CANADIAN SECURITIES ADMINISTRATORS NOTICE 11-304 … · 7/31/2003 · Inc., StrongBow Resources Inc., Tagish Lake Gold Corp., Tenajon Resources Corp., The SunBlush Technologies Corporation,

CSA/ACVM Canadian Securities Administrators

Autorités canadiennesen valeurs mobilières

CANADIAN SECURITIES ADMINISTRATORS

NOTICE 11-304

RESPONSES TO COMMENTS RECEIVED ON CONCEPT PROPOSALBLUEPRINT FOR UNIFORM SECURITIES LAWS FOR CANADA

On January 30, 2003, the Canadian Securities Administrators (CSA) published a conceptproposal entitled Blueprint for Uniform Securities Laws for Canada (the Concept Proposal). Thecomment period expired on April 30, 2003. There was a significant response to the ConceptProposal with 89 comment letters received. The list of commenters is attached as Appendix A tothis Notice.

The USL project to develop uniform securities legislation for consideration by each of theprovincial and territorial governments of Canada complements the Ministers’ initiative toimplement a passport system or one-stop shopping for issuers and registrants.

The CSA thank the commenters and appreciate their time and effort in responding to the ConceptProposal. The comments were thoughtful, thorough and will be very useful in assisting the USLSteering Committee in drafting uniform legislation. Appendix B to this Notice provides adetailed summary of all comments received together with the CSA responses. The full text of allthe comment letters can be viewed on the Alberta Securities Commission web site athttp://www.albertasecurities.com/policies/comment.html.

The vast majority of the commenters are supportive of the USL initiative. There is generalsupport for:

• passport or one-stop shopping for issuers and registrants;• uniform securities legislation for registration, prospectuses and exemptions; and• delegation of decision making powers from one securities regulatory authority to another.

Some commenters qualify their support. The two most frequently occurring qualifications ofsupport are:

• the objective of the USL should be both achieving and maintaining uniform securities laws,with many commenters questioning whether it is possible to achieve these objectives withinthe existing framework of securities regulation in Canada; and

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• the USL’s scope does not put enough emphasis on simplification and streamlining ofregulatory requirements.

The CSA are very much concerned with both achieving and maintaining uniformity. In thisregard, the CSA plan to enter into protocols to ensure that regulators co-ordinate changes tosecurities law. We also intend to propose to our governments that they consider adopting aninter-governmental protocol to co-ordinate securities legislation.

Although the primary objective of the USL project is to develop uniform securities legislation,simplification and streamlining are complementary objectives of the project. Uniformregistration requirements, a streamlined national registration system, and consolidation ofoverlapping and differing registration and prospectus exemptions into a uniform exemptions ruleare significant examples of simplification and streamlining.

The CSA believe that the USL project is an important step in the process of regulatory reform,regardless of the ultimate solution that may be adopted for our capital markets.

NEXT STEPS

The USL Steering Committee is currently overseeing the drafting of a Uniform Securities Act(USA) and a Model Securities Administration Act (MAA). Work is underway on both draftstatutes, and the contributions of the commenters are being considered continually during thisprocess. We expect to publish consultation drafts of the USA and MAA in Fall 2003 forcomment.

July 31, 2003

Contacts

Stephen P. Sibold, Q.C., ChairAlberta Securities Commission4th Floor, 300 –5th Avenue S.W.Calgary AB T2P 3C4

[email protected]

Jane Brindle, Legal CounselAlberta Securities Commission4th Floor, 300 – 5th Avenue S.W.Calgary AB T2P 3C4

[email protected]

APPENDIX A:

LIST OF COMMENTERS

Commenter AbbreviationCanadian Advocacy Committee of the Association for InvestmentManagement and Research AIMR

Alberta Minister of Economic DevelopmentAlberta Minister ofEconomicDevelopment

Association of Canadian Pension ManagementAssociation ofCanadian PensionManagement

Barclays Global Investors Canada Limited Barclay GlobalInvestors

Burnet, Duckworth & Palmer LLP BD&P

Bennett Jones LLP Bennett JonesBourse de Montréal Inc. Bourse de Montréal

Canaccord Capital Corporation Canaccord

Canadian Bankers Association Canadian BankersAssociation

Canadian Capital Markets Association Canadian CapitalMarkets Association

Canadian Council of Chief Executives Canadian Council ofChief Executives

Canadian Institute of Chartered AccountantsCanadian Institute ofCharteredAccountants

Canadian Investor Relations Institute Canadian InvestorRelations Institute

Canadian Listed Company AssociationCanadian ListedCompanyAssociation

Certified General Accountant Association of Canada

Certified GeneralAccountantsAssociation ofCanada

Certified General Accountants Association of Manitoba

Certified GeneralAccountantsAssociation ofManitoba

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Commenter Abbreviation

Certified Management Accountants of Alberta

CertifiedManagementAccountants ofAlberta

Clark, Wilson Clark, Wilson

CSI Global Education Inc. CSI GlobalEducation Inc.

Davies Ward Phillips & Vineberg LLP Davies

EnCana Corporation EnCana

Fasken Martineau DuMoulin LLP Fasken Martineau

Fidelity Investments Canada Limited Fidelity

Financial Planners Standards Council Financial PlannersStandards Council

Groia & Company Groia & Company

Investment Dealers Association of Canada IDAThe Investment Funds Institute of Canada IFIC

Imperial Oil Limited Imperial Oil

Institute of Chartered Accountants of AlbertaInstitute of CharteredAccountants ofAlberta

Institute of Chartered Accountants of ManitobaInstitute of CharteredAccountants ofManitoba

Investment Counsel Association of CanadaInvestment CounselAssociation ofCanada

International Swaps and Derivatives Associates, Inc. ISDAKPMG LLP KPMG

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Commenter AbbreviationMembers of the Canadian Listed Companies Association: AmericanInsulock Inc., AMI Resources Inc., Badger and Co., Canadian ImperialVenture Corp., CON-SPACE Communications Ltd., Davis & Company,DIVERSAFLOW Corporation Ltd., Dome Ventures Corporation,Energold Mining Ltd., Emgold Mining Corporation, ESTec SystemsCorp., Freeport Resources Inc., Glenbriar Technologies Inc., ImpactMinerals International Inc., International Barytex Resources Ltd.,International Northair Mines Ltd., Intermap Technologies Corp., LexacalInvestment Corp., Midasco Capital Corp., Navigator Exploration Corp.,NDT Ventures Ltd., New Guinea Gold Corporation, Northern EmpireMinerals Ltd., Patent Enforcement and Royalties Ltd., ProspectorConsolidated Resources Inc., Rand Edgar Investment Corp., RedhawkResources, Inc., Sherwood Mining Corporation, St. Eugene MiningCorporation Limited, Stornoway Ventures Ltd., Stratacom TechnologyInc., StrongBow Resources Inc., Tagish Lake Gold Corp., TenajonResources Corp., The SunBlush Technologies Corporation, TIR SystemsLtd., Total Telcom Inc., Troon Ventures Ltd., VisionQuest EnterpriseGroup Inc. and Vulcan Minerals Inc.

Members of theCanadian ListedCompaniesAssociation

Mutual Fund Dealers Association of Canada MFDA

Odlum Brown Odlum Brown

Ogilvy Renault Ogilvy Renault

Securities Law Subcommittee of the Ontario Bar Association Ontario BarAssociation

Ontario Teachers’ Pension Plan Ontario Teachers’Pension Plan

Osler, Hoskin & Harcourt LLP Oslers

Prospectors & Developers Association of Canada PDACPhillips, Hager & NorthInvestment Management Ltd.

Phillips, Hager &North

Simon Romano and Robert Nicholls, partners at Stikeman Elliott LLP Romano and Nicholls

Royal Bank of Canada Royal Bank ofCanada

Market Regulation Services Inc. RS Inc.

