for comments accompanying the 2013 Proposed Amendments.
A copy of the PCMA comment letter can be found here: http://
October 2014 Proposed Amendments to NI 31-103
Now fast forward to October 2014. The good news, as it turns
out, is that the CSA were listening. The final amendments to NI
31-103 and the Companion Policy do not include the changes
On October 16, 2014, the CSA published the final amendments
to NI 31-103: http://www.osc.gov. on.ca/en/SecuritiesLaw_
The phrase “whether or not a prospectus was filed in respect
of the distribution” was not deleted from section 7.1(2)(d)(i) and
the status quo appears to have been maintained. Moreover, the
addition to the Companion Policy that looked to exclude EMDs
from any participation in prospectus offerings was modified so
that it only restricts EMDs from participating “as underwriter” in a
distribution of securities offered under a prospectus.
Accordingly, the analysis supporting EMD participation as selling
group members in prospectus offerings appears to be alive and well.
What do we take from this?
We can draw a number of conclusions from this situation.
First, the CSA appears to be listening to industry and shaping
policy on that basis. Second, there are many voices in the CSA
and many opportunities for disagreement. We probably witnessed
an example of such disagreement in December 2013 when the
tide shifted against EMD involvement in prospectus offerings as
set out in the 2013 Proposed Amendments. Third, the CSA have
not expressly accepted the argument outlined in this article, which
means we should be realistic in our assessment of the current
state of play and recognize that there may be more changes in the
future. For example, the CSA messaged in its recently published
changes to NI 31-103 that it is considering the possible involvement
of portfolio managers who are also EMDs participating in the
prospectus offering of investment funds. Stay tuned for further
information on this front.
For now, we believe the door remains open for EMDs to
participate as selling group members in prospectus offerings.
However, any EMD planning to pass through that door should bear
in mind that a member of the CSA could raise an objection.
Other questions remain to be answered
Although the CSA appears to have backed away from the
proposed changes, there remains significant uncertainty about
how EMDs can participate in prospectus offerings. For example,
under Ontario securities law, the definition of the term “underwriter”
excludes a dealer whose only interest in a transaction is limited
to receiving the “usual and customary distributor’s or seller’s
commission” payable by an underwriter or the issuer. Although
this suggests an EMD can participate as a selling group member
in a prospectus offering, the meaning of the phrase “usual and
customary” commissions is unclear. Does this mean an EMD can
only receive, for example, half of the commissions of the lead
underwriter (i.e., IIROC member)? Moreover, what percentage of
a prospectus offering can be sold by an EMD, as a selling group
member, before a CSA member believes the EMD is acting as an
underwriter? The answers to these questions will determine the
line EMD’s can’t cross without becoming an underwriter. For now,
we don’t have a bright line test, so this will continue to be a risk
factor for EMDs in connection with prospectus offerings.
These matters need to be discussed and considered further
and the PCMA looks forward to its continued dialogue with
industry and with the CSA to resolve these questions.
For now, the bottom line is the CSA have backed away from
the 2013 Proposed Amendments. Only a few weeks ago, we
were looking at the possibility of an outright prohibition for EMD
participation in a prospectus offering. This is good news.
For more information contact:
1. Subsection ( 5) deals with secondary market trading,
which is outside the scope of this article.
2. Under NI 31-103, an EMD cannot act as a underwriter in connection
with a prospectus offering; however, it can act as an underwriter in
a distribution of securities under a prospectus exemption. Section
7.1(2)(d)(i) relates to an EMD acting as dealer, section 7.1(2)(d)(iv)
relates to an EMD acting as underwriter. The distinction comes
down to the definition of the term “underwriter” in the applicable
securities legislation. In the Securities Act (Ontario), for example, a
dealer is not an underwriter if their only interest in the transaction
is limited to receiving the “usual and customary distributor’s or
seller’s commission” payable by an underwriter or the issuer. What
is usual and customary will be a focal point as EMDs participate in
prospectus distributions. We return to this point later in the article.