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BCN 2004/31 Publication for Comment of Rules and Instruments to Implement the New Securities Act [BCN - Lapsed]

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Published: 2004-06-21
Rescinded / Lapsed: 2012-07-03

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Document
BCN 2004-31 Proposed Rules

On May 13, 2004, the new Securities Act S.B.C. 2004, c. 43 received royal assent. The Act will come into force on proclamation (expected in the late fall) and will repeal the Securities Act R.S.B.C. 1996, c. 418. The Commission is publishing for comment the proposed rules and other instruments that are necessary to implement the new legislation. These include the general Securities Rules and four special instruments: BC Instrument 62-502 Takeover Bids and Issuer Bids, BC Instrument 71-502 Exemptions for Foreign Market Participants, BC Instrument 81-509 Mutual Fund Requirements and BC Instrument 81-510 Exemptions from Periodic Disclosure Requirements for Non-Redeemable Investment Funds.

Interface Exemptions
Most market participants are subject to securities regulation in more than one province. To avoid imposing different requirements on those who are subject to the securities legislation in other provinces, we propose new “interface” exemptions that generally allow those market participants to satisfy the requirements in British Columbia by complying with the requirements of another province, filing in British Columbia what they file in that province, and providing investors here with what they provide investors in that province. To provide greater certainty as to the requirements elsewhere that can be relied upon for the purposes of the interface exemptions, we are developing a designation schedule that will be adopted when the rules are finalized.

The proposed Rules contain similar exemptions for BC issuers subject to designated SEC requirements. Proposed instruments 62-502, 71-502 and 81-509 also contain interface exemptions.

Proposed Rules
The proposed Rules would replace the existing Securities Rules B.C. Reg. 194/97, the Registration Transfer Rules B.C. Reg. 193/97, and a number of other regulations and instruments. The proposed rules streamline and simplify many current requirements and replace others with requirements that are more outcomes-based.

Dealers and Advisers - Code of Conduct
The proposed Rules include a Code of Conduct that contains 25 outcomes-based rules that replace many of the current detailed, prescriptive, and process-based rules that govern registrant conduct. We believe that the Code will provide better protection for investors by focusing registrants on the interests of their clients, and will provide registrants with more flexibility in meeting their regulatory obligations by specifying the outcome and leaving implementation in the hands of the registrant.

There is no interface exemption for compliance with the Code, although registrants who continue to comply with current requirements will likely comply with the Code in most areas. However, the Code may require changes in current practice in two areas - fee disclosure and conflict of interest.

Dealers and Advisers - Firm-only registration
The proposed Rules contain an exemption from the registration requirement for individuals who are retained to represent registered firms. Under the Code, a firm would be required to hire representatives suitable for work in the securities industry. The proposed rules require a firm to file annually a list of its representatives. The firm’s fees would include a component related to the number of its representatives, which would replace (and be equivalent to) the current fee for individual registration.

Issuers - Restrictions on Use of CMA Exception
The Continuous Market Access system described in the BC Model in April 2003 is contained in the prospectus exemption in section 18(3) of the new Act.

Under the CMA system, a public issuer whose continuous disclosure record is up to date and includes a current annual information form (AIF) can issue securities without filing a prospectus. The continuous disclosure requirements under the legislation and under National Instrument 51-102 Continuous Disclosure Obligations are sufficiently comprehensive to require an issuer to make all material information about the issuer available to the market at all times. Therefore, if the issuer is in compliance with its continuous disclosure obligations, there is no new material information about the issuer to be disclosed at the time of the offering, other than information about the offering itself. To comply with timely disclosure requirements, the issuer would file a new release disclosing the offering and the relevant details. No hold periods apply to any securities of CMA issuers.

Under the proposed Rules, this exemption would not be available to an issuer doing a prospectus offering in British Columbia and another province under National Policy 43-201 Mutual Reliance Review System for Prospectuses and AIFs and for whom the BCSC is principal regulator under that Policy. This is to ensure that the mutual reliance system continues to work seamlessly with the rest of CSA for the benefit of BC issuers who do national prospectus offerings. For the same reasons, under the proposed Rules the CMA exemption would not apply to an issuer using the Canada-U.S. Multi-Jurisdictional Disclosure System with BC as the review jurisdiction.

