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

PART 2 FLEXIBLE REGULATION

In Part 2 of this report, we discuss issues relating to the structure and operations of the Commission, the basic structure of the Act such as its purposes and principles, rulemaking and the impact of the Internet on securities regulation. One of our main concerns is that the regulatory framework be flexible enough to adapt to a changing marketplace while maintaining high standards of investor protection.

Chapter 4 The Commission - Its Structure, Governance and Accountability

In a time when corporate governance of public companies is under intense scrutiny, it is not surprising that some have turned their attention to the structure, governance and accountability of the Commission as the regulator and overseer of Ontario's capital markets. In this chapter we address this issue.

4.1 The Structure of the Commission

In 1994, the Act was amended to change the status of the Commission from that of a government agency to that of a Crown corporation, and in 1997 the Commission obtained 'self-funding' status. 88 With these changes, the Commission has achieved greater autonomy and independence from the government.

For the purposes of this chapter it is necessary to distinguish between the Commission and its staff.

  1. The Commission

    The Commission is a not-for-profit corporation. The Commission, composed of nine to 14 members known as Commissioners, serves as its board of directors.89 The Commission is responsible for the administration of the Act.90 The Commissioners are appointed by the Lieutenant Governor in Council. One Commissioner is designated as the Chair of the Commission and is also the chief executive officer of the Commission and must devote him- or herself full time to the work of the Commission.91 The Lieutenant Governor in Council may also designate one or two Commissioners as Vice-Chairs.

    The Commission and the Minister of Finance are required to enter into a memorandum of understanding every five years setting out:

    1. the respective roles and responsibilities of the Minister and the Chair;

    2. the accountability relationship between the Commission and the Minister;

    3. the responsibility of the Commission to provide to the Minister business plans, operational budgets and plans for proposed significant changes in the operation or activities of the Commission; and

    4. other matters that the Minister may require.

    The final form of the memorandum of understanding must be published in the Bulletin. The first memorandum of understanding was to have been entered into by 1999. To date, no memorandum of understanding has been entered into between the Minister and the Commission.92

  2. Staff

    The Commission is authorized to employ 'such persons as it considers necessary to enable it to effectively perform its duties and exercise its powers under this and any other Act.' 93 Staff comprises lawyers, accountants, economists, investigators, managers and support staff. The Commission also establishes advisory committees of stakeholders from time to time to advise it on matters of mutual importance.

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4.2 Governance Matters

  1. Governance Structure

    The Commission discharges many of its responsibilities through committees: the Compensation Committee, the Audit and Finance Committee, and the Corporate Governance and Nominating Committee.94 The mandate of each committee, and its membership, is available on the website of the Commission at www.osc.gov.on.ca. The members of the committees are non-executive Commissioners except that the Chair of the Commission is an ex-officio, non-voting member of the Corporate Governance and Nominating Committee.

  2. Oversight and Accountability

    One method by which a corporation ensures that its governance structure is appropriate and it is operating properly is to undertake reviews of its structures and operations. Before the Commission became a Crown agency, its internal controls were established and monitored by the provincial government. When it became a Crown corporation, it began the process of establishing its own internal controls. As part of this process, the Audit Committee commissioned one of Canada's major accounting firms to identify and assess the key risks that may impact the objectives of the Commission and to develop an internal audit plan which would assist the Commission in mitigating these risks. Recommendations were delivered to the Audit Committee in October 2002. Following its review of the recommendations, the Audit Committee retained that accounting firm to continue its work by conducting the internal audit as contemplated by that report. This internal audit project is currently in the first year of its three-year plan.

    In its recent report95 the Fraser Institute notes that in the U.S., oversight of the SEC is conducted mainly through both houses of Congress. Each of the House of Representatives and the Senate has a committee whose mandate includes oversight of the SEC. Further, these committees rely heavily on the General Accounting Office (GAO), an independent government agency which studies government programs and spending, to oversee and study aspects of the SEC's operations. In 2001, the GAO released nine reports related to aspects of the SEC's operations.96

    We believe the Minister and the Commission should consider whether reviews or studies of specific aspects of the Commission's operations, similar to those conducted by the GAO of the SEC, would be beneficial to the Commission and its stakeholders.

Recommendation:

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


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4.3 Transparency

The Act, in section 2.1, sets out the principles for the Commission to consider and apply in carrying out its mandate, including the need for ' ... timely, open and efficient administration of the Act.' The governance of the Commission should serve as an example to those it regulates and oversees:

Recommendation: the quality of the governance of a regulator contributes towards the competitiveness of a jurisdiction's capital markets. It helps assure market participants that regulatory powers will be used in a reasonable manner and regulatory resources will be used efficiently.97

A fundamental aspect of the Commission's accountability is its relationship with the Minister. We strongly encourage the Minister and the Commission to execute the memorandum of understanding between them, and to publish it in the Bulletin.

The goal of transparency in connection with the Commission's structure and operations is further enhanced through the Commission's reporting processes. Section 143.9 of the Act requires the Commission, within 90 days of the end of its financial year, to deliver to the Minister and publish in its Bulletin a statement of the proposed priorities of the Commission in connection with the administration of the Act, the regulations and the rules, together with a summary of the reasons for the adoption of the priorities. This Statement of Priorities also must outline in general terms the Commission's anticipated expenditures for the next financial year by category for any category expected to exceed 10 per cent of the overall expenditures for the year. At least 60 days before the publication date of this statement, the Commission must publish a notice in the Bulletin inviting interested persons or companies to make written representations as to the matters that should be identified as priorities. The Statement of Priorities is published in the Bulletin and posted on the Commission's website when finalized. The Commission also reviews annually its performance against its past objectives in either its Annual Report, which is also published and sent to certain market participants, or the Statement of Priorities.

We are encouraged by recent measures and initiatives the Commission has undertaken to increase transparency in connection with its governance and accountability structure. The website of the Commission now contains a section entitled 'Governance and Accountability.' The section discusses the structure of the Commission and identifies its committees, their mandates and members. We also note and strongly support the Commission's commitment to continue to enhance the information it provides on its website in this regard.

4.4 The Many Roles of the Commission

The Commission is a multi-functional administrative agency. It discharges a number of different and overlapping roles at the same time, including making policy, conducting investigations and sitting as an administrative tribunal.

We have considered whether the structure of the Commission, which permits it to develop policy, conduct investigations and adjudicate issues which come before it, should be modified. We reviewed the structure of other administrative tribunals in Canada, and of securities regulatory authorities in Canada, the U.S., the U.K. and Australia98. We have also considered the case law in Canada concerning the functions of administrative tribunals.99.

The structure of the Commission, combining both regulatory and adjudicative functions in one administrative agency, is neither unique to the Commission nor contrary to the common law doctrine of reasonable apprehension of bias. The Supreme Court of Canada has considered multi-functional administrative agencies similar to the Commission on several occasions, and has consistently held that if the multiple functions are authorized by statute (as they are in the case of the Commission), the administrative tribunal cannot be attacked on grounds of reasonable apprehension of bias, solely because the structure, albeit statutorily authorized, expressly authorizes and directs it to perform overlapping functions.

The question, then, is not whether the current structure is permissible, but whether it is one which gives rise to perceptions of potential for conflict or abuse.100 This is a complex issue. There are advantages and disadvantages to both an integrated tribunal with 'overlapping functions' as well as a bifurcated model where the investigative and adjudicative functions are performed by separate entities. We make no recommendation on this issue at this time other than to note that because the structure of a multi-functional agency can give rise to perceptions of potential for conflicts or abuse, the current structure of the Commission merits further thought and study on a priority basis.

Recommendation:

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.


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Chapter 5 Objectives of the Act

5.1 Purposes of the Act

The Act sets out two purposes (the "Statutory Powers"):

1.1 The purposes of this Act are,

  • to provide protection to investors from unfair, improper or fraudulent practices; and

  • to foster fair and efficient capital markets and confidence in capital markets.

