  6. Gordon Coleman, Garfield Emerson and David Jackson, Report of the Committee to Review Provisions of the Securities Act (Ontario) Relating to Take-over Bids and Issuer Bids (Toronto: Ontario Securities Commission, 1983).
  7. See Task Force on Securities Regulation, Responsibility and Responsiveness - Final Report of the Ontario Task Force on Securities Regulation (1994), 17 OSCB 3208 [hereinafter the "Daniels Report"].
  8. Ainsley Financial Corporation v. Ontario Securities Commission (1993), 14 O.R. (3d) 280 (General Division).
  9. The Act, section 143.12.
  10. See (2000), 23 OSCB 3034 or http://www.osc.gov.on.ca/en/Summary/fiveyearreview.html.
  11. A list of those individuals or groups who made written submissions to the Committee on the Issues List is attached as Appendix D to this Report. The submissions can be found online at http://www.osc.gov.on.ca/en/Summary/commentletters.html.
  12. A list of individuals and organizations that met with the Committee at the Committee's request regarding the Issues List is attached as Appendix E.
  13. A list of Commission staff who made submissions to the Committee regarding the Issues List is attached as Appendix F.
  14. A list of those individuals or groups who made written submissions to the Committee concerning the Draft Report is attached as Appendix B to this Report. The submissions can be found online at http://www.osc.gov.on.ca/en/Summary/srac_5yr-draft-report-comments.htm. We also met with representatives of the IDA and the BCSC and, at our request, members of the Capital Markets Branch of the Commission.
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