NOTICE AND REQUEST FOR COMMENT
PROPOSED AMENDMENTS TO
NATIONAL INSTRUMENT 33-105 UNDERWRITING CONFLICTS
Introduction
The Canadian Securities Administrators (CSA or we) are publishing for a 90-day comment period
proposed amendments to National Instrument 33-105 Underwriting Conflicts (NI 33-105).
Objective of the proposed amendments
The proposed amendments to NI 33-105 (the Proposed Amendments) will provide limited relief from the
requirement to include connected and related issuer disclosure in an offering document used to distribute
securities under a prospectus exemption in the context of foreign private placements offered to
sophisticated investors in Canada.
Proposed text
We invite comment on the Proposed Amendments set out in Appendix A.
Background
(a) Connected and related issuer disclosure requirements
The purpose of the Proposed Amendments is to eliminate one of the disclosure requirements that results
in the preparation of a “wrapper” when foreign securities are offered to sophisticated Canadian investors
under a prospectus exemption.
1
The Proposed Amendments only apply to offerings of foreign securities sold to permitted clients.
Permitted clients are sophisticated, usually institutional, investors that will be able to understand the
limited nature of the disclosure exemption that will apply to such offerings.
A foreign offering document, if delivered to a Canadian purchaser, generally constitutes an “offering
memorandum” or other prescribed offering document which is subject to certain securities law disclosure
requirements, depending on the jurisdiction. As a result, in order to have the prescribed Canadian
disclosure included in the foreign offering document, the foreign offering document may either be
amended to include the prescribed Canadian disclosure, or, more commonly, a supplemental document
known as a "wrapper" with the prescribed Canadian disclosure and other optional disclosure is prepared
by one or more underwriters and attached to the face of the foreign offering document. The wrapper
together with the foreign offering document thus form one Canadian offering document for the purposes
of offering securities in Canada.
NI 33-105 requires that detailed disclosure on the relationships and conflicts of interest that exist
between underwriters and issuers or selling securityholders be included in a document provided in
connection with a distribution. Specifically, section 2.1 of NI 33-105 requires disclosure in a document
where a specified firm registrant acts as a direct underwriter in a distribution of securities of or by an
issuer that meets the definition of “connected issuer” or “related issuer”. The required disclosure is
specified in Appendix C of NI 33-105 (Connected and Related Issuer Disclosure Requirements), some
of which must be included on the front page of the relevant document.
1
Other proposed amendments are related to this initiative. Also being published for comment today is Multilateral Instrument 45-107
Listing Representation and Right of Action Disclosure Exemptions (MI 45-107). The Ontario Securities Commission previously published for
comment, on April 25, 2013, proposed amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions and an Ontario
only amendment to Form 45-106F1. See “Related Amendments” for additional information.
The definition of “connected issuer” under NI 33-105 means, for a “specified firm registrant” (as defined
in NI 33-105) an issuer that has a relationship with certain identified parties (including the specified firm
registrant involved in the offering) such that a “reasonable prospective purchaser” may question whether
the issuer and the specified firm registrant are independent of each other for purposes of the distribution.
The definition of related issuer focuses on the ownership of securities of an issuer that enables a party to
cast more than 20 per cent of the votes for the election or removal of directors of an issuer.
Once either definition is triggered, Appendix C of NI 33-105 requires detailed disclosure to be included in
an offering document. For example, disclosure must be included in the document that describes, among
other things:
•
the nature of the relationship between the issuer and specified firm registrant
•
whether the relationship is due to indebtedness, and if so, “the extent to which” the issuer is in
compliance with the terms of the agreement governing the indebtedness, and
•
“the extent to which the financial position of the issuer…or the value of the security has changed
since the indebtedness was incurred.”
Market participants have submitted that the breadth of the “connected issuer” test, which hinges on the
viewpoint of a “reasonable prospective purchaser”, makes complying with the Connected and Related
Issuer Disclosure Requirements difficult in the context of foreign offerings. A significant amount of
additional information needs to be obtained from a foreign issuer and each underwriter involved in the
offering if either of the initial triggering definitions is met.