Securities Transfer Association of Canada STAC

Shareholder Association for Research and Education SHARETalisman Energy Inc. Talisman

Torys LLP Torys

Total Telcom Inc. Total Telcom

TSX Group TSX Group

APPENDIX B:

SUMMARY OF COMMENTS AND RESPONSES

Table of Contents

General Comments.............................................................................................................1Local Rules ........................................................................................................................5Interpretation and Application ...........................................................................................8Cost-Benefit Analysis ........................................................................................................9Forum Shopping.................................................................................................................9Sunset Clauses..................................................................................................................10Legal Delegation ..............................................................................................................10Alternative Approaches to Regulatory Reform ...............................................................12Information Sharing .........................................................................................................13Powers of Investigation, Confidentiality and Penalties Available to aProvincial Court ...............................................................................................................14Administration Acts .........................................................................................................14Self-regulation and Marketplaces ....................................................................................15Registration ......................................................................................................................20Prospectus Requirements .................................................................................................28Derivatives .......................................................................................................................31Capital Raising Exemptions.............................................................................................33Other Exemptions ............................................................................................................36Resale Restrictions...........................................................................................................38Distributions Outside a Jurisdiction.................................................................................40Reporting Issuer Status ....................................................................................................47Continuous Disclosure Requirements..............................................................................51Trade Disclosure ..............................................................................................................53Investment Funds .............................................................................................................56Take-over and Issuer Bids................................................................................................57

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Civil Liability...................................................................................................................60Enforcement .....................................................................................................................71Joint Hearings ..................................................................................................................74General Provisions ...........................................................................................................75Fees ..................................................................................................................................77Comments on Existing National Instruments and Other CSAInitiatives..........................................................................................................................78Comments on the Interaction of Securities Laws and Corporate Laws...........................78

USL PROPOSAL

SUMMARY OF COMMENTS AND RESPONSES

# Theme Comments Responses

GENERAL COMMENTS

1. The USL Project

General support

(AIMR; Alberta Minister of EconomicDevelopment; Association of CanadianPension Management; Barclays GlobalInvestors; BD&P; Bennett Jones; Bourse deMontréal; Canadian Bankers Association;Canadian Capital Markets Association;Canadian Council of Chief Executives;Canadian Institute of Chartered Accountants;Canadian Investor Relations Institute;Certified General Accountants Associationof Canada; Certified General AccountantsAssociation of Manitoba; CertifiedManagement Accountants of Alberta; Clark,Wilson; CSI Global Education Inc.; Davies;EnCana; Fasken Martineau; Fidelity; IDA;IFIC; Imperial Oil; Institute of CharteredAccountants of Alberta; Institute ofChartered Accountants of Manitoba;Investment Counsel Association of Canada;KPMG; MFDA; Odlum Brown; OgilvyRenault; Ontario Teachers’ Pension Plan;Oslers; PDAC; Phillips, Hager & North;Romano and Nicholls; Royal Bank ofCanada; RS Inc.; Talisman; Torys; TSXGroup)

The CSA have received over 80 comment letters on theConcept Proposal. The vast majority of commenters arevery supportive of the USL.1 Many commenters applaudthe CSA for taking the initiative to advance the USL andare impressed with the progress that the CSA have madesince the USL Project’s commencement. Manycommenters also express support for what they see aspositive spin-off benefits of the USL such as increasedcooperation and coordination among securities regulatoryauthorities.

One commenter supports the structure of the USL whichcan be implemented within Canada’s existingconstitutional framework in a manner which is respectfulof the unique nature of the Canadian confederation whileat the same time achieving a high degree of uniformity.

Some commenters qualify their support of the USL. Thetwo most frequently occurring qualifications are:

� That the USL’s scope does not put enoughemphasis on the simplification andstreamlining of regulatory requirements (seecomment 4 below); and

� The objective of the USL should be bothachieving and maintaining uniform securitieslaws. These commenters are concerned thatthe USL contemplates differences at theoutset and does not give particulars of howthe CSA will maintain uniformity once it isachieved (see comment 7 below).

The CSA thank the commenters for their supportwhich will be invaluable in advancing the USLProject. The CSA believe that this is an extremelyimportant and achievable initiative that willfundamentally improve Canada’s system of securitiesregulation. The CSA also agree that there arenumerous spin-off benefits to the USL that will alsoimprove our system of securities regulation.

Please see comments 4 and 7 below for the responsesto these comments.

1 Please note that in this summary, “USL” refers to the entire body of legislation (both statutory and subordinate) that is being developed under the CSA’s USL Project.

2# Theme Comments Responses 2. The USL Project

General concerns

(Romano and Nicholls; Torys)

Two commenters are concerned that the cost and amountof work to achieve uniformity of securities laws may beunderestimated and that the goal may be too ambitiousunder the current timetable. One commenter suggestsfocusing on a limited number of reforms, for example theadoption of a passport system.

The CSA believe that uniform laws are important tomeaningful regulatory reform. Therefore, the resourceexpenditure on the USL is appropriate.

3. Changes to the Infrastructure ofSecurities Regulation

Creation of a national securities regulatoryauthority

(Barclays Global Investors; Canaccord;Canadian Bankers Association; FaskenMartineau; Fidelity; Groia & Company;Imperial Oil; Investment CounselAssociation of Canada; Ogilvy Renault;Ontario Teachers’ Pension Plan; Oslers;Romano and Nicholls; Royal Bank ofCanada; TSX Group)

A number of commenters support the creation of anational securities regulatory authority in Canada.

The objective under the USL is the harmonization ofexisting laws as well as streamlining and simplifyingthe current regulatory regime where the appropriatepolicy debate and public consultation have occurred.The creation of a national securities regulatoryauthority goes beyond the scope of the USL.

A number of initiatives are currently under way whichare looking into major reforms to the currentregulatory regime. Such initiatives include the workof the provincial Ministers responsible for securitiesregulation (who have proposed the creation of apassport system) and the work of the Wise Persons’Committee established by the federal Department ofFinance to review the structure of Canadian securitiesregulation.

3# Theme Comments Responses 4. Scope of the USL

Objectives of the USL

(Canaccord; Canadian Listed CompanyAssociation; Fidelity; Members of theCanadian Listed Company Association;Romano and Nicholls)

Several commenters express the view that while theharmonization of securities laws is important, it is equallyimportant that securities laws be streamlined andsimplified.

The CSA agree that simplification and streamliningare also important objectives. These arecomplementary objectives to the USL’s overallobjective of uniformity. The USL does contemplatesignificant streamlining and simplification. Forexample, the CSA are proposing to consolidate themany overlapping and slightly different registrationand prospectus exemptions that exist in jurisdictionsinto a uniform exemptions rule.

The CSA believe, however, that achieving uniformlaws is an important threshold step to comprehensive,Canada-wide streamlining and simplification of thesecurities regulatory system. The Concept Proposalcontains many examples of immediate simplificationsthat can be achieved through the combined result ofharmonized laws and legal delegation. For example, astreamlined national registration system, whereby aregistrant in one jurisdiction could become registeredin another jurisdiction by notifying its homejurisdiction regulator, will be easier to implement withuniform registration requirements across Canada.

5. Regulatory Approach

Principles versus rules-based regulation

(Canaccord; Canadian Listed CompanyAssociation; Fidelity; Members of theCanadian Listed Company Association;Odlum Brown)

Several commenters express the view that the currentsecurities regulatory system is too “rules-based” and thatthe CSA should use the USL as an opportunity to adopt aprinciples-based approach to regulation.

The CSA are also concerned about regulatorycomplexity. In this regard, the USL attempts toharmonize and streamline securities legislation. Oursecurities legislation is based on both principles andprescriptive rules. The adoption of a solely principles-based approach to all aspects of securities regulationwould represent a fundamental policy change that hasnot been studied or debated by the CSA.

6. Political considerations impacting theUSL Project

Political buy-in

(KPMG; Torys; TSX Group)

Several commenters point to a number of politicalconsiderations that may affect the ability of jurisdictions toadopt uniform legislation in the short term and maintainuniformity in the long term. For example, one commenternotes that provincial legislatures have the authority toapprove or reject securities legislation and at all timesmust respond to the constituents they represent. Thecommenter also notes that existing legislatures cannotbind future legislatures who may have entirely differentviews of what is in the best interest of their constituents.

