Securities Law & Instruments

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HELPING ONTARIO FAMILIES AND MANAGING RESPONSIBLY ACT, 2010



Schedules 3 and 18 of the Helping Ontario Families and Managing Responsibly Act, 2010 contain amendments to the Commodity Futures Act and the Securities Act. Bill 135 received Royal Assent on December 8, 2010. Bill 135 has become chapter 26, Statutes of Ontario, 2010. Most of these amendments came into force on the same date and the remainder come into force on one or more days to be named by proclamation of the Lieutenant Governor of Ontario.

These Schedules may be viewed on the Ontario Legislative Assembly's website at www.ontla.on.ca. In addition, consolidated versions of the Securities Act and the Commodity Futures Act reflecting these amendments are expected to be available shortly on the Ontario e-laws site at www.e-laws.gov.on.ca.

The Explanatory Notes in Bill 135 provided a summary of these amendments. Relevant extracts are reproduced below, subject to minor text changes made for greater clarity and to the addition of italicized notes. The additional notes generally specify which of the provisions are to come into force on proclamation.

SCHEDULE 3

COMMODITY FUTURES ACT

Currently, section 59 of the Commodity Futures Act authorizes the Ontario Securities Commission to issue a direction for the interim preservation of property or money in certain circumstances, and requires the Commission to apply to court no later than seven days after the direction is issued for a court order continuing the direction. An amendment to the section requires the Commission, instead, to serve and file a notice of application for a court order no later than 10 days after the Commission issues the direction.

Subsection 64(3) of the Act is re-enacted to make its wording consistent with Crown immunity provisions in other Ontario statutes.

SCHEDULE 18

SECURITIES ACT

In general terms, the amendments to the Securities Act deal with five matters: the establishment of a regulatory framework for trading in derivatives; the regulation of credit rating organizations; the regulation of alternative trading systems; insider trading; and technical matters. Here are some highlights of these amendments.

Regulatory framework for derivatives

Amendments to the Act establish a regulatory framework for trading in derivatives in Ontario. A new Part respecting trading in derivatives is added to the Act. New rule-making authority is also added to the Act. Current provisions of the Act are made applicable to derivatives, including provisions respecting registration, fraud, market manipulation, insider trading and the oversight of exchanges.

Here is a more detailed description of some of those amendments.

Definitions of "derivative", "designated derivative" and "related derivative" are added to subsection 1(1) of the Act. Related amendments are made to several other definitions. Amendments to other provisions of the Act authorize the Ontario Securities Commission to include or exclude financial instruments from the definition of derivative or designated derivative. (See, for example, the amendment to subsection 1(10) of the Act.) Related amendments are made to subsection 143(1) of the Act, which authorizes the Commission to make rules. (See, in particular, new paragraphs 10.1, 19.1, 19.2 and 19.4 of subsection 143(1) of the Act.) [Note: Paragraphs 19.1, 19.2 and 19.4 of subsection 143(1) of the Act come into force on proclamation.]

A new Part XV.1 is added to the Act. It imposes requirements for trading in designated derivatives. Section 64.1 of the Act prohibits a person or company from trading in a designated derivative unless a prescribed disclosure document has been filed and accepted by the Director. Provision is made for exceptions to this requirement. Subsection 64.2(2) of the Act provides that no derivatives transaction is void, voidable or unenforceable, and no counterparty is entitled to rescind a transaction, solely because the transaction failed to comply with the Act or the regulations. Related amendments are made to subsection 143(1) of the Act, which authorizes the Commission to make rules. (See, in particular, paragraphs 11 and 35 of subsection 143(1) of the Act.) [Note: Part XV.1 and paragraph 143(1) 35 of the Act come into force on proclamation.]

Subsection 21(5) of the Act is re-enacted to extend the Commission's supervisory powers to exchanges on which derivatives are traded. A new section 21.2.2 of the Act permits the Commission to designate trade repositories and to regulate them. Related amendments are made to subsection 143(1) of the Act, which authorizes the Commission to make rules. (See, in particular, paragraphs 11, 12 and 35 of subsection 143(1) of the Act.)

