CSA publishes paper on passport system

(May 27, 2005) The Canadian Securities Administrators has published for comment a draft paper on a new principal regulator system. The proposal would allow firms and advisors to trade in securities or deal with clients in more than one Canadian jurisdiction, simply by following the rules of their home, or principal, regulator. But Ontario is still refusing to support the concept.

The paper comes following a meeting last fall at which ministers responsible for securities regulation in most Canadian provinces and territories signed a memorandum of understanding and agreed to an action plan that included making best efforts to implement a passport system in certain areas of securities regulation by August, 2005.

“The ministers agreed that the system would provide a single window of access to market participants in areas where there are already highly harmonized securities laws across Canada or where highly harmonized securities laws could be achieved quickly,” the CSA says.

“The areas to be covered by the system are prospectus requirements and clearance, registration process, requirements and related filings, continuous disclosure requirements, and prospectus and registration exemptions and routine discretionary exemptions.”

Ontario was a notable holdout, arguing that while a passport system may be a step forward, it would prefer to work toward some sort of national securities regulator.

“The proposal moves Canada’s capital market further away from achieving the important objective of establishing a single, consistent set of securities laws,” said OSC vice-chair Susan Wolburgh Jenah in a statement issued on Friday. “The principal regulator system would allow different standards for public companies doing business in Ontario, creating a competitive disadvantage across Canada.”

The principal regulator model permits market participants to comply with different laws based on the location of their head office and would allow regulators to export these different standards into other jurisdictions, she argues. “The OSC believes this creates inefficiency, an unlevel playing field and will result in increased complexity and confusion for market participants.”

Ontario-based market participants will not be able to rely on the exemptions contained in the proposed new instrument, the CSA says, but will continue to use the mutual reliance review system (MRRS), on which the principal regulator proposal was modeled.

The OSC will continue to act as principal regulator under MRRS. “The OSC strongly supports a parallel and related CSA initiative to streamline and improve the MRRS,” the commission stressed today.

The recently established National Registration System will serve as the principal regulator system for the registration process, the CSA notes.

“A market participant’s principal regulator will usually be the regulator in the jurisdiction where its head office is located,” the CSA says. “A market participant will generally have the same principal regulator under the proposed instrument and the relevant MRRS.”

Some jurisdictions, such as Quebec and B.C., will have to make changes to their local rules to take part in the principal regulator system. Amendments to securities regulations were published for comment in Quebec in March. And the British Columbia Securities Commission says it will consider comments received before deciding whether to adopt the principal regulator system.

The comment period ends July 27. The CSA hopes to implement the system by late August.

New proposals for fund governance

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Ontario opts out of passport model Independent review committees proposed for mutual funds

It was a busy Friday for the CSA. The regulator also published a revised version of its proposed new mutual fund governance regime. Under the new version, all publicly-offered investment funds would be subject to new rules, not just mutual funds.

That would add scholarship plans, labour-sponsored or venture capital funds, closed-end funds and mutual funds that are listed and posted for trading on a stock exchange (such as exchange-traded funds) or quoted on an over-the-counter market to the list.

“We believe the proposed rule will provide substantial protection to investors,” said OSC chair David Brown. “It will ensure that a manager’s conflicts of interest do not influence the decisions that affect investors.”

However, there are only minor changes to the requirement that funds set up independent review committees (IRCs) to oversee fund managers and monitor potential conflicts of interest. In the past, critics have called IRCs a “half measure,” since they do not have the same powers as an independent board of directors, first suggested in the initial version of National Instrument 81-107.

Still, the IRC would have the ability to stop a manager from proceeding with a prohibited transaction, the CSA notes, and investors would have the right to vote on a proposed increase of management fees, change of manager, and changes to a fund’s investment objective.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(05/27/05)

Doug Watt