The CSA agree that there are political considerationsthat, although out of the CSA’s control, must be keptin mind. The CSA believe that it is an opportune timeto introduce legislation that represents significantimprovement to the current securities regulatoryregime.

4# Theme Comments Responses 7. Achieving and maintaining uniformity

General

(AIMR; IDA; KPMG; Ogilvy Renault;Ontario Bar Association; Romano andNicholls; Torys; TSX Group)

A number of commenters express concern over thenumber of differences between the laws of eachjurisdiction that are contemplated by the ConceptProposal. They urge the CSA to maximize uniformityrather than enshrine regional differences. One commenteridentifies over 20 incidents where harmony is not soughtand submits that this demonstrates a lack of commitmentnecessary to ensure the success of the USL.

In addition, a number of commenters express concern overthe possibility of differences between the laws ofjurisdictions developing over time. One commenter notesthat the USL, as it now stands, does not obligate provincialand territorial governments or their securities regulatoryauthorities to coordinate amendments to any uniformsecurities legislation so as to maintain uniformity overtime.

The CSA acknowledge that the Concept Proposal doesnot contemplate absolute uniformity in all areas.However, the CSA continue to work towards commonpositions in these areas and have achieved consensuson a number of them. The CSA are committed toachieving uniformity in all but very limited, justifiablecircumstances.

The CSA plan to enter into protocols to ensure thatsecurities regulatory authorities coordinate changes tosecurities laws. In addition, the CSA may suggest toprovincial and territorial governments a protocol forcoordinating amendments to securities legislation.

8. Proportionate regulation

General

(TSX Group)

One commenter suggests that the Concept Proposal seemsdeficient in addressing the needs of emerging issuers. Thecommenter suggests that a two-tier regime may bedesirable to effectively address the needs of emergingcompanies as well as more senior issuers.

The CSA are currently studying this issue in thecontext of our Proportionate Regulation Project.

9. Canadian securities laws and theglobal community

Uniformity with the U.S.

(Romano and Nicholls)

One commenter recommends harmonizing Canadiansecurities laws where practicable with U.S. securities laws.

The CSA believe that Canadian securities laws shouldbe tailored to Canadian circumstances but should notcreate barriers to cross-border activity.

10. Proliferation of rules


One commenter suggests that the rule making process,while perhaps conceptually sound, has in practice begunswiftly to lead to over-regulation. The commenter alsosuggests that although the comment process is animprovement over past means of regulation, it is now tooeasy to regulate and practitioners are drowning in new(and often highly technical) rules. The commentersubmits that the costs of keeping up are clearlyoutweighing the benefits in most cases.

Securities regulatory authorities are currently requiredto follow rule making processes which require them tojustify the need for any new rules. These processeswill continue to exist under the USL.

5# Theme Comments Responses 11. Transitional rules


One commenter submits that securities regulatoryauthorities should provide realistic transitional provisionsin rules because their sudden introduction can causeproblems in pending transactions.

The CSA agree that rules should contain realistictransitional provisions. The CSA recognize thatappropriate transitional provisions are critical foreffective implementation of the USL.

LOCAL RULES

12. Local Rules

General

(AIMR; Association of Canadian PensionManagement; Barclays Global Investors;Bennett Jones; Canadian Capital MarketsAssociation; Canadian Council of ChiefExecutives; Fasken Martineau; IDA; IFIC;MFDA; Ogilvy Renault; Ontario BarAssociation; Oslers; PDAC; Phillips Hager& North; Romano and Nicholls; Royal Bankof Canada; Torys; TSX Group)

A number of commenters are of the view that allowingsecurities regulatory authorities to implement local rulesunder the USL may reinforce the current fragmentation ofsecurities laws and, ultimately, undermine the USL’s goalof harmonized legislation. Most of these commentersencourage the CSA to severely limit the scope of thevariances from uniformity that are allowed under the USL.Many of these commenters make particularrecommendations in this regard, such as:

� Requiring legislatures to approve anyregulatory initiative that is not adoptednationally;

� Requiring that every amendment to the USLbe agreed to unanimously (although thecommenter recognizes that such an approachmay be overly restrictive);

� Requiring that there be a compelling localneed for a different rule together with arequired waiting period and mandatory“mediation process” before a non-uniformrule can take effect;

� Ensuring that any variations aresupplementary and do not enable a singlejurisdiction to undermine harmonized rulesor effectively veto efforts to update aharmonized platform;

The CSA agree that structural disincentives must bebuilt into the USL to ensure that uniformity ofsecurities laws is maintained over the long term. TheCSA believe that the implementation of protocols foramending the USL among jurisdictions both at thegovernment and securities regulatory authority levelsand a protocol among securities regulatory authoritiesfor the introduction of local rules under the USL willbuild in the appropriate structures to ensure uniformityover the long-term. The protocol among the securitiesregulatory authorities will require each jurisdiction tocome to the CSA table prior to acting unilaterally in aspecific area. This will ensure that issues that havemulti-jurisdictional importance will be developed on apan-Canadian basis and that only truly local issues willbe dealt with by a jurisdiction on an individual basis.

6# Theme Comments Responses

� Ensuring that the principles of the USLexpressly state that a local rule should onlybe implemented in exceptionalcircumstances and that each local rule shouldbe examined every two years to see whetherthose exceptional circumstances continue toexist such that maintenance of the local rulecan be justified;

� Requiring that a securities regulatoryauthority obtain the approval of a majority ofthe other jurisdictions before it adopts a localrule that would apply to issuers or registrantswith a head office outside the localjurisdiction;

� Having explicit parameters guiding whatwould be considered a legitimate reason topermit a jurisdiction to formulate local rules;

� Specifying how disagreements betweenjurisdictions as to whether a local rule shouldbe adopted would be managed;

� Requiring a securities regulatory authoritythat is proposing a local rule that wouldlessen harmonization or cooperation toestablish to the satisfaction of the CSAmembers and publicly disclose that it is inthe public interest to adopt the local rule,notwithstanding non-uniform effect. Thesecurities regulatory authority should also berequired to explain why the benefits of thenew rule outweigh the costs associated withthe additional regulatory fragmentation itwill cause; and


� Imposing an obligation on a securitiesregulatory authority to provide to other CSAmembers and to publish for public commentthe reasons for a decision to opt-out of aparticular element of the USL and to providean empirical cost/benefit analysis in supportof the position.

13. Local Rules

Local rules to meet regional and localconcerns

(BD&P; Institute of Chartered Accountantsof Alberta; TSX Group)

Two commenters support the proposal to permit in theUSL certain local rules to be adopted in limitedcircumstances to meet regional and local concerns.

One commenter notes that Alberta has benefited from avibrant and accessible capital market and it is important tobalance the need for rules to foster investor confidenceand the need to avoid undue barriers in companiesaccessing venture capital. The commenter adds that thewestern provinces have been successful in maintainingthis balance and this should not be lost in the USL.

Another commenter notes that a number of initiatives havebeen now adopted in multiple jurisdictions that originatedfrom local initiatives such as the JCP Program, the SHAIFsystem and MI 45-103. However, the commenter notesthat the use of the power to make local rules should belimited to ensure that it does not result in “de-harmonization” of the USL.

The CSA agree that, although the ability of securitiesregulatory authorities to make local rules should belimited to ensure long-term uniformity of securitieslaws, it is nonetheless important to ensure that ajurisdiction is able to address truly local matters andtherefore regulate its capital market appropriately.

In addition, it is critical to ensure that novel,innovative approaches to regulation that may arise inone jurisdiction at first, but which may becomeappropriate on a multi-jurisdictional or national basisare not stifled. The CSA believe that the JCPProgram, the SHAIF system, the “accredited investor”exemption and MI 45-103 are all excellent examplesof ideas that originated in one or two jurisdictions butwhich were subsequently implemented on a widerscale and have provided benefits to industryparticipants in many jurisdictions. These exampleshighlight the fact that local rules often providesubstantial relief from securities law requirementsrather than imposing additional requirements.

