*This blog was updated in February 2021. Scroll down to the bottom to read about the final report.
This year the Ontario Government established the Capital Markets Modernization Taskforce.
They delivered a report in July with different policy proposals. The report engages in issues such as the improvement of regulatory governance, modernisation of the capital markets and fostering innovation and investor protection. A feedback consultation period was open until September 7 with a view to implement the proposals by the end of this year.
What changes can be expected?
Key changes proposed include:
- decreasing the early warning reporting threshold with regard to shareholder ownership from 10% to 5%;
- a quarterly filing regime; and
- the prohibition of short selling in connection with prospectus offerings and private placements.
With respect to ownership transparency, the current regime does not require the shareholders to disclose their beneficial ownership or control over voting and equity securities until a 10% threshold is reached. However, the Taskforce recommends that the reporting threshold is decreased to 5%, given that a shareholders meeting can be requested with only a 5% holding of the issuers voting securities. In an effort to increase transparency, the Taskforce also recommends the adoption of a quarterly filing regime (similar to the US 13F report), as institutional investors are not currently required to disclose their holdings unless the 10% threshold has been crossed.
Under the current regulatory regime, short selling during prospectus offerings is permitted. However, according to the Taskforce, this can make the pricing and execution of the offerings difficult. This is due to the fact that the offering price is usually below the market price and investors may engage in aggressive short selling in order to depreciate the price. The report makes a reference to the US prohibition in Rule 105 of Regulation M. Therefore, the Taskforce makes a recommendation for the Ontario Securities Commission to consider the adoption of a rule that bans market participants and investors that have previously sold short securities of the same type as offered under a prospectus or private placement from acquiring securities under the prospectus or private placements.
Regardless of when the regulatory changes come in force, we have an in-house team which interprets and translates legal information into algorithms, creating and maintaining 400+ regulatory rules. Our cloud based solution maintains pace with regulatory changes published by aosphere (an affiliate of Allen & Overy), which helps reduce the margin of errors within compliance teams, ensuring no regulatory fines are imposed.
Examples of this include our quick creation of new rules ahead of the roll-out of the Singapore short selling regime in October 2018 and, more recently, our quick response to the sudden drop in EU SSR limit from 0.2% to 0.1% as a result of the COVID-19 Pandemic. In an increasingly unpredictable time and regulatory landscape, our ability to quickly update our rules at short notice has become an indispensable asset to our clients.
The Capital Markets Modernization Taskforce in Ontario (“the Taskforce”) has published a final report in January, after engaging with over 110 stakeholders in response to the published Consultation Report in July 2020.
With regards to the provided information above, we can confirm that the Taskforce recommends:
- Decreasing the shareholder reporting threshold in Ontario from 10 per cent to 5 per cent for non-passive investors; and
- The prohibition of short selling in connection with prospectus offerings and private placements, recommending that the Ontario Securities Commission adopts a rule prohibiting market participants and investors who have previously sold short securities of the same type as offered under a prospectus or private placement, from acquiring securities under the prospectus or private placements.
However, the Taskforce has not provided a recommendation to adopt quarterly filing requirements for institutional investors (similar to the 13F quarterly disclosure obligations required by the SEC in the US), as discussed in its Consultation Report.
Other notable regulatory recommendations include:
- The introduction of a modern, centralised and user-friendly electronic filing system (SEDAR+) in 2021;
- Replacing the Securities Act (Ontario) and Commodity Futures Act (Ontario) with the Capital Markets Act (CMA); and
- Generally modernising the short-selling regime, including the requirement of an investment dealer to confirm the ability to borrow securities prior to accepting a short sale order from another person, or entering an order for its own account.
What's to follow? The next steps for the Final Report are for the Minister of Finance to decide on the above-mentioned recommendations.