The proposed rules would remove the CMA exemption from those who rely on exemptions from filing an AIF. This would include venture issuers that take advantage of the relief from filing an AIF under National Instrument 51-102 Continuous Disclosure Obligations and non-redeemable funds that rely on an exemption from filing an AIF in proposed BC Instrument 81-510 (described below). For both types of issuers, the proposed Rules would also impose a 4-month hold period on securities issued under exemptions for which there are hold periods in other jurisdictions. The CMA system is therefore available as a package: if the issuer files an AIF and complies with continuous disclosure requirements, it can use the system to offer securities without a prospectus or hold period. Issuers who do not file an AIF must use a prospectus or an exemption, generally with a hold period.

The proposed rules would also remove the CMA exemption from some foreign issuers who rely on the exemptions in proposed Instrument 71-502 (described below).

Other changes
In addition, the proposed Rules would:

  • replace current prescriptive and arbitrary capital and bonding requirements with a sufficiency test tied to the firm’s business model and potential risks (SRO members would continue to follow SRO requirements)
  • impose outcomes based record-keeping requirements and a requirement to retain records for 6 years and communications with clients for 3 years
  • provide a new exemption for institutional financial derivatives sold by Canadian financial institutions or registered dealers
  • incorporate audit committee and corporate governance requirements consistent with those the BCSC recently published for comment (BCNs 2004/19 and 2004/28)
  • require delivery of offering documents and continuous disclosure documents to investors on request
  • require a public issuer to file annually a list of its insiders
  • impose plain language requirements for all information provided to investors or clients
  • require all filings with the Commission to be electronic (we will issue an instrument that exempts from this requirement filings for which no electronic system is yet available)

We are studying the independent owner-operator proposal described in the BC Model in April 2003. Under this proposal, one-person dealers could be registered as restricted dealers, with the requirements contained in the conditions to the registration of these dealers. We expect to report on the outcome of our study in early 2005.

Proposed Instrument 62-502
Proposed Instrument 62-502 largely continues the existing bid requirements and retains the existing language in the current Act dealing with takeover bids. It also consolidates all requirements, including those now in the Act, into one instrument.

A significant change in the proposed instrument is the removal of the current valuation requirement for insider bids, issuer bids and going private transactions. Valuations are often unnecessary and we regularly grant exemptions from the current requirement. As a practical matter, when valuations are necessary directors routinely obtain opinions from independent and qualified valuators, even when not required by securities laws, in order to ensure they discharge their duties as directors.

Proposed Instrument 71-502
Proposed Instrument 71-502 provides exemptions from BC requirements for foreign market participants that comply with the conditions in the instrument. These include foreign dealers, advisers and mutual fund companies that are dealing with pre-existing clients or that accept orders that were not solicited. The proposed foreign instrument also provides exemptions relating to continuous disclosure, proxies and takeover bids for two categories of foreign issuers

  • exempt foreign issuers -public issuers (as defined in the Act - the equivalent to today’s reporting issuer) that are reporting in the United Kingdom or Australia or are listed on a senior exchange in the United States;
  • limited connection foreign issuers - those that are not exempt and have less than 10% of their equity securities owned by residents of Canada.

The proposed foreign instrument also provides an offering exemption for exempt foreign issuers that comply with the rules in the UK, Australia or the US.

Proposed Instrument 81-509
Proposed Instrument 81-509 contains offering and continuous disclosure requirements for public mutual funds and exemptions for pooled funds.

The proposed instrument retains the existing prospectus and continuous disclosure requirements for mutual funds. These continuous disclosure requirements will be repealed when proposed NI 81-106 Investment Fund Continuous Disclosure is adopted.

The proposed instrument also retains a streamlined version of the self dealing provisions currently in Part 15 of the Act. These will be considered further when the comments on proposed NI 81-107 Independent Review Committee for Mutual Funds are considered.

The proposed instrument contains a streamlined, outcomes-based approach to sales practices for mutual fund managers. Sales practices for dealers and their representatives are dealt with in the Code. The instrument provides an interface for mutual fund managers that comply with National Instrument 81-105 Mutual Fund Sales Practices.

