Private Capital Markets - Fall Winter 2017

36. ;e OM Exemption is not available in respect of speci;ed derivatives or structured ;nance products. 12 ;ese are complex terms imported into NI 45-106 from other national instruments as a means of preventing the OM Exemption from being used to distribute unduly complicated securities.

37. ;ese de;ned terms are very precise and were designed to achieve speci;c purposes in the instruments from which they were taken. Outside of the context of the original instruments, the application of these terms becomes less clear.

Speci;ed derivatives

38. “Specified derivatives” are de;ned in National Instrument

51-102 – Continuous Disclosure Obligations: “speci;ed derivative” means an instrument, agreement or security, the market price, value or payment obligations of which are derived from, reference to, or based on an underlying interest, other than one that is also (a) a conventional convertible security, (b) a speci;ed asset-backed security, (c) an index participation unit, (d) a government or corporate strip bond, (e) a capital, equity dividend or income share of a subdivided equity or ;xed income security, (f) a conventional warrant or right, or (g) a special warrant.

39. ;e PCMA notes that there are circumstances in which the de;nition of speci;ed derivatives can exclude structures that are commonplace and bene;cial to investors. For example, a common investment structure in the private capital markets features a top investment vehicle that invests solely or primarily in a bottom investment vehicle in order to create RRSP-eligibility for investors. In such a structure, the value of the securities issued by the top investment vehicle is derived from the underlying interest in the bottom investment vehicle. It is unclear on the face of the de;nition whether such securities would be “speci;ed derivatives” and, therefore, carved out of the OM Exemption.

Structured ;nance products

40. “Structured finance products” are de;ned in National Instru-
ment 25-101 – Designated Rating Organizations:
“structured ;nance product” means any of the following:
a. a security that entitles the security holder to receive payments
that primarily depend on the cash ;ow from self-liquidating ;nan-
cial assets collateralizing the security, such as loans, leases, mort-
gages, and secured or unsecured receivables, including:
(i) an asset-backed security;

(ii) a collateralized mortgage obligation;

(iii) a collateralized debt obligation;

(iv) a collateralized bond obligation;

(v) a collateralized debt obligation of asset-backed securities;

(vi) a collateralized debt obligation of collateralized debt obligations;

b. a security that entitles the security holder to receive payments that substantially reference or replicate the payments made on one or more securities of the type described in paragraph (a) but that do not primarily depend on the cash ;ow from self-liquidating ;nancial assets that collateralize the security, including: (i) a synthetic asset-backed security;

(ii) a synthetic collateralized mortgage obligation;

(iii) a synthetic collateralized debt obligation;

(iv) a synthetic collateralized bond obligation;

(v) a synthetic collateralized debt obligation of asset-backed securities;

(vi) a synthetic collateralized debt obligation of collateralized debt obligation.

41. ;e PCMA notes that there are circumstances in which the de;nition of structured ;nance products can exclude structures that are commonplace and bene;cial to investors. For example, it is not unusual to o;er securities with a distribution feature where the cash ;ow is secured against underlying assets. It is unclear on the face of the de;nition whether such securities would be “ structured ;nance products” and, therefore, carved out of the OM Exemption.

42. Again, the PCMA feels that it is not productive to have issuers, promoters and regulators parse the de;nitions of “speci;ed derivatives” and “structured ;nance product” to determine whether the OM Exemption is available or not. As we observed above in connection with investment funds, this leads to inconsistency and creates risk.

RECOMMENDATION #7

43. ;e PCMA recommends that the exclusion of speci;ed derivatives and structured ;nance products in section 2.9(2.1)(d)(i) and (ii) of NI 45-106 be removed.

44. ;e PCMA further recommends that any speci;c exclusions the OSC wishes to impose in lieu of section 2.9(2.1)(d)(i) and (ii) be drafted speci;cally for the OM Exemption and be presented for comment in terms that simplify the application of the exemption.