We considered whether the purposes set out in the Act continue to be appropriate. In doing so, we reviewed comparable provisions (to the extent they exist) in securities legislation in the U.S., the U.K. and Australia.101 We are satisfied that section 1.1 provides the Commission with a mandate that is appropriate and largely consistent with the mandate of other foreign securities regulators.

5.2 Principles to Consider

The Act directs the Commission to have regard to the following six fundamental principles in pursuing the Statutory Purposes (the 'Principles Clause'):

2.1 In pursuing the purposes of this Act, the Commission shall have regard to the following fundamental principles:

  1. Balancing the importance to be given to each of the purposes of this Act may be required in specific cases.

  2. The primary means for achieving the purposes of this Act are,

    1. requirements for timely, accurate and efficient disclosure of information,

    2. restrictions on fraudulent and unfair market practices and procedures, and

    3. requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants.

  3. Effective and responsive securities regulation requires timely, open and efficient administration and enforcement of this Act by the Commission.

  4. The Commission should, subject to an appropriate system of supervision, use the enforcement capability and regulatory expertise of recognized self-regulatory organizations.

  5. The integration of capital markets is supported and promoted by the sound and responsible harmonization and co-ordination of securities regulation regimes.

  6. Business and regulatory costs and other restrictions on the business and investment activities of market participants should be proportionate to the significance of the regulatory objectives sought to be realized.102

We identified the following additional considerations which are set out in securities regulation in other jurisdictions which we discuss below:

  • promoting the informed participation of investors in the marketplace;

  • maintaining the competitive position of Ontario in light of the international character of capital markets;

  • facilitating innovation in connection with regulated activities; and

  • facilitating competition among regulated market participants.
  1. Promoting the Informed Participation of Investors in the Marketplace

    Individual Canadians are investing in the capital markets in increasing numbers.103 With access to on-line research, advice and trading, individuals are becoming more directly involved in managing their own investments. In this environment, investor education has taken on a new importance. Retail investors face a bewildering array of choices. To invest wisely they need to understand the basics of investing and saving, know how to evaluate an investment or salesperson, and know how to protect themselves against possible fraud. We therefore recommend as reflected below that the Act be amended to incorporate in the Principles Clause the principle that effective and responsive securities regulation should promote the informed participation of investors in the marketplace. We note that the Commission has devoted considerable attention and resources to investor education in recent years.104

  2. Ontario's Place in Global Capital Markets

    In Part 1 of this report, we discussed the importance of Canadian capital markets being competitive on a global basis. Globalization of financial services, coupled with advances in information technology, mean investors are no longer geographically bound. Cross-border, 24-hour trading is already commonplace. If our markets are healthy and vibrant, investors will choose Canada. If our markets do not measure up to international standards, investors will bypass Canada and seek quality elsewhere. We therefore recommend as reflected below that the Act be amended to incorporate in the Principles Clause the principle that capital markets are international in character and it is desirable to maintain the competitive position of Ontario's capital markets.

  3. Facilitating Innovation

    In recent years we have seen the development of new technologies, new financial products, new market participants and new trading methods. Such financial innovations should be encouraged. They reduce costs and enable investors to better manage their money. Regulators should work with the securities industry to facilitate innovation. In particular, participants should be encouraged to discuss new product ideas and new market developments with the regulators at an early stage to ensure that the risks and regulatory implications are properly understood and managed. Similarly, regulators should avoid unreasonable barriers to entry or restrictions on market participants launching new products. We therefore recommend as reflected below that the Act be amended to incorporate in the Principles Clause the principle that innovation in Ontario's capital markets should be facilitated.

  4. Competition Among Market Participants

    Competition among market participants is the main engine for innovation and in general works to consumers' best interests. The Commission should seek to ensure that its rules and policies do not impede or distort competition. In particular, it is important to maintain a level playing field among all market participants. We therefore recommend as reflected below that the Act be amended to incorporate in the Principles Clause the principle that the administration and enforcement of Ontario's securities law should not unnecessarily impede or distort competition among persons carrying on regulated activities.

    These recommendations appeared in the Draft Report. All the comments we received on these recommendations following the release of the Draft Report were supportive,105 although one commenter was concerned that the additional principles may 'make the Act unwieldy.106 In particular, the commenter questioned, 'How should the Commission prioritize the various principles?' We do not believe that it would be advantageous for us to prioritize the various principles for the Commission, because different principles will vary in importance in different situations. Many of the principles complement one another and the Commission should consider them together when exercising its statutory mandate. We recognize that, in practice, there may be tensions between the different principles and that balancing these principles will not always be easy. We believe, however, that it should be left to the Commission to balance and prioritize competing principles as necessary.

Recommendation:

We recommend that the Principles Clause 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.


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Chapter 6 Structure of the Act

6.1 Should the Act Be Overhauled?

Since the Act first came into force in 1945, it has evolved into a complicated maze of legislation, regulations, rules and interpretative policies. The Act itself is less than 150 pages. However, its provisions must be read together with over 2,000 additional pages of regulations, rules (including national instruments), policy statements, notices, communiqués and clarification notes which restrict the provisions of the Act in some cases and supplement them in others. The result is a fragmented regulatory scheme which is accessible only to highly specialized practitioners.

The Committee considered whether Ontario should abandon the current Act and start again, this time adopting a more streamlined approach to securities regulation. This could be accomplished, for example, by enshrining broad principles and standards of market behaviour (together with enforcement authority) in the statute, with detailed requirements set out in rules that would be subject to ministerial approval. An exercise of this nature would only make sense if it could be done in the context of a national initiative. We are concerned that an overhaul of the Act in Ontario alone would exacerbate the differences in legislation that already exist across the country.107

Rulemaking has introduced increased flexibility into our system of regulation. It has made Ontario securities law easier to develop, adopt and amend. Accordingly, we recommend that future legislative initiatives move in the direction of broad principles being enshrined in the Act and detailed requirements contained in the rules. Although we make some recommendations to streamline further the rulemaking process, the ability of the Commission to make rules, if combined with some housecleaning of the Act, will move us significantly toward a more manageable set of regulations, particularly if the CSA's uniform securities law project achieves its objective. We support the efforts of participants in this project and believe that it is important that in drafting uniform legislation, they will take into account the recommendations of this Committee.

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6.2 Enshrining Core Concepts

Concepts that are fundamental to securities regulation should be enshrined in the Act. Some already are, but others are buried in the regulations. For example, the Act itself provides that a person must be registered to trade a security or act as an adviser; a prospectus must be prepared in order to distribute securities to the public; minority shareholders cannot be excluded from a take-over bid; public companies must provide certain information to their shareholders; and insiders may not misappropriate material undisclosed information for their own benefit. However, the concept that registered dealers and advisers 'deal fairly, honestly and in good faith with clients' is not set out in the Act, although this must surely be considered a cornerstone of securities regulation in Ontario. This principle is contained in a rule.108 The Committee believes that principles as fundamental as this should be enshrined in the Act. Furthermore, the detailed requirements that support the fundamental concepts of the Act should be moved from the Act to the rules. For example, the Act could provide that all exemptions from the prospectus requirement are prescribed by rule. This will ensure the Act remains a more manageable piece of legislation and will allow the Commission to amend the detailed requirements more easily to respond to changing circumstances in the marketplace.

6.3 Housekeeping Amendments

The Act is cluttered with outdated provisions that have been superseded by rules. One example is the exemption from the prospectus requirement available for trades made by an issuer of its own securities with its employees. There is an exemption for such trades in the Act.109 However, there is also a rule110 which eliminates this exemption and replaces it with a different exemption and conditions for using that exemption. Yet, on a plain reading of the Act, one would not be aware of the existence of the rule which fundamentally varies the exemption contained in the Act and the circumstances in which it is available. In situations such as these, the Act should be amended to reflect the fact that the Act has effectively been amended or supplemented by a rule. Such housekeeping amendments should be included in the Minister's legislative agenda on a regular basis.

