Recent Developments in Securities Law

• Author: Paul G. Findlay
• Pages: 293-324

Recent

Developments

in

Securities

Law

Paul

G.

Findlay

There

is

perhaps

no

area

of the law in

Canada that

is

changing

as

rap-

idly

as

securities law.

The

Ontario Securities Commission (OSC) pub-

lishes

a

bulletin every week. More

often

than

not it

contains

one or

more

notices,

rules,

or

policies that

affect,

or

proposals

that

would

affect,

securities regulation.

The

other

major

securities commissions issue

a

similar

publication weekly

as

well.

The

purpose of this paper is, as its name suggests, to discuss recent

changes

in

securities law.

But

beyond discussing

the

actual changes,

it

attempts

to

describe what

is

causing

the

securities regulatory authori-

ties

to

implement these changes. Finally,

it

describes

the

recent propos-

als for an

overhaul

of the

whole securities regulatory regime

—

unifor

m

securities

legislation,

a

passport system,

and a

national securities com-

mission.

Paul

G.

Findlay

is a

partner

at

Borden Ladner Gervais

LLP in

Toronto.

He

practises

in the

area

of

corporate/commercial

law

with

an

emphasis

on

securi-

ties

law, mergers

and

acquisitions,

corporate governance,

and

mutual

funds.

293

294

PAUL

G.

FlNDLAY

A.

WHAT

IS

DRIVING

THE

SECURITIES

REGULATORY

CHANGE

1)

U.S. Developments

As

has

been

well

documented,

a

series

of

corporate scandals

in the

Unit-

ed

States caused

the

U.S. Congress

to

pass

the

Sarbanes-Oxley

Act

(SOx),

which imposed

a

number

of

requirements

on

U.S. reporting companies

with

a

view

to

attempting

to

avoid such scandals

in the

future.

Further-

more,

the

stock exchanges

in the

United States have strengthened their

corporate

governance requirements

for

largely

the

same reasons.

Canada

has had its own

share

of

corporate scandals. However,

for

the

most part

it had not

acted

to

implement measures

to

avoid such

scandals until

the

passage

of

SOx. That caused

the

securities regulatory

authorities (especially

the

OSC)

to

consider which

of

those provisions

should

be

brought

to

Canada. Here, there

was

much public discussion

about whether

SOx was

appropriate

for the

Canadian environment

in

light

of our

different

capital markets, that

is, our

much larger percent-

age of

small capitalization companies.

One

could argue that

the

proposed imposition

of

civil liability

for

secondary market disclosure

in

Ontario

was as a

result

of the

U.S. cor-

porate scandals

and the

passage

of

SOx. That legislation was,

of

course,

proposed

by the

Canadian Securities Administrators (CSA)

in

2000,1

but

it

had not

progressed

in any

province until

the

passage

of

SOx. Even

so,

it

has not yet

been proclaimed

in

force

in

Ontario,

nor has it

been pur-

sued

in the

other provinces.

It is

expected

to be

implemented

in

Ontario

later

in

2004.

Certain other changes were

specifically

more

SOx-inspired.

For

example, National Instrument 52-108, Auditor Oversight establishes

a

requirement

for

auditors

of

reporting issuers

to

become registered

with

the

Canadian Public Accountability Board, which

was

modelled

on the

U.S.

Public Company Accounting Oversight

Board.

Multilateral

Instrument 52-109,

Certification

of

Disclosure

in

Issuers'

Annual

and

Interim Filings, also substantially emulates

the

requirements proposed

in the

United States

to

require

the

chief

execu-

tive

officer

(CEO)

and

chief

financial

officer

(CFO)

of

public companies

1 CSA

Notice 53-302

—

Report

of

the

Canadian

Securities

Administrators

Proposal

for

a

Statutory

Civil

Remedy

for

Investors

in the

Secondary

Market

and

Response

to

the

Proposed

Change

to the

Definition

of

"Material

Fact"

and

"Material

Change"

23

O.S.C.B.

7383 (November

3,

2000)

[CSAN

53-302].

Recent

Developments

in

Securities

Law 295

to

certify

the

accuracy

of the

financial

statements and,

after

a

transition

period,

the

efficacy

of

disclosure controls

and

procedures

and

internal

control over

financial

reporting.

Multilateral

Instrument

52-110,

Audit Committees establishes respon-

sibilities

and

rules

for the

composition

of

audit committees

of

public

companies. Again,

a

significant source

was

SOx,

the

rules

promulgated

thereunder,

and the new

listing requirements

of the

NYSE

and

NASDAQ.

Furthermore,

the

SOj-inspired

corporate governance changes

in the

United States also spawned proposed Multilateral Policy 58-201,

Effec-

tive

Corporate Governance,

and the

related Multilateral Instrument

58-

101, Disclosure

of

Corporate Governance Practices.

Proposed National Instrument 81-107, Independent Review Com-

mittee

for

Mutual Funds, although dealing with governance

of

mutual

funds,

cannot truly

be

said

to be

inspired

by

recent U.S. developments,

as the

concept

paper

on

which

it was

based pre-dated

the

latest

spate

of

mutual

fund

scandals

and

even corporate scandals that inspired SOx.

However,

it is

reasonable

to

expect that

the

scandals

in the

United States

will provide more impetus

to

pass

NI

81-107.

2)

Increasing Importance

of the

Secondary Market

The

focus

of

securities legislation historically

has

been

the

primary

offering

of

securities.

The key

definition

of

"distribution" primarily

relates

to

trades

in

securities

of an

issuer that

"have

not

been

previous-

ly

issued."2

Any

trade that would

be a

distribution

is

prohibited unless

a

prospectus

is

filed

with

and

cleared

by the

applicable securities regu-

latory

authority.3

The CSA

have indicated that approximately

94

percent

of

all

trades occur

in the

secondary

market.4

The

implication

is

that

the

emphasis

on

prospectus disclosure

may be

misplaced.

It is

difficult

to

reconcile

the

statutory

civil

liability imposed

in

connection with

prospectus

offerings

with

the

lack

of

statutory liability

to

purchasers

in

the

secondary market.

It is

true that,

in the

latter case,

the

issuer does

not

receive

the

proceeds

of the

transaction. However,

from

the

investor's

point

of

view

the

investment decision

is

essentially

the

same.

It is

only

the

documents

on

which

the

investor relies that

are

different.

2

The

definition

of

"distribution" also includes securities being resold

by an

issuer, control block

holdings,

sales

by an

underwriter,

and

certain re-sales

of

securities,

but the

vast

majority

of

trades

of

securities that have been previous-

ly

issued would

not

constitute

a

distribution.

3

E.g.,

s. 53 of the

Securities

Act

(Ontario),

R.S.O. 1990,

c. S.5

[OSA].

4

See

CSAN 53-302, Part

II(i).