The registration requirement in subsection 25(1) of the Act, which currently applies only in relation to securities, is amended to apply in relation to derivatives too. Persons or companies who are in the business of trading in derivatives are required to be registered as dealers. Additional categories of registration may be prescribed under the new subsection 25(1.1) of the Act for persons or companies trading in derivatives. Corresponding amendments are made with respect to registration as advisors, and relating to exemptions from the registration requirements. (See, for example, the amendments to subsections 25(7), 27(3) and section 34 and the new subsection 35(5.1) of the Act.) [Note: The amendments referred to in this paragraph come into force on proclamation.]

Part XIII of the Act is amended to extend the market conduct requirements to dealers in derivatives. These amendments include the requirement to provide trade confirmations (subsection 36(1) of the Act), the requirement to provide trade information to the Commission (subsection 36(2) of the Act), the prohibition against telephoning a residence or calling at a residence for the purpose of trading in a derivative (subsection 37(1) of the Act) and the requirement to obtain Commission approval of certain advertising material and disclosure documents (subsection 50(2) of the Act).

Provisions dealing with insider trading and tipping (sections 76 and 134 of the Act), misrepresentation in disclosure documents (section 122 of the Act) and fraud and market manipulation (sections 126.1 and 126.2 of the Act) are extended to include derivatives. Amendments to subsections 134 (7) and (8) of the Act also extend, for "related derivatives", the operation of the provision concerning civil liability for insider trading and tipping. [Note: The amendment to section 122 of the Act comes into force on proclamation.]

The Commission's investigation and enforcement powers are extended to cover derivatives. This includes amendments to the Commission's power to order investigations and financial examinations (sections 11 and 12 of the Act) and to conduct compliance reviews (section 20 of the Act). The Commission's authority under section 127 of the Act to issue sanctions when required in the public interest is also extended.

Regulation of credit rating organizations

A new Part IX of the Act authorizes the Commission to regulate credit rating organizations. Definitions of "credit rating organization" and "credit rating" are added to subsection 1(1) of the Act.

Under a new section 22 of the Act, credit rating organizations may apply to the Commission to be designated. Section 23 of the Act requires the designated credit rating organizations to comply with regulatory requirements. A related amendment is made to subsection 143(1) of the Act, which authorizes the Commission to make rules. (See paragraph 63 of subsection 143(1) of the Act.)

A new subsection 24(2) of the Act prohibits designated credit rating organizations from making representations that the Commission has in any way passed upon the merits of a credit rating or the methodologies used to determine the credit rating.

Regulation of alternative trading systems

Currently, under section 21 of the Act, the Commission is authorized to recognize stock exchanges and to make decisions relating to them. A new section 21.0.1 of the Act gives the Commission analogous authority to make decisions relating to alternative trading systems. A definition of "alternative trading system" is added to subsection 1(1) of the Act. A related amendment is made to subsection 143(1) of the Act, which authorizes the Commission to make rules. (See paragraph 12 of subsection 143(1) of the Act.)

Insider trading

Currently, section 76 of the Act prohibits insider trading and tipping in relation to reporting issuers. This prohibition is extended in relation to issuers that have a real and substantial connection to Ontario and whose securities are listed and posted for trading on the TSX Venture Exchange. (See the new definition of "reporting issuer" in subsection 76(5) of the Act.) [Note: As indicated previously, section 76 has also been amended to apply to derivatives. This is implemented through the reference to "related derivative" in subsection 76(6).]

Technical matters

Currently, section 126 of the Act authorizes the Commission to issue a direction for the interim preservation of property or money in certain circumstances, and requires the Commission to apply to court no later than seven days after the direction is issued for a court order continuing the direction. An amendment to the section requires the Commission, instead, to serve and file a notice of application for a court order no later than 10 days after the Commission issues the direction.

The English version of subsection 141(3) of the Act is re-enacted to make its wording consistent with Crown immunity provisions in other Ontario statutes.