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6.4 Plain English

The Committee believes Ontario securities law should be written in a style that is clear and easy to understand. As part of the Reformulation Project, proposed instruments must be accompanied by explanatory notices and Companion Policies; these notices and Companion Policies provide an opportunity for accessible explanations both of changes to the regulatory regime and of new regulatory initiatives. We understand that the CSA has embarked on a plain language initiative and we encourage these efforts.

Recommendation:
  1. 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.

  2. 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.


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Chapter 7 Rulemaking

The Commission was given rulemaking authority in the 1994 Amendments. The Committee reviewed the Commission's rulemaking process and concluded that although the rulemaking process works well, on balance, some refinements should be made to it.

7.1 Background

Prior to 1994, the Commission regularly issued policy statements. These policy statements did not receive legislative or ministerial approval, but were treated as having legal effect, both by the Commission and by capital market participants. In 1993, however, the court in the Ainsley decision found that one of the Commission's policy statements was invalid on the basis that the Commission had 'exceeded its jurisdiction under its enabling legislation in promulgating it.111

With the validity of policy statements under challenge as a result of this decision, there was a need to find a way to provide these instruments with legislative legitimacy. In October 1993, the Ministry and the Commission established the Daniels Committee. The Daniels Committee recommended that the Commission be given rulemaking authority, subject to appropriate accountability and transparency controls.112 The Government of Ontario accepted this recommendation and provided the Commission with rulemaking authority as part of the 1994 Amendments.

In response to the Ainsley decision and the 1994 Amendments, the Commission began the process of reviewing 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. This process is commonly known as the 'Reformulation Project.113 The Commission has also undertaken a number of new rulemaking and policy-making initiatives to keep pace with a changing marketplace. A significant number of the regulatory instruments considered during the Reformulation Project were national instruments; accordingly, securities regulators in other jurisdictions participated in this process. The need to ensure co-ordination among numerous provincial and territorial regulators has made the process more complex and resource intensive. In some cases, this multi-jurisdictional approach to rulemaking has hindered timely and expeditious securities policy-making and regulation.

The Reformulation Project is nearing completion. It has been an enormous undertaking not only for the Commission and other members of the CSA, but also for market participants and their advisers who have been operating in a changing regulatory environment and who have been asked to comment on a plethora of both reformulated instruments and new instruments. We expect that the completion of this project will alleviate some of the concerns expressed by market participants in their submissions regarding the number of new rules and policies.

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7.2 Scope of Rulemaking Authority

The matters with respect to which the Commission has the authority to make rules are specifically listed in the Act.114 These 'heads of rulemaking power' were intended to provide sufficient authority for the Commission to make rules dealing with those matters that were previously the subject of policy instruments, as well as securities regulatory matters which might arise in the foreseeable future. There is no 'basket provision,' however, that would allow the Commission to make rules with respect to matters within its legislative mandate but which were not specifically contemplated under the heads of its rulemaking power.

In the absence of a basket provision, the Commission must seek a legislative amendment to the heads of rulemaking authority if it wishes to introduce a rule that is within its legislated mandate, but which does not fall within the specific heads of rulemaking authority set out in the Act. This occurred during the Reformulation Project, when it became apparent that the Commission did not have sufficient legislative authority to support the conversion of certain existing policy statements into rules. These 'lack of authority issues' arose in connection with certain prospectus disclosure rules (such as the mutual fund and general prospectus rules) and procedural rules for distributions under a prospectus (such as the prompt offering qualification system and the shelf system).115

The Alberta Securities Commission, the BCSC and the SEC each have a basket provision as part of their rulemaking heads of authority. The Alberta Securities Commission is authorized to make rules governing 'any other matter related to the carrying out of the Act or the conduct of the business and affairs of the Commission.' The BCSC may make rules 'for the purpose of regulating trading in securities or exchange contracts, or for the purpose of regulating the securities industry or the exchange contract industry.' The SEC is authorized under six different statutes to adopt whatever rules and regulations may be necessary or appropriate to carry out its statutory functions. The reason for such a broad granting of powers was the 'imperative to protect investors against fraud or deception made possible by constantly changing conditions.116

We understand that commenters to the Daniels Committee opposed the inclusion of a basket provision in the heads of rulemaking authority out of concern that the authority of non-elected officials to make binding law had to be specifically circumscribed. Notwithstanding these comments, the Daniels Committee recommended in its final report that the Commission be given the authority to make rules 'respecting any other matter authorized by or required to implement any provision of this Act.117 The Government of Ontario did not accept this recommendation.

In our Draft Report we recommended that basket rulemaking authority be added to the rulemaking provisions in the Act. Some commenters on the Draft Report were concerned that basket rulemaking authority would give the Commission virtually unfettered rulemaking authority.118 We believe that there must be a balance between legitimate concerns relating to legislative authority and the need for regulatory responsiveness and flexibility. Piecemeal legislative amendments to broaden the heads of rulemaking authority unnecessarily slow down the rulemaking process. We note that any rule proposal must relate to the purposes of the Act and is subject to a public notice and comment period and Ministerial review and approval. These provisions should act as effective checks to ensure that the Commission acts within the proper scope of its basket rulemaking authority. Future five-year reviews would also afford an opportunity to consider whether the Commission has exercised this authority appropriately.

In the Draft Report our recommendation stated that the Commission should be given the authority to make rules respecting any matter that, in the opinion of the Commission, is necessary or advisable for carrying out the purposes of the Act. We have deleted the phrase 'in the opinion of the Commission' to remove the subjectivity of the determination from the test so that reliance on the basket rulemaking authority is reviewable. This should alleviate certain concerns expressed to us about giving the Commission this basket rulemaking authority.

We also understand that some CSA jurisdictions with basket rulemaking authority do not, in practice, rely on such authority for rule proposals. This practice appears to be based on a belief that a general rulemaking grant is ineffective where it is coupled with a list of specific heads of rulemaking authority. We are not aware of the basis for this belief nor have we found any support for this position in principles of statutory interpretation and administrative law. We would nonetheless suggest that if our recommendation is adopted by the Government of Ontario, particular attention be paid to this issue at the legislative drafting stage to ensure that the Commission is able to effectively use the proposed basket rulemaking authority.

Recommendation:

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.'


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7.3 The Need to Streamline the Rulemaking Process

Rulemaking permits flexibility and responsiveness in securities policy making and regulation. In general, the comments made to the Committee have been supportive of the Commission's rulemaking authority and believe that rulemaking is an effective regulatory tool.119 There is, however, concern with the time required to make a rule.120 It generally takes a minimum of 18 months to put a national or multilateral rule in place. Changes occur in the markets much more quickly than that. Ontario needs to adopt a more streamlined rulemaking process, subject to maintaining appropriate accountability and transparency controls.

  1. Length of comment period and Ministerial approval

    In our Draft Report, the Committee considered what improvements could be made to streamline the rulemaking process. We noted that Alberta and British Columbia each has a rulemaking process similar to that in Ontario, with certain important differences: the length of the comment period and the process for obtaining Ministerial approval.121 We therefore considered whether conforming the rulemaking process in the Act to the approach in either of these provinces would achieve our streamlining objective and facilitate the adoption of harmonized regulation across the country without compromising the public consultation process or the prerogative of the Minister to consider the Commission's regulatory initiatives. In this context, we made two recommendations including that:

    • The minimum initial comment period for rules be reduced from 90 to 60 days and that the minimum initial comment period for policies be reduced from 60 to 30 days.

    • The period for Ministerial review of rules be shortened from 60 to 30 days.

    Most commenters on the Draft Report were opposed to these recommendations.122 Commenters strongly believe that the net cumulative effect of our proposed recommendations would be to sacrifice full and complete public discussion in the name of expediency. Commenters noted that the costs associated with implementing new regulation can be burdensome and that it is critical to ensure that there is full transparency and a full airing of different views in the rulemaking process. In this regard commenters generally viewed the proposed shortened time frames as unrealistic and inadequate to obtain the proper input from market participants. We have reconsidered our draft recommendations in light of the concerns raised by commenters and have decided not to include them in our Final Report.

