An Ontario government task force is calling for the overhaul of Canada’s largest securities regulator, and proposing a new law that it says will level the playing field for independent dealers when competing with the investment banking services of the country’s largest financial institutions.
After 11 months of study, Ontario’s Capital Markets Modernization Taskforce has recommended that the Ontario Securities Commission be reconfigured, including adding another guiding principle – “fostering capital formation and competition in the markets” – to the regulator’s primary mandate of protecting investors. It also urged stringent new climate-related reporting requirements.
The task force’s report, released Friday morning, also recommends major governance changes for the regulator, including the creation of a tribunal within the OSC, a body that will be responsible for ruling on alleged securities-act violations. Currently, OSC commissioners preside over such hearings while also functioning as the OSC’s board of directors. Under the new structure, these duties would be separated – a traditional board of directors to oversee the performance of the regulator, and a different set of adjudicators to enforce provincial securities laws.
The task force was launched by then Ontario finance minister Rod Phillips in late 2019, and was led by Walied Soliman, the chair of Bay Street law firm Norton Rose Fulbright Canada LLP. It has called itself the first major review of Ontario’s securities laws since 2003, and has said one of its primary goals was to revive competition in the province’s capital markets. It released its preliminary recommendations in July.
The task force has softened one of those earlier recommendations – an effort to make it more difficult for the big banks to bundle commercial loans with underwriting and advisory services, or what is known as “tied selling.”
In its July consultation report, the task force had called for a new securities law completely prohibiting the practice. But after receiving feedback, it has amended the proposal to ban only “coercive” tied selling, Mr. Soliman said in an interview.
Under the new proposed law, a senior officer of the bank would be required to attest that no such exclusivity arrangements were imposed when one of its borrowers is provided with capital markets services.
The stricter, initial proposal had received significant pushback from the big banks who argued that prohibiting tied-selling would result in issuers turning to foreign banks for more cost-effective lending, underwriting and advisory services.
Mr. Soliman said the task force’s compromise addresses the concerns of independent dealers who felt they were being squeezed out, while also recognizing the banks’ concerns.
“We have moved significantly to accommodate the concerns of the larger banks, while keeping true to the public policy objective,” he said.
Rather than include all of the task force’s many proposed changes into Ontario’s existing law, the group is calling on the province to pass the Capital Markets Act – a piece of legislation, never enacted, that was drafted in anticipation of the national securities regulator proposed by the then federal government of Conservative leader Stephen Harper.
Although the national regulator has been shelved because of objections from Quebec and Alberta, Mr. Soliman said that the passing of the law would mean the tens of millions of dollars Ontario spent in drafting a modernized securities law would no longer go to waste, while also allowing for a chance to incorporate the task force’s proposals. Such a move would also “send a signal across Canada” that “Ontario is going to stand ready as the political stars align to be at the forefront of a national securities regulator,” he said.
In a major move, the task force is urging the OSC to enforce much tougher standards on disclosure of climate change and other environmental impacts among companies – something that has so far been urged but not required.
It said companies should adopt the gold standard of reporting governance, strategy and risk management as set out by the international Financial Stability Board’s Task Force on Climate-Related Financial Disclosure, and file reports with the regulator. A report by the consultancy Millani found that just a third of Canadian companies aligned with the TCFD in 2019.
The task force has also targeted several practices that it says undermine confidence in the capital markets – including a type of short selling that was highlighted in a Globe and Mail report in 2020 on the collapse of the cannabis sector. Hedge funds anticipating a new cannabis deal were shorting the issuer’s shares before the deal launched, knowing a new offering, available at a discount, was in the works. They would cover their positions by purchasing large portions of the financing and, in effect, instantly earn a discount percentage.
The task force was told the practice is “rife in the Canadian markets,” the report says. The task force says the law should be changed so that any market participant that has previously shorted securities of the same type as offered under a prospectus should then be forbidden from acquiring those securities under the prospectus.
The task force has also tried to sharpen laws that ban misinformation that can significantly affect stock prices. The proposal is designed to target “pump and dumps,” a scheme that wrongdoers use to inflate the price of a stock with false information before selling their shares, and “short and distort” campaigns, which is when wrongdoers try to crater a stock’s price with false information to profit from a short position.
Under the new proposed law, the OSC would not need to prove that the false information caused a stock’s price to change, the report says. “An intention to impact the market or influence a reasonable investor’s decision-making would be sufficient,” the task force said.
Precisely how the OSC can police such information without stifling speech is not spelled out exactly in the report. The task force says the proposal is not designed to “capture analysts who frequently provide their researched views,” or the views of “reputable activist short sellers.” The report points out that commentary from such short sellers can be “important for price correction of a public issuer’s securities.”
The report has also called for increased powers for the OSC to collect unpaid fines. Similar to provisions enacted in British Columbia, such new laws would allow the regulator to more easily seize property from wrongdoers. Also like B.C., the task force has called for the government to refuse to renew the driver’s licence of someone with an unpaid OSC fine.
Finally, the task force has recommended that the OSC change its name to the Ontario Capital Markets Authority. But in his interview with The Globe, Mr. Soliman acknowledged that the costs associated with such a change – new signage and branding – are likely to make such a move unpalatable for the government. “It’s the right thing, but we’re also respectful of the current economic client we’re in,” he said.
With reports from Vanmala Subramaniam and Jeffrey Jones