Market participants have suggested that, in the context of United States and other global offerings of
foreign securities, the time and expense associated with retaining counsel and preparing a “wrapper” to
meet Canadian disclosure requirements discourages some foreign issuers and underwriters from
extending foreign offerings into Canada pursuant to a private placement.
(b) U.S. disclosure requirements on conflicts of interest between issuers and underwriters
United States disclosure requirements with respect to underwriting conflicts of interest can be found in
Regulation S-K under the United States Securities Act of 1933 (Reg S-K) section 229.508 (Item 508) –
Plan of Distribution and the Financial Industry Regulatory Authority (FINRA) Rule 5121 – Public Offerings
of Securities With Conflicts of Interest (Rule 5121).
Under Item 508 of Reg S-K, an offering document must identify each underwriter that has a “material
relationship” with the issuer and state the nature of the relationship.
Under FINRA Rule 5121, no member that has a conflict of interest may participate in a public offering
unless the offering complies with certain mandated disclosure requirements.
Together, these provisions require prominent disclosure in an offering document of a material conflict of
interest between an underwriter and an issuer in respect of an offering of securities.
Substance and purpose of the Proposed Amendments
The Proposed Amendments will eliminate the requirement to provide connected and related issuer
disclosure in the context of offerings of securities that qualify as “designated foreign securities”.
Designated foreign securities are defined in the proposed amendments as securities offered primarily in
a foreign jurisdiction that are:
•
securities that are issued by an issuer that
o
is incorporated, formed or created under the laws of a foreign jurisdiction
o
is not a reporting issuer in a jurisdiction of Canada
o
has its head office outside of Canada, and
o
has a majority of its executive officers and directors outside of Canada, or
•
securities that are issued or guaranteed by the government of a foreign jurisdiction.
2
The Proposed Amendments further provide that the purchaser of the securities must be a permitted
client (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing
Registrant Obligations (NI 31-103)). As noted above, permitted clients are generally sophisticated,
usually institutional investors.
The Proposed Amendments will apply to offerings by both non-investment funds and non-redeemable
investment funds that meet the above criteria. Under current subsection 1.3(b) of NI 33-105, the rule
does not apply to a distribution of mutual funds securities. Non-Canadian issuers that are investment
funds are reminded that there are other Canadian regulatory requirements specific to investment funds,
such as investment fund manager registration, that may still apply. Permitted clients (as defined in NI
31-103) that are investment funds are reminded that other Canadian regulatory requirements, such as
fund on fund restrictions, may restrict a Canadian investment fund’s ability to purchase securities of a
non-Canadian issuer that is an investment fund.
Summary of the Proposed Amendments
The Proposed Amendments will provide for relief from the Connected and Related Issuer Disclosure
Requirements set out in subsection 2.1(1) of NI 33-105 and related Appendix C, for distributions of
designated foreign securities offered on a private placement basis into Canada under a prospectus
exemption to permitted clients, provided that an offering document is delivered to purchasers that
complies with U.S. disclosure requirements on conflicts of interest between issuers and underwriters.
In addition, the Proposed Amendments will provide limited relief from the disclosure required by NI 33-
105 in the case of foreign government offerings that do not include comparable U.S. disclosure.
First, the Proposed Amendments will provide relief from the connected issuer disclosure requirements in
their entirety in the case of foreign government offerings.
Second, where the requirement to include related issuer disclosure is triggered for an offering of
designated foreign government securities, the Proposed Amendments will provide relief from the
requirement to include certain statements on the cover page of the offering document. However, the
offering document will still need to contain all of the disclosure required to be included in the body of the
document. We are satisfied that permitted clients do not need the added protection of duplicative cover
page disclosure.
In addition, a specified firm registrant involved in offerings of designated foreign securities will have to
provide to a permitted client that proposes to acquire such foreign securities, alternative notification of
any conflicts of interest that would otherwise trigger a disclosure obligation under NI 33-105. The
Proposed Amendments provide for a number of ways in which this disclosure can be provided to clients.