    In the context of our proposed recommendation in the Draft Report to shorten the time period available for Ministerial review of rules, one commenter raised a concern that the Ministerial review process is being used by lobbyists to 'unmake' or 'remake' Commission rules.123 We note that the Daniels Committee's recommendation that the Commission be given rulemaking authority was based on a number of foundational principles, including 'the need to preserve an appropriate political responsibility for the system of securities regulation.' The Daniels Committee strongly believed that there was a legitimate role for the Government of Ontario on securities-related matters that had broader public policy implications. The Daniels Committee also believed that it was important to have some form of government mechanism to safeguard against arbitrary actions by the Commission. It therefore recommended a form of government review of Commission rules.124 In making this recommendation, the Daniels Committee cautioned against frequent government disapproval of Commission rules as this would 'attenuate the commitment of stakeholders to active participation in the Commission's notice and comment process,' which the Daniels Committee regarded as the principal forum for public deliberation and debate over securities rulemaking.125

    We are supportive of the existing Ministerial review process and share the views expressed by the Daniels Committee. The Ministerial review period legitimately provides stakeholders with an opportunity to lobby the Minister if they believe a rule proposal is flawed or if, in their view, the comments they raised during the comment period have not been adequately addressed. However, it is fundamentally important that there be transparency with respect to the issues directly raised with the Minister during the Ministerial review period so that the integrity and transparency of the public notice and comment process are not undermined. In particular, the Minister should indicate the names of commenters who have raised concerns about a particular rule proposal 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.

    Recommendation:

    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.


  2. Republication for Comment

    In considering what improvements can be made to streamline the rulemaking process, the Committee also considered the existing requirement to republish proposed rules and policies for comment.

    The Act requires the Commission to republish a proposed rule or policy for comment if the Commission 'proposes material changes' to the rule or policy. This is an objective test. In Alberta and British Columbia, republication is required if the Commission proposes to make an amendment to a proposed rule that the Commission considers to be a material change. In other words, the determination is left to the expert tribunal in British Columbia and Alberta. In the U.S., a subsequent comment period is not required for SEC rules, 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.' The U.S. test provides some guidance to the SEC as to when republication is warranted.

    We found numerous examples of Commission rules and policies that have been republished for comment three or four times.126 In such cases, it is not unusual for the rulemaking process to take three to four years to complete. It is not clear to us that the benefits of republication always outweigh the resulting delays in the rulemaking process. As a result, in our Draft Report we proposed an alternative approach based on elements of the U.S., British Columbia and Alberta tests for republication, with additional guidance built in. In particular, we recommended that the Act be amended to require that the Commission republish for comment a proposed rule only if the Commission proposes changes to a rule that the Commission considers to be material, 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 recommended that a similar test be adopted for the republication of policy statements. In making this recommendation, we noted that the Ministerial review process could act as an effective control to ensure that the Commission republishes for comment in appropriate cases. In particular, the Minister has the power to return a rule to the Commission for further consideration and, in this context, could ask that a rule be republished for comment.

    We received several comment letters on recommendation. Most commenters were opposed to the subjective element of the proposed test and expressed concern that our proposal could result in significant changes not being republished for comment.127 Many commenters were supportive, however, of giving the Commission guidance as to when republication is warranted.128 In response to the comments received, we have removed the subjective element from our recommendation and continue to recommend adding guidance to the Act as to when republication for comment of a rule or policy is warranted.

    Finally, to assist market participants in their review of changes to rules and policies, we also 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.

    Recommendation:
    1. 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.

    2. 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 proposal rule or policy.


  3. Crowded Agenda and Prudent Imperfection

    We are concerned that the Commission's internal processes slow down the rulemaking process. In this regard, we note the number of initiatives that the Commission has on its policy agenda at any given time and the length of time that it often takes the Commission to complete them. It seems to us that the Commission may be trying to do too much. When rules take years to complete, the problems or inefficiencies they are intended to address continue. We are also concerned that the number of initiatives on the Commission's rulemaking agenda has discouraged capital-market participants from being fully engaged in commenting on proposed rules.

    We recommend that the Commission review its procedures to determine where bottlenecks occur. It should then establish internal standards that set out acceptable timeframes for staff to review and respond to comments received on a rule or policy proposal. Staff should report to the Commission annually on its performance against these standards and the Commission should publish these internal standards and report on its performance against such standards. 129

    We received several comments on this recommendation in the Draft Report. All of the commenters strongly supported this recommendation. One comment letter also raised the point that the efficiency of the Commission's policy work could be greatly improved if the Commission did not strive for perfection in their rule proposals. Rather, this commenter emphasized the need to focus on continuous improvement through a succession of goal-oriented, albeit imperfect solutions, that can be adjusted. In particular, the commenter noted:

    In its quest for perfect solutions the CSA tends to delay the implementation of change until, on occasion, the event which precipitated the need for change, ceases to be topical. An approach which would seek practical, if not perfect solutions would greatly improve the CSA process. Because CSA policy development is frequently delayed there is a tendency to override policy development by granting discretionary relief. ... .To avoid this it is critical that the CSA policy development process be made more efficient. 130

    We share the commenter's concern and believe that in order to enhance the timely implementation of policy changes, the Commission and the CSA should be willing to adopt practical, if not perfect, solutions.

Recommendation:
  1. 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.

  2. 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.


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7.4 Cost-Benefit Analyses

The Commission is required to publish in the Bulletin a notice of every rule it proposes to make.131 That notice must include 'a description of the anticipated costs and benefits of the proposed rule.132 Accordingly, both draft and final rules contain a section dealing with costs and benefits. In the past, this disclosure has often been boilerplate, providing a general overview of the benefits of the proposed regulation and certain of its costs. It is common to find the following statement made at the close of such a discussion: 'Based on experience to date, the Commission believes that the benefits of the proposed rule justify the costs.133 Notices have seldom included any empirical data in support of these conclusions. In comparison, the SEC often sets out the specific costs and benefits associated with proposed regulation.134 The SEC urges commenters to provide empirical evidence to assess whether proposed regulation will promote the efficiency of securities markets and the confidence of capital market participants.135

The Committee believes that, as a general practice before implementing rules, securities regulatory authorities should solicit, commission or conduct empirical studies with the objective of enabling regulators to assess the effectiveness, costs and benefits of the proposed rules. This cost-benefit analysis should include, where possible, a description of background materials and empirical evidence relied on. This affords investors and market participants the opportunity to digest and challenge the Commission's analyses through the comment process and/or provide additional empirical evidence for the Commission's consideration.

The Committee notes that the Commission has recently made improvements in this area. For example, in a recent concept proposal for a new fee structure issued by the Commission, the accompanying Notice included a very helpful economic analysis of the impact of the concept proposal on capital-market participants.136 We encourage the Commission to continue to include analyses of this nature, and of the type we discuss, in future rules.

However, there will be occasions when it is either unnecessary or infeasible to collect and assess empirical data and to perform the recommended cost-benefit analysis. In some cases, even if it is possible to collect certain data, it may not be possible to conduct a statistically significant analysis with it. In cases where the Commission does not complete more detailed cost-benefit analyses prior to the introduction of new regulation, it should explain why it was not feasible to do so.

Regulation that is not harmonized with securities laws in other CSA jurisdictions can be costly for issuers. Thus, we believe that cost-benefit analyses should also specify whether a proposed rule contributes to harmonizing securities laws across Canada. In particular, the notice accompanying a proposed rule should discuss the expected effect of the new policy or rule on harmonization and co-operation.137 If adoption of the rule is expected to lessen harmonization or cooperation, the Commission should describe why it should nevertheless be adopted.

Recommendation:
  1. 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.

  2. 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.