The proposed instrument contains a new exemption for pooled funds, which is available if a registered adviser invests client assets in funds to provide discretionary money management services. The instrument includes a reporting requirement for pooled funds similar to the one in BCI 45-505 Alternative Reporting Requirements for Exempt Distributions of Eligible Pooled Funds.

Proposed Instrument 81-510
Proposed Instrument 81-510 provides periodic disclosure relief for non-redeemable investment funds. This allows those issuers to comply with their existing requirements until National Instrument 81-106 Investment Fund Continuous Disclosure is adopted.

Forms, and guidance and fees
We intend to publish for comment before the end of June the draft Forms to be specified under the new legislation, as well as two draft Guides (one for issuers and one for registrants). Later in the summer we will be consulting on a draft fee regulation.

National and Multilateral Instruments
Over the past nine years, we have adopted many national and multilateral instruments as part of the CSA’s program of national cooperation and harmonization. Our proposed Rules and instruments would effectively replace much of the content of the national and multilateral instruments but we are still analyzing what to do with them. We will retain the national instruments that we need for our new regulatory scheme, including those for shareholder communications and mining and oil and gas disclosure, and will examine each other instrument to consider whether we should rescind it or retain it but make it applicable only to persons operating under the interfaces.

We expect to publish a specific proposal for comment in early 2005.

Local Instruments
As noted above, the proposed Rules will replace the current Securities Rules, the Registration Transfer Rules and various other local instruments. The BC Instruments we expect to repeal when the new Rules are adopted include BC Instrument 45-501 Mortgages B.C. Reg. 189/2000 and BC Instrument 45-502 Cooperative Associations B.C. Reg. 9/2001.

Request for Comments
We are seeking comments on all aspects of the proposed Rules and the four other proposed instruments. We also raise the following specific issues.

1. The proposed Rules increase the threshold for the current $97,000 exemption from registration and prospectus requirements to $150,000. This is the threshold under the current legislation in Ontario, and is under consideration in other CSA jurisdictions. What will be the expected impact, if any, of the increased threshold on capital raising?

2. The proposed rules do not permit mutual funds to rely on the offering memorandum exemption. Currently, mutual funds can use this exemption in BC, Nova Scotia, and Newfoundland and Labrador, but not in the other provinces that have the exemption. We are concerned that mutual funds could use this exemption to distribute securities broadly to the public while avoiding the regulatory regime for public mutual funds. Is this exemption still needed for private placements of non-public mutual funds, given the pooled fund exemption, accredited investor exemption and other exemptions that are available to them?

3. The proposed rules reduce from 150 to 50 the number of members that a cooperative association can have and still rely on the registration and prospectus exemption for the sale of investment shares. The new threshold of 50 members corresponds to the 50-person threshold in the definition of private issuer. Is there any reason to have a different threshold in the case of cooperative associations?

4. Proposed instrument 62-502 does not include the current exemption from takeover bid requirements for bids made through the facilities of an exchange because we understand these transactions rarely occur. Is there any reason to retain this exemption?

5. The proposed rules contain a new requirement for dealers and advisers to keep for three years written communications, either received or sent, that relate to the business and relationship with the client for 3 years. These are based on current SEC requirements, which are useful in dealing with cases of alleged misconduct by firms and representatives. What are the compliance implications associated with this requirement?

Comments
You can deliver comment letters in hard copy, by fax or by e-mail. Please address your submission to:

Brenda J. Benham
Project Head, New Legislation Project
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, BC V7Y 1L2
Fax: (604) 899-6506
bbenham@bcsc.bc.ca

All comments received by August 23, 2004 will be considered.

Your comment letter will be part of the public record, unless you request confidentiality. If you request confidentiality, we will not put your letter in the public file, but we might still have to disclose it if someone makes a request under freedom of information legislation.

If you have any questions, please contact:

Brent Aitken
Commission Vice Chair
(604) 899-6749
baitken@bcsc.bc.ca

Brenda Benham
Head, New Legislation Project
(604) 899-6635
bbenham@bcsc.bc.ca

Leigh Anne Mercier
Senior Legal Counsel
(604) 899-6643
lmercier@bcsc.bc.ca

Sheryl Thomson
Senior Legal Counsel
(604) 899-6778
sthomson@bcsc.bc.ca


June 21, 2004

Brent W. Aitken
Vice Chair

This Notice may refer to other documents. These documents can be found at the BC Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.