In particular, the Proposed Amendments indicate that a specified firm registrant will have the option of
providing a one-time notice which explains that any offering document provided in the context of future
foreign private placements made in reliance on these provisions, for U.S. registered offerings, will comply
with U.S. federal securities law requirements on conflicts of interest instead of the specific disclosure
requirements set out in NI 33-105, or in the case of offerings of foreign government securities, will
explain the information that can be excluded.
Finally, the Proposed Amendments will not apply to a distribution if a prospectus has been filed with any
Canadian securities regulatory authority, as these provisions are intended to relate solely to private
placements made to investors that qualify as permitted clients.
3
Alternatives considered
In spring 2013, time-limited exemptive relief was first granted to a number of large institutional Canadian
and foreign dealers from Canadian-specific disclosure requirements that must be included in a wrapper.
Similar decisions have since been issued with respect to other applicants.
The relief in each case is subject to a “sunset” clause that results in the termination of each decision on
the earlier of: (i) three years after the date of the decision, or (ii) the date that amendments to the
legislation become effective that provide for substantially the same relief as the decision.
The relief will be addressed by making rule amendments that will place all market participants in a similar
position.
No other alternatives were considered.
Related amendments
Also being published for comment today is Multilateral Instrument 45-107 Listing Representation and
Right of Action Disclosure Exemptions (MI 45-107). The purpose of MI 45-107 is to provide for
exemptions from other securities law disclosure requirements that also generally apply with respect to
offerings of designated foreign securities.
The proposed exemptions relate to disclosure of statutory rights of action and restrictions on the making
of representations that securities will be listed or quoted on an exchange or quotation system. All
jurisdictions except British Columbia and Ontario are participating in MI 45-107. The Ontario Securities
Commission previously published for comment, on April 25, 2013, proposed amendments to OSC Rule
45-501 Ontario Prospectus and Registration Exemptions that address the same issues. The British
Columbia Securities Commission is not participating because it has previously issued a blanket order to
address one of these disclosure requirements and the other does not apply in that jurisdiction.
More information on the proposed Ontario amendments can be found at Appendix B.
Impact on investors
Many institutional investors as well as underwriters involved in foreign offerings have expressed
frustration at the current requirements, which they believe restrict investor access to foreign investment
opportunities.
We anticipate that the Proposed Amendments will facilitate participation by sophisticated Canadian
investors that qualify as permitted clients in foreign securities offerings, including offerings by foreign
corporations and governments. As a result, this may provide some investors with a wider range of
investment opportunities than were previously available.
Anticipated costs and benefits
By implementing the Proposed Amendments, we aim to simplify the process for offering foreign
securities into Canada to permitted clients on an exempt basis. These changes will reduce the regulatory
burden associated with these offerings and may expand investment opportunities for sophisticated
investors. As a result, we consider the benefits of the Proposed Amendments to potentially be significant.
Local Matters
Where applicable, Appendix B is being published in any local jurisdiction that is making related changes
to local securities laws, including local notices or other policy instruments in that jurisdiction. It also
includes any additional information that is relevant to that jurisdiction only.
4
Request for Comments
We welcome your comments on the Proposed Amendments.
All comments will be posted on the Ontario Securities Commission (OSC) website at www.osc.gov.on.ca
and on the Autorité des marchés financiers website at www.lautorite.qc.ca.
We cannot keep submissions confidential because securities legislation in certain provinces requires
publication of a summary of the written comments received during the comment period.
How to provide your comments
Please provide your comments in writing by February 26, 2014. Regardless of whether you are sending
your comments by email, you should also send or attach your submissions in an electronic file in
Microsoft Word, Windows format.
Please address your submission to the CSA as follows:
British Columbia Securities Commission
Alberta Securities Commission
Financial and Consumer Affairs Authority of Saskatchewan
The Manitoba Securities Commission
Ontario Securities Commission
Autorité des marchés financiers
Financial and Consumer Services Commission of New Brunswick
Superintendent of Securities, Prince Edward Island
Nova Scotia Securities Commission
Superintendent of Securities, Newfoundland and Labrador
Superintendent of Securities, Yukon Territory
Superintendent of Securities, Northwest Territories
Superintendent of Securities, Nunavut
Deliver your comments only to the two addresses that follow. Your comments will be distributed to the
other CSA member jurisdictions.