14. Local Rules

Local rules to maintain some aspects ofcurrent registration regimes

(Barclays Global Investors; Davies; Groia &Company; IFIC; Ogilvy Renault; OntarioBar Association; Oslers; Phillips, Hager &North; Royal Bank of Canada)

A number of commenters are concerned with allowingjurisdictions to continue some aspects of their currentregistration regimes under the USL through the use oflocal rules since this will lead to non-uniformity.

The CSA believe that it is necessary to allowindividual jurisdictions to enact local rules to deal withparticular aspects of their local markets. However, theCSA recognize that individual jurisdictions should bediscouraged from implementing rules that in effectmaintain their current registration regimes at theexpense of uniformity.

8# Theme Comments Responses 15. Local Rules

Legal delegation

(PDAC)

One commenter supports the simplified approval processand reduced processing costs the legal delegation modeloffers but expresses concern that the existence of localrules will not permit the process to be as efficient as itcould be since local rules will require each securitiesregulatory authority to either be intimately familiar withthe local rules of other jurisdictions or continue to beinvolved in each matter to ensure that local rules are beingadhered to and enforced in the correct manner.

The CSA agree that the proposed legal delegationmodel will result in substantial efficiencies for bothregulators and industry participants. The CSAacknowledge the concerns raised by the commenter inrelation to local rules. These concerns will beaddressed as the delegation model is developed.

INTERPRETATION AND APPLICATION

16. Interpretation and Application

Securities regulatory authorities and theirstaff

(IFIC; Oslers; PDAC; Torys)

A number of commenters note that securities regulatoryauthorities’ staff in all jurisdictions must interpret andenforce the USL uniformly to achieve true uniformity ofsecurities laws. These commenters emphasize the needfor mechanisms to ensure uniform application.

Two commenters also note that uniform rules would beundermined if securities regulatory authorities continue toapply unwritten rules or administrative practices.

One of these commenters recommends that securitiesregulatory authorities commit to applying the USL andlocal rules but cease applying unwritten policies. Thecommenter recommends that the USL contain a statementof principles that provides that the USL should beinterpreted, applied and enforced in a harmonized andconsistent manner.

The CSA agree that, in order to achieve trueuniformity, laws must not only be uniform in theirwording, but must be interpreted uniformly acrossjurisdictions. The CSA are aware that currently,similar provisions are interpreted differently by thestaff and members of different securities regulatoryauthorities. The CSA believe that, under the USL,there will be no principled reason for the staff ofdifferent securities regulatory authorities to interpretand therefore apply word-for-word uniform provisionsdifferently. However, the CSA agree that this is anissue that must be addressed. The CSA believe thateducation of securities regulatory authority staff (e.g.providing them with the appropriate policybackground of a particular provision) will be key aswill information flow between staff of differentsecurities regulatory authorities (e.g. canvassing theinput of the staff of other securities regulatoryauthorities when interpreting a new provision). Inaddition, it will be important for securities regulatoryauthorities, collectively, to ensure (perhaps through“internal audits”) that staff are interpreting andapplying the uniform laws in a consistent manneracross jurisdictions.

9# Theme Comments Responses 17. Interpretation and Application

Courts

(TSX Group)

One commenter suggests that maintaining uniformity overthe long term may lie in the differences in the way thecourts in each jurisdiction interpret uniform law and rules,a matter outside the control of securities regulatoryauthorities and governments alike.

The CSA agree that, in some instances, judicialinterpretation of securities laws by courts in differentjurisdictions may result in inconsistent interpretationof the uniform law. However, the CSA believe that,given the overarching principles underlying the USLand its stated objectives, there should be no principledreason for differing interpretations of the uniform lawby courts in different jurisdictions. In addition,although a court ruling in another jurisdiction is onlyof persuasive value, the CSA believe that it will begiven considerable weight given the background andnature of the legislation. This will hopefully result inconsistent interpretation across jurisdictions over time.

COST-BENEFIT ANALYSIS

18. Cost-Benefit Analysis

(Canadian Listed Company Association;IFIC)

Two commenters submit that the CSA should conduct acost-benefit analysis of the USL. One of thesecommenters believes that a cost-benefit analysis similar tothat found in most proposed rules of the SEC isappropriate for the USL given the sweeping nature of itsproposed reforms.

The CSA will take this comment into consideration.

FORUM SHOPPING

19. Forum Shopping

Regulatory arbitrage

(IFIC; TSX Group)

One commenter believes that under the USL, it will bepossible for market participants to structure their affairs sothat they are subject to a seemingly “better” jurisdiction.The commenter recommends putting safeguards in placeto prevent individuals and issuers from engaging inregulatory arbitrage.

One commenter recommends clearly defining criteria forthe selection of a principal jurisdiction to reduce the riskthat an issuer may favour one jurisdiction over otherswhen choosing where to incorporate, locate its head officeor complete an offering.

The goal of the USL is to eliminate differences andreduce opportunities for regulatory arbitrage.

The CSA intend to provide objective criteria fordetermining an industry participant’s principaljurisdiction.

10# Theme Comments Responses 20. Forum Shopping

Proceedings

(Bennett Jones)

One commenter is concerned that the delegation ofauthority contemplated by the USL could exacerbate theproblem of forum shopping if provisions are not built intothe new legislation to address the issue. The commentersuggests that protections be introduced to ensure thatproceedings are heard in the jurisdiction that has theclosest connection to the subject matter of the proceedingto prevent issuers or others from being dragged into aninconvenient forum for tactical reasons. The commenternotes that such an approach would be similar to theprocedure used to determine the principal jurisdiction forMRRS applications and short form prospectus reviews.

The inclusion of provisions relating to the problem offorum shopping in the USL may be possible in thefuture once harmonized securities laws exist and thedelegation model has been further developed.However, one securities regulatory authority cannotprevent another securities regulatory authority fromasserting jurisdiction over a matter.

SUNSET CLAUSES

21. Removal of obsolete or unnecessaryrules


One commenter submits that the USL should requiresecurities regulatory authorities to review their rulesperiodically, with a view to removing obsolete orunnecessary ones, by providing generally for sunsetclauses in rules.

As the CSA develop protocols for rule making, we willconsider this comment.

LEGAL DELEGATION

22. Legal Delegation

General support

(BD&P; Bourse de Montréal; CanadianCouncil of Chief Executives; IDA;Investment Counsel Association of Canada;Ogilvy Renault; Ontario Bar Association;PDAC; Royal Bank of Canada; Torys; TSXGroup)

A number of commenters support the proposed legaldelegation model as a means to achieve harmonization andeliminate duplicative review by securities regulatoryauthorities. Many of these commenters suggest thatdelegation is critical to the achievement of harmonization.

The CSA acknowledge the comments.


General concerns

(IDA; Ogilvy Renault; Ontario BarAssociation; PDAC; TSX Group)

A number of commenters express specific concerns aboutaspects of the proposed legal delegation model including:

� Whether optional and revocable delegationwill be an impediment to a truly coordinatedregulatory environment;

� How the lack of a mechanism to ensurelegislation remains uniform may lead to the

The CSA are aware that delegation raises a number ofoperational issues and is developing an inter-jurisdictional memorandum of understanding (MOU)which will specify the parameters of any delegation aswell as how any delegation may be revoked. TheMOU may be based, in part, on the existing MOU forMRRS. The CSA contemplate that delegation will notinvolve a case-by-case review by a delegatingjurisdiction of a delegate jurisdiction’s decision.


system breaking down;

� The need for a memorandum ofunderstanding between each of the provincesand territories and their respective securitiesregulatory authorities, setting out, at aminimum, the parameters of any delegation,any opting-out privileges and a disputeresolution mechanism; and

� The nature of a dispute resolutionmechanism. One commenter submits that adelegating jurisdiction should only exerciseits power to overrule the delegate jurisdictionin circumstances where the decision of thedelegate jurisdiction is judged to be patentlycontrary to the public interest and that such adetermination should only occur with theapproval of the Minister responsible forsecurities regulation in that province.

Therefore, no opt-outs are contemplated. In addition,there will be no ability for a delegating jurisdiction torefuse to give effect to a decision made by a delegatejurisdiction.