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7.5 Blanket Rulings and Orders

Blanket rulings and orders138 are rulings or orders of general application issued by a securities regulator that exempt classes of trades, securities, companies, transactions and other matters from regulatory requirements otherwise applicable. 139 Blanket rulings and orders apply to anyone who fits the terms of the order and obviate the need for a particular capital-market participant to seek a separate ruling or order from the Commission on an ad-hoc basis. Blanket rulings and orders eliminate costs, delays and uncertainty caused by individual applications for discretionary relief. The ability to issue blanket rulings and orders in connection with non-contentious recurring situations provides the regulator with another useful tool to address changes in the marketplace in a timely manner.

The Daniels Committee recognized the importance of blanket rulings and orders to a modern system of securities regulation. In its interim report, the Daniels Committee noted:

If properly utilized, the blanket ruling constitutes an effective means for incremental policy-making by the Commission. Specifically, the blanket ruling permits the Commission to exercise its discretionary exemption powers in respect of a class of cases involving similar or identical facts with which the Commission has had considerable regulatory experience. Blanket rulings permit the parties to avoid the costs and uncertainty of regulatory hearings in respect of matters where the Commission's thinking has crystallized. 140

In its final report, the Daniels Committee ultimately decided, however, that if the Commission were to receive rulemaking power, there would be little need for the Commission to continue its use of blanket rulings and orders. It recommended including exempting rules, which would be subject to notice and comment requirements, within the Commission's general rulemaking power:141

Replacing the blanket ruling instrument with exempting rules would have the benefit of simplifying the regime through the reduction of the number of regulatory instruments used. Most significantly, however, the resulting exempting rules would be subject to the notice and comment requirements and the cabinet disapproval period that we recommend for rules generally - requirements that the Commission is not statutorily bound to adhere to presently. On a going forward basis, we regard these procedural protections as appropriate and necessary given the rule like character of the blanket rulings and orders. 142

The Government of Ontario accepted the recommendation of the Daniels Committee and eliminated the Commission's authority to issue blanket rulings and orders as part of the 1994 Amendments.143 We received many comment letters, however, that support reinstating the Commission's power to issue blanket rulings and orders to respond in a timely manner to emerging issues of general concern.144

We believe that blanket rulings and orders complement rather than undermine the rulemaking process. The weekly Bulletins abound with examples of applications for relief routinely given by the Commission. It would be much more efficient for the Commission to issue a blanket ruling or order when it becomes apparent that there is a general need for exemptive relief. For example, instead of issuing identical rulings and orders to individual applicants on a weekly basis, the Commission could have issued blanket rulings and orders to:

  • permit mutual funds to track stock market indices without violating concentration limits;

  • grant registration and prospectus relief with respect to exchangeable shares transactions; and

  • permit related underwriters to act as underwriters in connection with a distribution of securities of a connected issuer subject to appropriate conditions.

While we believe that the Commission should have the ability to issue blanket rulings and orders, we are sensitive to concerns relating to proliferation of regulatory instruments and Ministerial accountability. Therefore, in our Draft Report we recommended that any blanket ruling or order be subject to a sunset clause of three years from the date of the introduction of the blanket ruling or order. This would provide the Commission with sufficient time to prepare a draft rule on the topic of the blanket ruling or order, issue it for public comment and submit it for Ministerial approval.

Two commenters on this recommendation believed, however, that a sunset period was unnecessary.145 They argued that the proposed sunset provision would add inefficiencies into the system and that our concerns were not warranted given that the scope of the blanket rulings being proposed by the Committee were restricted so that they could only provide exemptive relief. We are also concerned that the inclusion of a sunset clause could potentially place market participants relying on the exemptive relief in jeopardy if the Commission was unable to get a rule in place in time. We also note that other Canadian securities regulators with blanket ruling authority are not subject to a sunset clause. The desirability of harmonization in this regard weighed against inclusion of a sunset clause in the Act. We have therefore deleted the requirement for a sunset period from our recommendation.

We also rejected the suggestion that blanket rulings should be subject to a 30-day public notice and comment period.146 While we agree that the Commission should, where practicable and appropriate, seek public input on a proposed blanket ruling, we do not believe that notice and comment should be legislatively mandated for blanket rulings. We are concerned that a mandatory notice and comment period may not be feasible because exemptive relief applications are often time sensitive.

Recommendation:

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


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7.6 Publication of Exemption Requests Granted or Denied under Rules

Currently, when the Commission grants an exemption pursuant to the Act, the order granting the exemption is published in the Bulletin, allowing others to understand the reasons for the granting of the exemption. The Commission has not yet consistently adopted this approach with respect to exemptions granted from securities rules.147 We believe that market participants would benefit from such transparency. We therefore 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. 148

Recommendation:

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.

7.7 Review of Ontario Securities Law

The Act requires that the Minister of Finance 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.149 We are the first such committee to be established. The Committee considered the provision in the Act which requires the Minister to appoint a committee every five years. As discussed in the Introduction, the Minister will be required to appoint the next committee at the end of 2004. That may follow too soon upon the submission of this Report. Thus, we believe that future review committees should be appointed five years after the date of delivery of the final report of the previous committee in contrast to the existing provision.

We received comments relating to the composition of such committees.150 For instance, the Canadian Investor Relations Institute recommends that the Minister consider selecting representatives from both an interlisted (Canadian/U.S.) issuer and a TSX-only issuer to ensure that 'vital compliance topics are addressed from a first-hand perspective.151 We believe that committee membership should represent a diversity of backgrounds and interests relevant to the capital markets but we note that not every representative stakeholder must be on the Committee in order to have its views considered. Rather, it is important for all stakeholders to have an opportunity to raise issues of particular concern to them through whatever process the Committee decides to adopt.

We also received comments which proposed implementation of time limits on the delivery of the Draft and Final Reports.152 The Committee considered these comments and concluded that in order for the Committee to function on a shorter time frame, it would need to have a budget allocation from the Minister of Finance to hire a full-time staff. In addition, we note that the Minister and future committees have the ability to shorten the time frame required to complete future reports by casting the mandate of the Committee more narrowly.

Recommendation:

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 recommend that Committee membership represent a diversity of backgrounds and interests relevant to the capital markets.


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Chapter 8 The Impact of the Internet

8.1 Overview

The Internet has created a new environment for companies, dealers, advisers and other intermediaries as well as for investors. Websites, bulletin boards, e-mail and push technology permit real-time, widespread and low-cost communication. Research indicates that the Internet is not just an information channel: it has blurred the lines between information on the one hand, and advice, sales and promotion on the other hand.153

As a communication vehicle the Internet impacts a number of issues such as registration, enforcement and proxy solicitation. Reporting issuers are using the Internet to conduct public offerings, communicate with shareholders and potential investors, and conduct shareholder meetings. Intermediaries are using the Internet for marketing purposes, and for communicating with, and receiving orders from, potential investors. Retail investors are using the Internet to open and maintain accounts online, to trade without the assistance of a registered intermediary154, to communicate with other investors and as a research and investment tool.155 The Internet is also providing retail investors with direct access to an unprecedented amount of information, previously available only to institutions and 'sophisticated' investors.

In this chapter, the Committee considered whether amendments to the Act are necessary as a result of the use of the Internet by capital-market participants. The issues we considered in this context include:

  • the conduct of offerings over the Internet;

  • satisfying delivery obligations by the Internet; and

  • substituting postings on the Internet as a proxy for satisfying delivery obligations.

In Chapter 9 we also consider the impact of the Internet on registration issues, including the emergence and regulation of financial portals and the obligation to conduct suitability determinations with respect to investors who trade securities over the Internet.

Finally, the Internet has also created new avenues for fraud. This is because the Internet offers a medium that is fast, cheap, easy to use and relatively anonymous. In Part 6, we make a number of recommendations aimed at strengthening the Act's enforcement regime, which should also assist in enhancing the Commission's efforts to deal with on-line securities fraud.