The Secretary
Ontario Securities Commission
20 Queen Street West
22
nd
Floor
Toronto, Ontario M5H 3S8
Fax: (416) 593-2318
E-mail: comments@osc.gov.on.ca
Me Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22
e
étage
C.P. 246, tour de la Bourse
Montréal (Québec) H4Z 1G3
Fax : 514-864-6381
E-mail: consultation-en-cours@lautorite.qc.ca
5
Content of Appendices
Appendix A sets out the Proposed Amendments to NI 33-105
Appendix B sets out local matters
Questions
Please refer your questions to any of:
Jo-Anne Matear
Manager, Corporate Finance
Ontario Securities Commission
416.593.2323
jmatear@osc.gov.on.ca
Elizabeth Topp
Senior Legal Counsel, Corporate Finance Branch
Ontario Securities Commission
416.593.2377
etopp@osc.gov.on.ca
Diana Escobar Bold
Legal Counsel, Corporate Finance Branch
Ontario Securities Commission
416.593.8229
dbold@osc.gov.on.ca
Paul Hayward
Senior Legal Counsel, Compliance and Registrant Regulation
Ontario Securities Commission
416-593-3657
phayward@osc.gov.on.ca
Gérard Chagnon
Analyste expert en réglementation
Direction des pratiques de distribution et des OAR
Autorité des marchés financiers
418-525-0337, ext 4815
1-877-525-0337
gerard.chagnon@lautorite.qc.ca
Brian Murphy
Deputy Director, Capital Markets
Nova Scotia Securities Commission
902-424-7768
murphybw@gov.ns.ca
November 28, 2013.
6
APPENDIX A
Proposed Amendments to
National Instrument 33-105 Underwriting Conflicts
1.
National Instrument 33-105 Underwriting Conflicts is amended by this Instrument.
2.
The following Part is added:
PART 3A – NON-DISCRETIONARY EXEMPTIONS - DESIGNATED FOREIGN SECURITIES
3A.1
Definitions - In this Part,
“designated foreign security” means a security offered primarily in a foreign jurisdiction in either of
the following circumstances:
(a) the security is issued by an issuer that
(i) is incorporated, formed or created under the laws of a foreign jurisdiction,
(ii) is not a reporting issuer in a jurisdiction of Canada,
(iii) has its head office outside of Canada, and
(iv) has a majority of its executive officers and directors resident outside of Canada,
(b) the security is issued or guaranteed by the government of a foreign jurisdiction;
“executive officer” means, for an issuer, an individual who is
(a) a chair, vice-chair or president,
(b) a chief executive officer or chief financial officer
(c) a vice-president in charge of a principal business unit, division or function including
sales, finance or production, or
(d) performing a policy-making function in respect of the issuer;
“exempt offering document” means:
(a) in New Brunswick, Nova Scotia, Ontario and Saskatchewan, an offering memorandum
as defined under the securities legislation of that jurisdiction, and
(b) in all other jurisdictions, a document including any amendments to the document, if the
document
(i) describe the business and affairs of an issuer, and
(ii) has been prepared primarily for delivery to and review by a prospective purchaser
to assist the prospective purchaser in making an investment decision in respect of
securities being distributed pursuant to an exemption from the prospectus
requirement;
7
“FINRA Rule 5121” means Rule 5121 – Public Offerings of Securities with Conflicts of Interest of
the United States Financial Industry Regulatory Authority, as amended from time to time;
“permitted client” has the same meaning as in section 1.1 of National Instrument 31-103
Registration Requirements, Exemptions and Ongoing Registrant Obligations.
3A.2
Exemption based on U.S. disclosure - Subsection 2.1(1) does not apply to a distribution
of a designated foreign security if all of the following apply:
(a) the distribution is made to a permitted client by a specified firm registrant;
(b) an exempt offering document prepared with respect to the distribution is delivered to the
permitted client;
(c) the exempt offering document complies with the requirements of section 229.508 of SEC
Regulation S-K under the 1933 Act and FINRA Rule 5121, whether or not those requirements
apply to the distribution.