Legal delegation – nature of delegation

(IDA)

One commenter states that real delegation means acommitment by securities regulatory authorities to rely ondecisions in the interests of the investing public in theirjurisdiction by other securities regulatory authorities evenif those decisions are not the decisions the securitiesregulatory authority would have made.

The commenter is of the view that comprehensivedelegation on all regulatory decision-making is essential.

The CSA contemplate that delegation will not involvea case-by-case review by a delegating jurisdiction of adelegate jurisdiction’s decision. Therefore, no opt-outs are contemplated. In addition, there will be noability for a delegating jurisdiction to refuse to giveeffect to a decision made by a delegate jurisdiction.


Legal delegation – applicability to SROs

(RS Inc.)

One commenter suggests that the USL should specificallyrecognize that one of the regulatory functions that may bedelegated between securities regulatory authorities is theoversight of SROs. There may be as many benefits toSROs to the “one stop shopping” approach recommendedin the Concept Proposal as there are for other industryparticipants.

The legal delegation powers in the USL will allow theCSA to consider delegation of a variety of regulatoryfunctions.


ALTERNATIVE APPROACHES TO REGULATORY REFORM

26. Alternative Approaches

Modified MRRS system


One commenter submits that the CSA should worktowards more modest and achievable goals such asestablishing a better MRRS system for exemptionapplications and for the handling of registration relatedmatters, one that in fact truly embodies actual mutualreliance.

The CSA believe that the legal delegation modelproposed under the USL will be a vast improvementover the current MRRS system and will allow anindustry participant to deal with one securitiesregulatory authority only on a specific issue withoutthe concern that there may be opt-outs.


Passport system

(Ontario Bar Association; Romano andNicholls; Torys; TSX Group)

Several commenters submit that the CSA should adopt apassport system whereby the approval of any one regulatoris sufficient on a national basis.

One commenter notes that the passport system could berestricted such that a Canadian jurisdiction could onlyaccept compliance with the rules of one of the majorCanadian securities jurisdictions, such as Alberta, B.C.,Ontario and Québec, as compliance with its own rules.This would still allow industry participants to deal withone Canadian regulator only.

One commenter suggests that consideration be given toimplementing a “passport system” for reporting issuerstatus. Such a system would be similar to that proposedunder the delegation provisions in that it would allow anissuer to comply with only the continuous disclosurerequirements of its principal jurisdiction, the effect ofwhich would be to enable it to maintain a currentcontinuous disclosure record in each jurisdiction. If apassport system is adopted, the commenter recommends,based on cost considerations, that issuers be able to usesuch a “passport” only in those jurisdictions in which theychoose to offer their securities.

The CSA believe that uniform laws will makeeffective delegation between jurisdictions easier toachieve.

The CSA believe the USL will achieve the suggestedresult through uniform continuous disclosurerequirements.


Functional division of regulatoryresponsibility

(Ogilvy Renault; Royal Bank of Canada)

Two commenters suggest that regulatory responsibilityshould be divided among securities regulatory authoritieson the basis of function. This approach would encouragethe development of expertise in certain areas, ensureconsistency and allow securities regulatory authorities toeffectively allocate resources.

Under the proposed delegation model, what thecommenter suggests would be possible.


INFORMATION SHARING

29. Information Sharing

(Barclays Global Investors; Bourse deMontréal; Fasken Martineau; IFIC; PDAC;Phillips, Hager & North; RS Inc.)

The following issues were raised by a number ofcommenters regarding the information sharing provisionsto be included in the USL:

� The importance of making the provincialauthorities responsible for freedom ofinformation and protection of privacylegislation aware of the importance of anopen information sharing regime among allprovinces;

� Whether the information sharing provisioncontained in the USL should be paramount toapplicable freedom of information legislationor whether privacy rights enshrined infreedom of information legislation should bepreserved;

� The need for securities regulatory authoritiesto determine what information is or is notnecessary to share;

� The importance of ensuring that the releaseof investigative information extends to SROsalong with regulatory agencies;

� The introduction of privacy legislation invarious jurisdictions in the near future shouldensure that each SRO operating in ajurisdiction is on the same footing as theapplicable securities regulatory authority;and

� The importance of sharing of information inthe investigation process.

The CSA believe that the ability of securitiesregulatory authorities to share information is essentialgiven that capital market activities often crossprovincial or national borders and therefore arerecommending that the USL contain an informationsharing provision which is paramount to freedom ofinformation and protection of privacy legislation.However, the CSA are cognizant of the balancebetween the public interest and the rights ofindividuals. The CSA note that several CSAjurisdictions already have a provision in theirsecurities legislation which overrides freedom ofinformation legislation.

The CSA will ensure the release of investigativeinformation under the USL extends to SROs alongwith regulatory agencies.

The CSA agree that the potential benefits of broadinformation sharing powers to SROs are significantand therefore it is important to ensure that SROs havethe same powers as securities regulatory authorities.The CSA note that with the introduction of privatesector privacy legislation in various jurisdictionsacross Canada, it is important to ensure that SROs areplaced on the same footing as securities regulatoryauthorities which will likely require that they besubject to freedom of information legislation asopposed to private sector privacy legislation.


POWERS OF INVESTIGATION, CONFIDENTIALITY AND PENALTIES AVAILABLE TO A PROVINCIAL COURT

30. Powers of Investigation,Confidentiality and PenaltiesAvailable to a Provincial Court

(Fasken Martineau; Groia & Company; IDA;SHARE)

One commenter notes that one reason given in theConcept Proposal for putting the powers of investigationand penalties a court may impose in the respectiveAdministration Acts is that they are of more concern tosecurities regulatory authorities themselves than theregulated community. The commenter states that methodsof investigation and penalties that can be imposed are ofparamount concern to the persons who will be subject tothem.

One commenter states that there is no reason in principlewhy investigative powers and procedures, confidentiality,and penalties should not be the same across Canada. Twoother commenters also agree that penalties should be madeuniform.

The objective under the USL is to make uniform, tothe greatest extent possible, investigative proceduresand penalties. However, the CSA’s first priority is theharmonization of those laws applicable to issuers,investors and intermediaries that will achieve greaterefficiency of regulation without unduly burdening themarket.

31. Powers of Investigation,Confidentiality and PenaltiesAvailable to a Provincial Court

Quantum of penalties

(SHARE)

One commenter is of the view that stronger financialdeterrents are required to maintain compliance andenhance investor protection and confidence. Thecommenter supports the proposed increase to the quantumof penalties available on conviction of an offence tried in aprovincial court.

The CSA acknowledge the comment.

ADMINISTRATION ACTS

32. Administration Acts

Inclusion of administrative and proceduralprovisions into an Administration Act

(Barclays Global Investors; IFIC; TSXGroup)

Two commenters accept that differences among provincialand territorial Administration Acts may be necessary to fitwithin the procedural framework that applies to regulatoryagencies in each province and territory.

One commenter recommends harmonizing, to the greatestextent possible, the procedural frameworks that apply tosecurities regulatory authorities in each province andterritory.

The CSA acknowledges the comments.

33. Administrative Provisions

Inclusion of administrative and proceduralprovisions into an Administration Act

One commenter submits that securities regulatoryauthorities and provincial legislatures should attempt to beconsistent in the delegation of investigative powers fromsecurities regulatory authorities to staff. The commenternotes that, given the multi-jurisdictional nature of

The CSA acknowledge that there are differencesacross jurisdictions.


(PDAC) securities trading, it is important for investigations to becommenced in multiple provinces at the same time. Thecommenter suggests that, in jurisdictions whereinvestigations may only be commenced upon an order ofthe securities regulatory authority rather than at a stafflevel there is an unnecessary delay.

SELF-REGULATION AND MARKETPLACES

34. Self-regulation

Self-regulation generally

(AIMR; IDA)

One commenter offers general support for self-regulationthat embodies a clear and principled approach toregulation, with a primary focus on promoting efficientcapital markets while placing the interests of clients andinvestors first.