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8.2 Application of Existing Regulation to Internet Communications

The CSA has twice issued interpretative policy guidance identifying issues to consider when using Internet communications in the context of activities regulated by the Act. These policies, National Policy 47-201 Trading in Securities Using the Internet and Other Electronic Means and National Policy 11-201 Delivery of Documents by Electronic Means, do not make any changes to the Act.156 Market participants must still adhere to the requirements in the Act and subordinate legislation even if they are communicating electronically with each other. These policies set out guidelines but allow 'participants to determine how they wish to comply with corporate and securities law requirements.'

We encourage the Commission to monitor the need for further guidance with respect to Internet communications and update the relevant policy statements as necessary. For example, guidance could be issued discussing instances in which hyperlinked documents will be considered by the CSA to form a part of a company's disclosure record and the types of website disclosure that may attract civil liability.

8.3 Electronic Commerce Act

Less than a year after the CSA adopted National Policies 11-201 and 47-201, the Province of Ontario passed the Electronic Commerce Act, 2000 (the 'ECA'). Similar legislation has either been tabled or passed in other provinces.

The objective of the ECA was to 'cut red tape and remove outdated legal barriers to e-commerce' in order to bring Ontario laws in line with technological advances.157 The ECA ensures that electronic contracts, documents and signatures have the same legal effect as contracts, documents and signatures on paper; sets rules for automated transactions; adopts national and international standards for e-commerce law; and requires consent for the provision of information in electronic form.

There is potential for inconsistencies and even conflict between the two CSA National Policies and the ECA. For example, a potential conflict could arise for an issuer if it were trying to determine whether it could deliver financial statements to shareholders, who had provided their consent, by posting these statements on the issuer's website. National Policy 11-201 suggests that delivery obligations can generally be satisfied by posting the relevant documents on a website if the investor has consented. In contrast, the ECA sets out circumstances in which merely making electronic information or documents available for access at a website will not constitute effective delivery. While our purpose is not to undertake an exhaustive review and comparison of the provisions of National Policy 11-201 and the ECA, we note that there are other provisions of the ECA that raise issues as to its impact on the guidance afforded by National Policy 11-201.

We believe the guidance offered by these National Policies has been helpful to many participants in the capital markets and that it is important that market participants be able to continue to rely on these policies. To the extent there is any inconsistency between the ECA and the National Policies, or perceived inconsistency, the CSA should amend the Policies, reformulate them as rules if necessary, or issue a notice providing guidance on how the ECA and the National Policies interact.

Recommendation:

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 commuiqué to market participants setting out its views.


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8.4 Internet Offerings

There have been some examples in the U.S., and to a much lesser extent in Canada, of issuers raising capital by offering securities on the Internet. Internet offerings conducted without the involvement of an underwriter are referred to as direct public offerings (DPOs). In 1998, e-minerals exploration corp., a Canadian junior mining company, completed the first DPO in Canada. Investors were permitted to subscribe for the offered shares by completing the on-line subscription agreement available at the website and submitting it electronically via the Internet. Since that time there have been no pure DPOs, although some companies have offered their securities over the Internet in conjunction with conventional sales by underwriters (e.g., flowthru.com, 1999). In addition, in the U.S., offerings of debt securities over the Internet by various governmental bodies are gaining increasing success and popularity.

Commenters on the Issues List noted that, except for National Policies 11-201 and 47-201, neither the CSA nor the Commission has offered guidance with respect to how securities can be offered over the Internet under existing Canadian securities laws. However, they did not provide specific examples of areas in which guidance is required. Market actors should start from the premise that the Act in no way prohibits Internet offerings and that the requirements that apply to paper-based offerings continue to apply to on-line offerings. The CSA has provided some guidance in NP 47-201 but has made it clear that this policy guidance does not change any substantive requirements of securities legislation.158 Accordingly, the Committee is of the view that additional regulation governing the sale or offering of securities on the Internet is unnecessary.

Pure DPOs are conducted without the involvement of a registered dealer. However, the Act requires that all trades in securities (including a primary distribution by an issuer) must be made through a registered dealer.159 Therefore, DPO issuers must find another way to comply with the requirement for trades in securities to be made through a registered dealer. The DPOs that have been completed to date have been done by having the issuer itself register as a dealer in the category of 'security issuer' (defined as 'an issuer that is registered for trading in securities for the purpose of distributing securities of its own issue solely for its own account').

Some argue that requiring an issuer to register as a dealer under the security issuer category is cumbersome and impedes an issuer's ability to quickly complete an offering of securities on the Internet. These commenters believe that eliminating the security issuer requirement would be desirable from the standpoint of the issuer because it enables the issuer to go to market more quickly.

However, eliminating the security issuer registration requirement would leave important investor protection issues unaddressed.160 The Committee does not believe there is anything about an Internet offering that eliminates the public policy rationale for the registration requirement. Without the appropriate know-your-client and suitability checks in place, investors may purchase securities that are highly speculative and inappropriate for the investor given his or her personal circumstances, investment experience, investment objectives and financial means.

In the Committee's view, if suitability and know-your-client assessments are necessary and appropriate protections in the context of offerings which are not conducted over the Internet, we see no reason why they should be unnecessary in the context of Internet offerings. 161

Recommendation:

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.


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8.5 Methods of Delivery

When an issuer is required to deliver documents to its shareholders, the Act does not specify the method of delivery except in a take-over bid context where delivery 'by pre-paid mail' is contemplated. The CSA has offered guidance through National Policy 11-201 for issuers who wish to deliver these documents electronically. If an issuer satisfies four criteria set out in the Policy, then an issuer may deliver documents electronically unless some other method of delivery is specifically required by the Act.162 The Committee agrees with this approach, as it offers flexibility to issuers who wish to avail themselves of the benefits of electronic delivery, but only permits them to do so where the recipient actively chooses electronic delivery.

8.6 Access-Equals-Delivery

In May 2000, the SEC issued a Release in which it sought comment on whether the delivery model presently contained in U.S. securities legislation should be replaced with an 'access-equals-delivery' model.163 Under such a model, investors would be assumed to have access to the Internet, thereby allowing delivery to be accomplished solely by an issuer posting a document on the issuer's or a third party's website. In the Release, the SEC stated that:

We believe that the time for an ‘access-equals-delivery' model has not arrived yet. Internet access is more prevalent than in 1995, but many people in this country still do not enjoy the benefits of ready access to electronic media. Moreover, even investors who are online are unlikely to rely on the Internet as their sole means of obtaining information from issuers or intermediaries with delivery obligations. Some investors decline electronic delivery because they do not wish to review a large document on their computer screens. Others decline electronic delivery because of the time that it takes to download and print a document.164

The comments received by the SEC at the time persuaded it not to abandon the present system of document delivery.

National Policy 11-201 states that 'referring an intended recipient to a third party website will generally not constitute valid delivery unless the recipient had previously consented to this form of delivery.165 Thus, the CSA would permit an issuer and shareholder to agree between themselves that delivery obligations can be satisfied by reference to the third-party website. However, the Policy does not, and could not, shift the onus of ensuring that shareholders receive disclosure documents from issuer to investor.

The delivery requirements in the Act must be re-evaluated in light of the Internet. The Commission, together with other members of the CSA, has responded to this imperative and we agree with the steps they have taken. The next step would be to consider whether 'access-equals-delivery' is a viable model. Should investors bear the onus of retrieving materials from the issuer's website? What about investors who do not have access to the Internet, or electronic capabilities to download and print large documents containing advanced graphics? On the other hand, there is considerable anecdotal evidence that suggests many investors do not read or want all material required to be delivered to them. It is also clear that an access-equals-delivery approach would result in significant cost savings to the industry, which hopefully would be shared by investors.