3A.3
Exemption for foreign government securities - Subsection 2.1(1) does not apply to a
distribution of a designated foreign security if all of the following apply:
(a) the distribution is made to a permitted client by a specified firm registrant;
(b) the issuer is a connected issuer but not a related issuer of the specified firm registrant; and
(c) the designated foreign security is issued or guaranteed by the government of a foreign
jurisdiction.
3A.4
Relief from front page disclosure requirements - The requirement in subsection 2.1(1)
to provide the information specified in items 1, 2 and 3 of Appendix C does not apply to a
distribution of a designated foreign security if all of the following apply:
(a) the distribution is made to a permitted client by a specified firm registrant;
(b) the issuer is a related issuer of the specified firm registrant; and
(c) the designated foreign security is issued or guaranteed by the government of a foreign
jurisdiction.
3A.5
Notice to permitted clients - A specified firm registrant that intends to rely on one or
more of the exemptions described in sections 3A.2, 3A.3 or 3A.4 must deliver a notice to a
permitted client, prior to or contemporaneously with the distribution of a designated foreign
security to the permitted client, that describes the terms and conditions of the exemptions being
relied on.
3A.6 Manner of notice - The notice requirement under section 3A.5 is satisfied if either of the
following apply:
(a) the specified firm registrant provides notice that the specified firm registrant intends to rely on
the exemptions in section 3A.2, 3A.3 or 3A.4 for a distribution of a designated foreign
security, including any future distributions of a designated foreign security, to the permitted
client;
8
(b) If the notice referred to in subsection (a) is not provided to the permitted client,
(i)
the specified firm registrant provides the notice required under section 3A.5 in the
exempt offering document delivered to the permitted client for a distribution of a
designated foreign security, or
(ii)
the specified firm registrant provides the notice required under section 3A.5 in a
document delivered to the permitted client that accompanies, but does not form
part of, the exempt offering document.
3A.7
Application - This Part does not apply to a distribution if a prospectus has been filed with
a Canadian securities regulatory authority for the distribution.
3.
This Instrument comes into force on ●.
9
APPENDIX B
Additional Notice Requirements in Ontario
Unpublished materials
In proposing the Proposed Amendments, we have not relied on any significant unpublished
study, report or other written materials.
Rule-making authority
The following provision of the Act provides the Commission with authority to adopt the Proposed
Amendments:
•
paragraph 143(1)49 authorizes the Commission to make rules permitting or requiring, or
varying the Act to permit or require, methods of filing or delivery, to or by the Commission,
issuers, registrants, security holders or others, of documents, information, notices, books,
records, things, reports, orders, authorizations or other communications required under or
governed by Ontario securities laws.
Related Ontario local amendments
On April 25, 2013 the OSC published for comment proposed amendments to the following rules
(the Ontario local amendments):
•
Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration
Exemptions (OSC Rule 45-501), and
•
An Ontario-specific amendment to National Instrument 45-106 Prospectus and Registration
Exemptions (NI 45-106).
The comment period expired on July 24, 2013 and we have considered the comments received.
The purpose of the Ontario local amendments is to amend specific Ontario disclosure
requirements that are currently required to be included in an offering memorandum to distribute
securities under a prospectus exemption in the context of foreign private placements offered to
sophisticated investors in Ontario.
Together with the amendments to NI 33-105 proposed by this instrument, the Ontario local
amendments are intended to eliminate the need for a wrapper to be prepared when foreign
securities are offered to sophisticated Ontario investors under a prospectus exemption. Certain
of the disclosure requirements that apply to foreign disclosure documents in these
circumstances are found in local rules or legislation, apart from the requirements of NI 33-105.
As a result, it was necessary for the OSC to propose the Ontario local amendments to ensure
that the goal of eliminating the wrapper requirement was achieved in Ontario.
Also being published for comment today by all jurisdictions except Ontario and British Columbia
is MI 45-107. The purpose of MI 45-107 is to provide for exemptions from securities law
disclosure requirements that are substantially similar to those that were addressed in the
Ontario local amendments.
A copy of the Ontario local amendments can be found on the OSC’s website at the following link
http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20130425_45-501_rfc-pro-amend.htm.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.