One commenter is encouraged that under the USL, thebasic framework for regulation of SROs will remainsubstantially similar to the current system. Thecommenter believes that the current relationship hasworked appropriately. The commenter agrees that aflexible approach to regulation is necessary. The capitalmarkets’ efficiency is inextricably related to itssophisticated regulatory environment, including its SROs.Self-regulation is integral to developed, efficient capitalmarkets. Innovative and rapidly changing productsrequire proactive decision-making and timely responses, achallenge which SRO staff, working with knowledgeableand experienced professionals within the industry, canmeet.


35. Self-regulation

Regulation of registrants

(IDA)

One commenter supports the USL provisions regardingthe incorporation of the SRO model for regulatingregistrants who are members of an SRO.


16# Theme Comments Responses 36. Self-regulation

Marketplaces

(Barclays Global Investors; Bourse deMontréal; Canadian Capital MarketsAssociation; IDA; IFIC; RS Inc.; TSXGroup)

A number of commenters support revising the term “stockexchange” by deleting the term “stock” to better reflect theproducts currently traded, especially with respect to assetclasses that have never traded on stock exchanges, such asbonds.

Several commenters support including the concept of a“marketplace” in the USL that is broader than the currentcategory of “exchange.” One commenter notes that notall “marketplaces” are empowered to regulate the conductof the persons who access them. The commenterrecommends that only those marketplaces that directlyundertake member and/or market regulation should beafforded the powers contemplated to be granted torecognized entities.

The CSA have deleted the reference to “stock” withrespect to an exchange.

The CSA acknowledge the comments. To clarify thediscussion in the Concept Proposal, the USL willinclude the concept of a "marketplace" but does notpropose recognition of "marketplaces". The currentregulatory structure for marketplaces is provided in NI21-101 and will be maintained under the USL.

37. Self-regulation

Market participants

(Canadian Capital Markets Association)

One commenter supports a focus on “market participants”which, in the commenter’s opinion, better reflects therealities of today’s and tomorrow’s capital markets both inCanada and abroad.


38. Self-regulation

Definition of “participant”

(RS Inc.)

One commenter recommends interpreting or defining theterm “participant” broadly enough to include a widerrange of persons and entities.

No definition of participant is contemplated. The CSAnote that “participant” is intended to capture members,participating organizations or any other persons orentities that are subject to the regulation of anorganization with self-regulatory functions. Inaddition, the definition of SRO includes the situationwhere an entity performs regulatory functions foranother regulated entity.

39. Self-regulation

Lead regulator approach

(Bourse de Montréal; MFDA; OgilvyRenault)

One commenter is of the view that all marketplaces shouldbe regulated but that multiple regulation by severaljurisdictions should be prevented. The commenterrecommends a lead regulator type oversight ofmarketplaces in Canada to prevent duplication andencourage competition with international markets.

Currently, securities regulatory authorities regulateexchanges under a “lead regulator” model. This modelentails recognition of the exchange by a “leadregulator.” The non-lead jurisdictions rely on the leadregulator to regulate the exchange. This modelsignificantly decreases the potential for duplication.Under the USL, a delegation model is contemplated,whereby a jurisdiction will be able to avoid duplicationby delegating, among other things, its oversightresponsibility to another jurisdiction. The discretion toexercise this delegation power is with each securitiesregulatory authority.


One commenter wants all CSA jurisdictions to have theability to receive applications from organizations seekingrecognition as an SRO in that jurisdiction to facilitateorganizations being formally recognized as an SRO acrossCanada. Alternatively, one commenter submits that SROsshould be recognized nationally through one securitiesregulatory authority.

Currently, SROs are subject to a “principal regulator”model whereby all securities regulatory authoritiesrecognize an SRO but the principal regulatorcoordinates the review and oversight of the SRO. TheUSL will provide each securities regulatory authoritywith the power to recognize an SRO operating in itsjurisdiction. However, the discretion to exercise thatpower or to delegate it to another securities regulatoryauthority will lie with each securities regulatoryauthority.

40. Self-regulation

Power of securities regulatory authorities –ability to enforce the rules and policies ofrecognized entities

(Bourse de Montréal; IDA; RS Inc.)

One commenter supports the continued ability ofsecurities regulatory authorities to enforce the rules andpolicies of recognized entities while one commenteropposes giving securities regulatory authorities the abilityto enforce the rules and policies of recognized entities.

One commenter suggests that any provision respecting theenforcement of rules of recognized entities by a securitiesregulatory authority make it clear that any disciplinary orenforcement action at that level is without prejudice to anypast, existing or future disciplinary or enforcement actionundertaken by the recognized entity.

The CSA believe that the power to enforce SRO rulesand policies is essential to the fulfillment of securitiesregulatory authorities’ oversight mandate and willassist in eliminating duplicative investigations andenforcement proceedings in situations where a partyhas breached requirements of both the SRO and thesecurities regulatory authority. This power currentlyexists in B.C. and Alberta.

The CSA will include this provision in the USL.

41. Self-regulation

Jurisdiction of SROs

(RS Inc.)

One commenter is of the view that the problem of SROjurisdiction should be viewed in a broader context thanjust the power to deal with former members. Thecommenter proposes that any provisions dealing withSROs include a statutory framework for the jurisdiction ofSROs. The commenter is of the view that a statutory basisof jurisdiction for each SRO will ensure that the ambit ofits jurisdiction is the same with respect to participants ineach marketplace that it regulates and in each jurisdictionin which it regulates.

The USL will provide an SRO with the power toregulate a participant or the participants of anotherrecognized entity. Each SRO has been recognized for aparticular purpose (e.g. IDA – member regulation, RSInc.– market regulation). Any proposed broadening ofjurisdiction of a particular SRO should be dealt with inthe context of its recognition order and structure.

18# Theme Comments Responses 42. Self-regulation

Powers of recognized entities – regulation offormer members

(Bourse de Montréal; IDA; Institute ofChartered Accountants of Manitoba; MFDA;RS Inc.)

A number of commenters agree with the proposal to grantrecognized entities the power to regulate former members.They submit that this power, along with the power tocompel witnesses to attend and produce documents atdisciplinary hearings, will enhance the ability ofrecognized entities to regulate their members

One commenter recommends the power to regulate formermembers be limited to those individuals or companies thathave been members within a three year period.

One commenter questions how the power of a securitiesregulatory authority over former members of a recognizedentity will be enforced. The commenter suggests thatwithout the ultimate penalty of termination ofmembership, enforcement might not have the necessary“teeth” to be effective. The commenter suggests thatperhaps the sanctions available to securities regulatoryauthorities are such that this power is effective.

The CSA will include the power to regulate formermembers in the USL and will consider whether it isappropriate to include a limitation period.

SROs have sanctioning powers that extend beyondtermination e.g. fines. For this reason, jurisdictionover former members is a valuable power and is onethat SROs unanimously support.

43. Self-regulation

Powers recognized entities – other powers

(Bourse de Montréal; IDA; MFDA; RS Inc.)

A number of commenters submit that SROs should beprovided with the following powers and immunities:

� The power to compel witnesses to attendand produce documents at the investigativestage;

� The power to file their decisions with theappropriate court so that they areenforceable as orders of that court or that theapplicable securities regulatory authority beallowed to file SRO decisions with the courton behalf of SROs;

� The power to seek a court-ordered monitorof a firm in difficulty;

� Statutory immunity for SROs and their staff.In essence, the commenter would like aprovision similar to the one under currentlegislation that protects a securitiesregulatory authority and its staff; and

Outside the USL, the CSA are reviewing requests bySROs to obtain the power to compel witnesses toattend and produce documents at the investigativestage, the power to file their decisions with a court ofcompetent jurisdiction and the power to seek a court-appointed monitor. CSA staff will work with SROs todetermine if these powers are appropriate and howbroad they should be.

The CSA agree that SROs and their staff should havethe same statutory immunity that securities regulatoryauthorities enjoy when they exercise powers delegatedto them by securities regulatory authorities. Such animmunity would be provided for under the USL.

The CSA are reviewing the request by SROs to extendstatutory immunity for negligence for regulatorydecisions made in good faith to SROs. CSA staff willwork with SROs to determine if this power isappropriate and how broad it should be.