In our Draft Report we suggested that as the approach to delivery evolves, one way for the CSA to phase in electronic delivery would be to consider whether different delivery obligations should apply to different categories of documents. For example, those documents that convey information but do not require any action by the shareholder (e.g., issuer's financial statements) might be considered appropriate candidates for an access-equals-delivery approach. On the other hand, documents that invite shareholders to take some form of specific action in connection with a particular corporate event (e.g., a take-over bid circular or a proxy circular) would require actual delivery.

Subsequent to publication of our Draft Report in which we discussed the 'access-equals-delivery' model, the CSA released for comment proposed National Instrument 51-102 Continuous Disclosure Obligations, which contemplates an access-equals-delivery model for certain continuous disclosure documents. Under the National Instrument, mandatory delivery of financial statements and MD&A to securityholders would be eliminated although these documents would continue to be posted to SEDAR. Issuers will only be obligated to deliver copies of these documents to securityholders that request them.166

Recommendation:

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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  1. The Act, subsection 3(12).
  2. The Act, subsection 3.1(1).
  3. The Act, subsection 3.1(2).
  4. The Act, subsections 3(5), 3(7).
  5. While no memorandum of understanding has yet been entered into, we understand one has been substantially negotiated between the Minister and the Commission and that the Commission does, in practice, perform its responsibilities under the memorandum of understanding as if it was in effect.
  6. The Act, subsection 3.6(1).
  7. By-law Number 1 of the Commission authorizes the Commission to establish committees. See section 3.8.
  8. Neil Mohindra, The Governance of the Ontario Securities Commission: Lessons from International Comparisons (Fraser Institute, Public Policy Sources Number 61: August 2002) at p. 13.
  9. Ibid. at p. 13. The studies looked at matters such as actions taken to address day trading concerns, human capital challenges, fine collections and disclosure of certain policies to investors.
  10. Ibid.at p. 17.
  11. In the U.S., hearings brought by the SEC are heard in the first instance by administrative law judges. At first blush it would appear that the SEC has completely separated its regulatory from its adjudicative functions. However, the administrative law judges are SEC employees, and their decisions are appealable to the SEC.
  12. Brosseau v. Alberta (Securities Commission) [1989] 1 S.C.R. 301; E.A. Manning Ltd. v. Ontario Securities Commission (1995), 23 O.R. (3d) 257 (C.A.); Ocean Port Hotel Ltd. v. British Columbia (General Manager, Liquor Control & Licensing Branch) 2001 SCC 52.
  13. We note that a Commissioner who has signed an investigation order under Part VI of the Act is prohibited from sitting on a hearing dealing with the matter in question (subsection 3.5(4) of the Act). This provision ensures that the Commissioners who perform a quasi-adjudicative function with respect to a matter are not biased. Furthermore, aside from signing an order under Part VI, Commissioners are not otherwise involved in the investigation process.
  14. Both the U.K. and Australian regulatory regimes have recently undergone a very thoughtful process of review and revision
  15. Sections 1.1 and 2.1 of the Act were enacted pursuant to the 1994 Amendments on the recommendation of the Daniels Committee. Section 2.1 was enacted as a result of concerns that there would be little to gain from having just a mandate section predicated on broadly defined purposes. Section 2.1 lists several principles that both "common sense and the actual practices of the Commission dictate should be and have been used to direct and structure the Commission's interpretation of the Act's purposes in the context of specific cases, problems and regulatory initiatives." See the Daniels Report, supra note 11 at page 3235.
  16. "Roughly one half of all working Canadians are directly and indirectly invested in the equities market. Over the past ten years, Canadian investors' holdings of securities have doubled to more than $550 billion today. Ten years ago, 22 per cent of the average investor's financial assets (bank accounts, RRSPs, pension, insurance, etc.) were stocks.Today this share has grown to 30 per cent." (IDA, Canadian Securities Industry Profile (http://www.ida.ca/indissues/indprofile.en.asp).
  17. For example, the Commission participates, along with other members of the Council of Securities Regulators of the Americas, in an annual "Investor Education Week" to heighten public awareness of the capital markets, the role of regulators and the information resources available to investors. In June 2000 the Commission also established the Investor education Fund to develop and support initiatives that educate investors.
  18. See comment letters of the Certified General Accountants of Ontario, Ogilvy Renault, Ontario Teachers' Pension Plan, Canadian Association of Insurance & Financial Advisors, and Securities Subcommittee of the Ontario Bar Association.
  19. See comment letter of the Securities Subcommittee of the Ontario Bar Association.
  20. As we discussed in Chapter 1, we believe that Canadian securities regulators should move toward greater harmonization.
  21. OSC Rule 31-505 Conditions of Registration, subsection 2.1(2).
  22. The Act, clause 72(1)(n).
  23. OSC Rule 45-503 Trades to Employees, Executives and Consultants.
  24. In Ainsley Financial Corporation v. Ontario Securities Commission (1993), 14 O.R. (3d) 280 (General Division), the court declared invalid a Commission policy statement respecting the sale of penny stocks because the Commission exceeded its jurisdiction.
  25. See the Daniels Report, supra note 11.
  26. Since 1995, the Commission has reviewed approximately 300 regulatory instruments.
  27. For example, the Commission may make rules regulating the listing or trading of publicly traded securities including requiring reporting of trades and quotations.
  28. The Daniels Report stated, for example, that the Commission should receive rulemaking authority to enable it to reformulate former National Policy Statement No. 44 Shelf Prospectus Offerings. However, the head of authority given to the Commission under the 1994 Amendments was not sufficiently broad to capture the entire shelf regime. The Act requires prospectuses to be renewed annually. The shelf regime allows shelf prospectuses to remain in force for two years, after which time they must be renewed. The Commission's rulemaking authority did not permit the Commission to extend the one-year period prescribed by the Act by way of a rule. As a result, in Ontario, amendments were made to the Commission's rulemaking authority in December 1999 to permit proposed National Instrument 44-101 Shelf Distributions to be adopted without the need for issuers to apply for and obtain discretionary relief in order for a receipt for a base shelf prospectus to be effective for more than one year.
  29. R.A. Holman & Co., Inc. v. SEC, [1962] 2999 F.2d 127, 132 (D.C. Cir.) cert. denied, 370 U.S. 911, quoted in L. Loss and J. Seligman, Securities Regulation, 3rd ed. (Boston: Little, Brown & Company, 1993) at 4915.
  30. The Daniels Committee also considered a broader formulation that would authorize rules respecting any matter that, in the opinion of the Commission, was "necessary or advisable for carrying out the purposes and provisions of the Act." The Daniels Committee noted that provisions of this type are frequently found in regulation-making provisions of Ontario and federal statutes. Ultimately, the Daniels Committee recommended the narrower formulation, although we note that this recommendation was never picked up in the 1994 Amendments. In reaching its recommendation, the Daniels Committee gave the following reasons:
    • the Commission's heads of authority are intended to be comprehensive, both in terms of the number of matters listed and in terms of the scope of the rulemaking authority that is provided for with respect to the listed matters;
    • a responsibly limited basket provision would be more consistent with the innovation of the Commission's rulemaking versus a more broadly drafted provision; and
    • periodic resort to the legislature for amendments to the Commission's heads of rulemaking authority is expected and desirable. (The Daniels Report, supra note 11 at page 3255.)
  31. See comment letters of Simon Romano, the Independent Financial Brokers of Canada, the Canadian Association of Insurance & Financial Advisors, and the Securities Subcommittee of the Ontario Bar Association.
  32. See comment letters on the Issues List of the Alberta Securities Commission, the Ontario Teachers' Pension Plan, the IDA, Torys LLP, TSX Venture Exchange, Canadian Institute of Chartered Accountants, Osler, Hoskin & Harcourt LLP, Simon Romano, Glorianne Stromberg, the Canadian Association of Insurance and Financial Advisors, and the BCSC.
  33. See comment letters on the Issues List of the IDA, Torys LLP, TSX Venture Exchange, and the Canadian Association of Insurance and Financial Advisers.
  34. For example, the BCSC must seek ministerial approval in principle prior to publishing a rule and ministerial consent once it has made a rule. The Commission must seek ministerial approval once it has made a rule. The Alberta Securities Commission does not need to obtain formal ministerial approval either prior to or following the adoption of a rule.
  35. See comment letters of the Independent Financial Brokers of Canada, the Investment Funds Institute of Canada, the Canadian Institute of Chartered Accounts, the Securities Subcommittee of the Ontario Bar Association, Simon Romano, BMO Nesbitt Burns, and the Canadian Bankers Association .
  36. See comment letter of the Nova Scotia Securities Commission
  37. While the 1994 Amendments required Ministerial approval of Commission rules, the Daniels Report had actually recommended that Cabinet be vested with the explicit statutory power to either disapprove or amend a Commission rule within a disapproval period (See the Daniels Report, supra note 11 at page 3229).
  38. See the Daniels Report, supra note 11 at page 3229.
  39. See for example, the publication history of OSC Rule 31-502 Proficiency Requirements for Registrants; OSC Rule 41-501 General Prospectus Requirements; OSC Rule 61-501 Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions; and OSC Rule 91-504 Over-The-Counter Derivatives.
  40. See comment letters of the Canadian Bankers Association, the Canadian Association of Insurance and Financial Advisors, and BMO Nesbitt Burns.
  41. See comment letters of the Canadian Association of Insurance and Financial Advisors, the Canadian Investor Relations Institute, Ontario Teachers' Pension Plan, and the Canadian Institute of Chartered Accountants.
  42. See comment letter of Ontario Teachers' Pension Plan, which recommended that the Commission publish its internal rulemaking standards and report on its success in meeting the benchmarks.
  43. See comment letter of the Nova Scotia Securities Commission.
  44. The Act, subsection 143.2(1).
  45. The Act, subsection 143.2(2).
  46. See, for example, Notice of Proposed Rule 33-503 Change of Registration Information, Rescission of Notice and Revocation of Regulations under the Securities Act, http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/33-503_rule.html (September 17, 1999); Notice of OSC Rule 31-507 "SRO Membership - Securities Dealers and Brokers", http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/31-507_oscrule_20000630.html (June 30, 2000).
  47. SEC, "Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate", 17 CFR Part 270, Release No. IC-24775; File No. S7-20-00, RIN 3235-AH57, or online at http://www.sec.gov/rules/proposed/ic-24775.html.
  48. A typical statement from an SEC Release requesting comments from capital market participants on a given subject reads, "The Commission requests comment on all aspects of this cost-benefit analysis, including identification of additional costs or benefits of the proposed changes. The Commission encourages commenters to identify or supply any relevant data concerning the costs or benefits of the proposed amendments." See, for example, SEC, "Firm Quote and Trade-Through Disclosure Rules for Options" 17 CFR Part 240, Release No. 34-43085; File No. S7-17-00, RIN 3235-AH96, or online at http://www.sec.gov/rules/proposed/34-43085.html#link17.
  49. Notice and Request for Comments 11-901 Concept Proposal to Revise Schedule 1 (Fees) to the Regulation to the Securities Act (Ontario) (2001), 24 OSCB 1971.
  50. See comment letter of Ogilvy Renault.
  51. Orders are granted pursuant to the Commission's exempting powers in sections 83, 144 and 147 of the Act. Rulings are granted pursuant to the Commission's exempting power in subsection 74(1) of the Act.
  52. Prior to the 1994 Amendments, the Commission had the ability under various statutory exemption powers to issue blanket rulings and orders. For example, the Commission had the power under subsection 121(2) of the Act to exempt any class of persons or companies or class of transactions from the requirements of Part 21 of the Act.
  53. The Daniels Report, supra note 11 at page 22.
  54. For example, paragraphs 8 and 20 of subsection 143(1) of the Act give the Commission authority to make rules for exemptions from the registration and prospectus requirements under the Act or for the removal of exemptions from those requirements.
  55. The Daniels Report, supra note 11 at page 3223.
  56. The Commission is now prohibited under section 143.11 of the Act from making any orders or rulings of general application.
  57. See comment letters of the Certified General Accountants of Ontario, the Investment Counsel Association of Canada, the Royal Bank of Canada, the Ontario Teachers' Pension Plan, the Canadian Bankers Association, the Nova Scotia Securities Commission, and the Securities Subcommittee of the Ontario Bar Association. See also the comment letters on the Issues List of the BCSC and Torys LLP.
  58. See comment letters of the Canadian Bankers Association and the Nova Scotia Securities Commission.
  59. See comment letter of the Ontario Teachers' Pension Plan.
  60. By way of example, the Commission does publish exemption orders granted under OSC Rule 61-501 Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions.
  61. Three commenters agreed that notice should be provided to the marketplace when exemptive relief applications are not granted but recommended that the identity of the applicant should be kept confidential. We agreed with this comment and revised our recommendation from the Draft Report accordingly.
  62. The Act, section 142.12.
  63. See comment letter of the Canadian Investor Relations Institute.
  64. Ibid.
  65. See comment letters of Ontario Teachers' Pension Plan, Robert Kyle, and the TSX.
  66. Bank Works Trading Inc., Making Money on the Web 2001: The Web and Other Channel Preferences (March 2001) (www.bankworks.com).
  67. Eighty-seven per cent of affluent online investors (i.e., average $100K-125K household income and $100K-160K of investable assets) use an adviser to some degree. Thirty-three per cent of affluent investors, whose primary investment provider is a discount broker, say they receive no financial advice. (Ibid.)
  68. Fifty-nine per cent of Canadians have direct in-home or office Internet access, but a far smaller percentage is doing meaningful activity (Ipsos-Reid, Canadian Telecom & IT Review, Third Quarter, 2000 (http://reailinteractive.ca)). Research and tracking are the dominant activity among affluent investors, with 95 per cent using the Internet for research. (Ibid.)
  69. (1999), 22 OSCB 8173 and (1999), 22 OSCB 8163.
  70. S.O. 2000, c. 17. See Government of Ontario Press Release issued October 16, 2001, announcing the passage of the ECA.
  71. See "Responses to Comments" in National Policy 47-201 (1999), 22 OSCB or online at: osc.gov.on.ca/en/Regulation/Rulemaking/Policies/47-201_19991217.html.
  72. The Act, section 25.
  73. See comment letter of the IDA.
  74. As we note in Chapter 9, not all trades in securities necessarily need to have a registrant do a suitability analysis, but all trades still need to be effected through registrants so that the know-your-client analysis, and its attendant protections, can be done.
  75. The four components of electronic delivery of documents are:
    1. The recipient of the document receives notice that the document has been, or will be, sent electronically or otherwise electronically made available.
    2. The recipient of the document has easy access to the document.
    3. The deliverer of the document has evidence that the document has been delivered or otherwise made available to the recipient.
    4. The document that is received by the recipient is not different from the document delivered or made available by the deliverer.
  76. "SEC Interpretation: Use of Electronic Media," Release Nos. 33-7856, 34-42728, IC-24426; File No. S7-11-00 (May, 2000).
  77. Ibid.
  78. This statement appeared in the "Responses to Comments," which were attached to the final version of NP 11-201. The actual provision in the Policy is as follows: "An attempt to deliver documents by referring an intended recipient to a third party provider of the document, such as SEDAR, will not likely constitute valid delivery of the document, in the absence of consent given by the intended recipient to such method of delivery."
  79. In February 2003 the Joint Forum of Financial Market Regulators released for comment a discussion paper entitled Rethinking Point of Sale Disclosure for Segregated Funds and Mutual Funds (2003), 26 OSCB 1443. The discussion paper contemplates extending an access-equals-delivery approach to delivery of documents to mutual fund investors. The fund summary document, which would replace the current simplified prospectus, would need to be offered to consumers before a purchase is made. However, the base disclosure documents and continuous disclosure documents of a fund would be made available in electronic form, via a web-based posting, or in paper form if requested.

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