� Statutory immunity for negligence forregulatory decisions made in good faith bySROs. The commenter submits that theconsequences of losing a lawsuit for“negligent regulation” would be catastrophicto the ability of the SRO to regulate. Inaddition, the SRO must deal with theattendant costs of this and similar lawsuits.

44. Self-regulation

Effective oversight

(Barclays Global Investors; IFIC)

One commenter emphasizes the need for SROs to worktowards achieving appropriate oversight of their membersand enforcement of their rules to firmly establish SROs asvaluable assets to the Canadian marketplace.

Another commenter emphasizes the need for securitiesregulatory authorities to provide active oversight of SROsto ensure that markets remain open to innovation and newproducts.


Securities regulatory authorities have developed anextensive oversight program for SROs. The oversightprogram includes the review of all rules of an SRO,examinations of its operations and filing requirements.

45. Self-regulation

Elimination of duplicative requirements

(Barclays Global Investors; IDA; IFIC)

Several commenters recommend that securities regulatoryauthorities work with SROs to create a system thateliminates potential overlap and gives market participantsa single and clear set of requirements they must follow.

One of these commenters supports the CSA’s recognitionof the importance of the USL’s objective to eliminateoverlap between securities regulatory authority and SROrules. The commenter supports the proposal to continuethe SRO model of regulation of registrants in thosejurisdictions where it currently exists.

In the context of their oversight program, securitiesregulatory authorities work with the SROs to minimizeduplication and ensure requirements are clear.


46. Self-regulation

Voluntary surrender of recognition

(Oslers)

One commenter is unclear as to what will happen in asituation where a securities regulatory authority is notsatisfied that the conditions set out in the USL for avoluntary surrender of recognized status are met. Thecommenter does not believe that a securities regulatoryauthority can compel a recognized entity to continue tocarry on business as a recognized entity if the entity doesnot want to do so. The commenter submits that if arecognized entity notifies a securities regulatory authoritythat it is voluntarily surrendering its recognition, thesecurities regulatory authority must accept the voluntarysurrender whether it agrees with the terms or conditions ornot and, if the latter, must step into the breach left by the

The voluntary surrender requirements are meant topermit an orderly wind-up of the SRO and ensure thatthe winding up of an SRO’s regulatory functions isdone in the public interest. For example, a securitiesregulatory authority must ensure that there is a propertransfer of SRO functions to another SRO or securitiesregulatory authority or a return of delegated powerback to the securities regulatory authority. In addition,with respect to an exchange, it is important to ensurethat the trades or outstanding positions are properlycleared and settled. The intention is not to compel arecognized entity to carry on business.


recognized entity when it surrenders its recognition andregulate in the place of the recognized entity.

47. Self-regulation

Legal delegation – further delegation toSROs

(RS Inc.)

One commenter recommends permitting the delegation ofpowers from securities regulatory authorities to SROs.

The commenter notes that the Concept Proposal does notaddress the question of whether securities regulatoryauthorities should be empowered to delegate enforcementactions to SROs where the subject matter falls within thejurisdiction of both the securities regulatory authority andone or more SROs. While SROs and securities regulatoryauthorities have coordinated investigations andproceedings, consideration should be given to providing amechanism for a “consolidated” proceeding that wouldpermit all issues to be resolved in a timely and consistentmanner in a single forum without duplication of effort onthe part of securities regulatory authorities and defendants.

The CSA will consider how broadly delegation will beapplied. It will be up to each individual securitiesregulatory authority to determine which areas it willdelegate.

48. Self-regulation

Conflicts

(Bourse de Montréal)

One commenter recommends clearly establishing that therole of an SRO is to regulate its members andmarketplaces exclusively and explicitly providing thatSROs should not carry on lobbying activities for theirmembers.

The issue of whether SROs should carry on otherfunctions is beyond the scope of the USL Project.

49. Self-regulation

Conflicts

(SHARE)

One commenter raises concerns about the ability of SROsto exist as a publicly traded entity and simultaneouslyfulfil their role as quasi-regulators. The commenter viewsthe dual nature of publicly traded SROs to be problematicand a breeding ground for potential conflicts. Thecommenter is opposed to allowing SROs to be publiclytraded and urges the CSA to provide the strongestprotections to ensure that potential conflicts in theoperation of publicly traded SROs do not compromiseinvestor protections.


REGISTRATION

50. Registration

General support

One commenter supports having one set of regulations, oran act, that covers all trading activities and one securitiesregulatory authority regulating these activities since underthis scenario, issues arising from inconsistencies betweendifferent acts are eliminated. The commenter further



(AIMR) submits that a registrant, whether trading futures andoptions or other securities, is much the same and therefore,the requirements for capital, proficiency, bonding andreporting should be the same.

The commenter also offers support for most of theproposals made in the area of registration requirements.

51. Registration

Registration trigger

(AIMR; Davies; IDA; IFIC; Ogilvy Renault;Ontario Bar Association)

A number of commenters recommend adopting a businesstrigger for registration since the trade trigger is overlybroad and requires numerous exemptions anddiscretionary relief applications. One commenter notesthat the development of an appropriate definition of“carrying on business” will result in Canada being broughtinto line internationally with the standards of otherrespected securities regulators.

One commenter agrees with adopting the trade trigger atthis time to achieve uniformity and, if appropriate,replacing it with a business trigger once additional policywork has been completed and industry consultations haveoccurred.

One commenter believes that only one trigger should beused by all securities regulatory authorities.

The CSA recognize that an in-the-business triggerwould have advantages but would have to be carefullyimplemented to avoid unintended effects. The CSAare considering this issue.

52. Registration

Firm-only registration

(Ogilvy Renault; Phillips, Hager & North;Romano and Nicholls)

A number of commenters suggest implementing a “firm-only” registration regime for dealers and advisers whichallows for the imposition of penalties against individuals.

The CSA believe that the move to a registrationsystem which requires only firms to register representsa significant policy shift from the current registrationregimes in most jurisdictions. Given that theappropriate policy work and industry consultationshave not occurred at the CSA level, the CSA are notprepared to move to firm-only registration at this time.

53. Registration

Permanent registration

(Bourse de Montréal; Phillips, Hager &North)

Two commenters believe that a permanent registrationsystem which requires the annual filing of specifiedinformation would be more efficient and less burdensomethan an annual registration system.

The CSA believe that the move to a permanentregistration system represents a policy shift from thecurrent registration regimes in most jurisdictions.Given that the appropriate policy work and industryconsultations have not occurred at the CSA level, theCSA are not prepared to move to permanentregistration at this time.

22# Theme Comments Responses 54. Registration

Simplification of registration categories

(AIMR; CSI Global Education Inc.; Davies;Fasken Martineau; IDA)

Several commenters support the proposed registrationcategories and believe that harmonized and simplifiedregistration categories will reduce costs, administrativeburden and investor confusion.

One commenter agrees that registration needs to beflexible and responsive enough to respond to newactivities in the market.


The CSA agree with the comment. The goal of theUSL is to create platform legislation which canaccommodate future changes to respond to changingmarkets.

55. Registration

Security issuer category

(PDAC)

One commenter supports replacing the “security issuer”category of registration with a registration exemption forissuers distributing their own securities but expressesconcern with any conditions that may be imposed. Thecommenter urges the CSA to not make this exemptionoverly restrictive.

The CSA have not determined all the conditions whichwould attach to the security issuer exemption butexpect that they may be similar to the terms andconditions currently imposed on registrants in thesecurity issuer category.

56. Registration

Mutual fund dealers

(IFIC)

One commenter supports the proposal to:

(a) Permit mutual fund dealers to provide adviceconcurrent with trading;

(b) Not permit mutual fund dealers to exercisediscretionary trading authority;

(c) Require mutual fund dealers to be a member of anSRO where the requirement currently exists; and

(d) Require mutual fund dealers to be subject to thecapital, supervisory, proficiency, sales conduct and otherrequirements established by securities regulatoryauthorities and SROs.


57. Registration

Mutual fund dealers

(Fasken Martineau; IFIC; Ogilvy Renault;Phillips, Hager & North; Romano andNicholls; Royal Bank of Canada)

Several commenters suggest harmonizing the ability ofmutual fund dealers to trade exempt securities. Onecommenter states that differing practices with respect tomutual fund dealers trading in exempt securities amongCSA jurisdictions are not warranted by either investorprotection or efficiency goals. If mutual fund dealers arepermitted to trade in exempt securities, one commenteremphasizes the fact that they must have the requiredqualifications.

The CSA recognize that the rules relating to the abilityof mutual fund dealers to trade in exempt products arenot uniform across the CSA jurisdictions and arediscussing this issue.


Restrictions on mutual fund salespersons

(IFIC)

One commenter emphasizes the importance ofdistinguishing between the powers of a mutual fund dealerand those of a salesperson with regard to the sale ofexempt products. The commenter submits that if a mutualfund dealer has chosen not to sell some or any exemptproducts, salespersons employed by that dealer should nothave the right to sell those products as an individualbecause these salespersons will create potential liabilityfor their dealer and confusion for clients.

The comment raises two distinct issues:

� The issue of whether a mutual fundsalesperson may sell exempt productswhen his or her dealer has chosen not togoes to the private relationship betweenthe dealer and the salesperson. The issueof potential liability should be addressedin that context; and

� The issue of salespersons carrying onmultiple businesses is the subject matterof the work of the CSA committeeresponsible for non-employmentrelationships. This committee is in theprocess of developing recommendationswith respect to salespersons carrying onmultiple businesses and will be preparinga paper for public comment.

59. Registration

Obligations of registrants

(AIMR; CSI Global Education Inc.; FaskenMartineau; IDA)

Several commenters support the proposal to conformsecurities regulatory authorities’ requirements and SROrequirements. One commenter requests clarificationregarding the statement “SRA and SRO rules would beconformed”.

One commenter notes that under the USL, investmentdealers and mutual fund dealers will be subject to thecapital requirements of their governing SRO but othersolvency requirements such as bonding, insurance andmargin requirements will be harmonized. The commenterqueries why the USL will not permit investment dealers toremain subject to solvency requirements other than capitalrequirements of their governing SROs where theserequirements are the subject of substantial regulation. Thecommenter also notes that, under the USL, thoseregistrants’ obligations with respect to issues of “integrity”such as know-your-client and suitability rules would, forSRO members, remain subject to SRO rules. Thecommenter supports the proposal to harmonize proficiency

The CSA acknowledge the comment. The CSArecognize that eliminating overlap between securitiesregulatory authorities’ rules and SRO rules is animportant objective and will continue to work withSROs to eliminate duplicative requirements. Thestatement “SRA and SRO rules would be conformed”means that to the greatest extent possible, differingrequirements would be made uniform.

The USL will contain registration requirements (e.g.proficiency, solvency, integrity) applicable to allregistrants. However, registrants that are members ofan SRO will be exempted from the USL requirementsprovided they comply with the requirements of anSRO that have been approved by securities regulatoryauthorities.


requirements and conform them to SRO requirements.

60. Registration

Proficiency requirements

(CSI Global Education Inc.; Romano andNicholls)

One commenter supports the proposal to harmonizeregistrant proficiency requirements.

One commenter suggests that harmonized proficiencyrequirements will need to be adjusted to the needs of non-Canadian firms, mutual fund dealer/investment dealerdifferences and restricted dealers and submits that theyshould be reviewed with an eye to competitiveness (e.g.the less demanding U.S. and U.K. adviser requirements).

The harmonized proficiency requirements will be on acategory-by-category basis. The CSA are not preparedto lower proficiency requirements for non-Canadiandealers operating in Canada at this time simplybecause they may be subject to lower standards in theirhome jurisdiction.

61. Registration

Bonding and insurance requirements

(Phillips, Hager & North)

One commenter notes that, among the 13 jurisdictions,bonding and insurance requirements are quite differentand therefore harmonization in this area would be mostwelcome.

The CSA agree with the comment.

62. Registration

Residency and incorporation requirements

(Davies; IFIC; Romano and Nicholls; RoyalBank of Canada)

Several commenters support eliminating residencyrequirements. One commenter suggests eliminatingresidency and Canadian incorporation requirements bothat the securities regulatory authority level and the SROlevel. Two commenters state that they do not appear toserve any investor protection benefits. One commenterstrongly urges the CSA to develop a common position onwhether there should be residency requirements forregistrants.

Currently, very few jurisdictions have residency andCanadian incorporation requirements. In Québec,mutual fund dealers fall under the jurisdiction of theBureau des services Financiers which does not havethe power to exempt a mutual fund dealer from anyrequirements, including residency requirements. TheCVMQ has an exempting power that it uses to exemptdealers under its jurisdiction from residencyrequirements and the requirement to have a principalestablishment in the province.

The CVMQ recognises that residency requirementsshould be softened and has decided to grant, withconditions and on a discretionary basis, exemptionsfrom residency requirements and the requirement tohave a principal establishment in Québec.Amendments to Québec’s Regulation RespectingSecurities are currently being considered in Québec toachieve uniformity in Canada.


Process for registration, renewal ofregistration and de-registration

(IDA)

One commenter supports the USL’s goal to harmonize theregistration and de-registration regime.


64. Registration

National streamlined registration system

(AIMR; IDA; Ogilvy Renault; OldumBrown; Phillips, Hager & North; Torys)

Several commenters support the concept of a streamlinednational registration system. One commenter hopes thatthe system goes beyond mere procedure and amounts to atrue delegation to the securities regulatory authorityaccepting the delegation.

One commenter suggests that as an immediate solution todiffering registration systems (which have beenresponsible for impeding innovation e.g. difficulties withimplementing NRD), one of the larger provincialregistration regimes should be adopted (perhaps bylottery) as the system for the entire country. Onecommenter states that in addition to a streamlined nationalregistration system, all registration requirements should beuniform across CSA jurisdictions.

The CSA anticipate that with legal delegation andharmonized registration rules, the streamlinedregistration system will amount to a true delegationwhereby a registrant deals only with its principalregulator regardless of the number of Canadianjurisdictions in which it operates.

The CSA are developing uniform registration rules aspart of the USL and prefer not to simply adopt onejurisdiction’s registration regime.

65. Registration

Non-resident advisers

(Oslers; Romano and Nicholls)

One commenter submits that in order to harmonize theadviser registration requirements that apply across theprovinces and territories of Canada, the USL shouldclarify the circumstances in which registration as anadviser is necessary.

One commenter questions the incorporation of OSC Rule35-502 in the USL as an approach to the regulation ofnon-resident advisers. The commenter submits that OSCRule 35-502 is inconsistent with the approach of otherregulators, hampers Canadian investors’ access to foreignportfolio management expertise in a cost-effective wayand unnecessarily restricts privately placed funds. Thecommenter suggests allowing non-resident advisers whoare resident and regulated in the U.S. and otherappropriate jurisdictions to provide advice to mutual fundsand other collective investment schemes and to accreditedinvestors who have opened accounts on an unsolicitedbasis without being registered in Canada.

The USL will follow the general approach in OSCRule 35-502. However, certain aspects of that rule areunder consideration.


Universal registration system

(Barclays Global Investors; FaskenMartineau; Groia & Company; IDA; IFIC;Ogilvy Renault; Ontario Bar Association;Phillips, Hager & North; Romano andNicholls; Royal Bank of Canada)

Several commenters support not including the universalregistration system in the USL. Some commenters areconcerned however that it will re-emerge in local rules. Inparticular, one commenter is concerned that the concept ofa limited market dealer will re-emerge within the restricteddealer category. The commenter believes that allowingsecurities regulatory authorities to retain aspects of theuniversal registration system is not consistent withuniformity.

Some commenters believe that investor protection wouldbe greatly increased by a consistent registration systemacross the country, which at the same time, would assist inreducing the costs for industry participants in complyingwith varying registration requirements. One commenterdoes not believe that the exempt securities markets incertain jurisdictions require more comprehensiveregulation than the exempt securities markets in otherjurisdictions.

The CSA are considering these comments.

67. Registration

Universal registration system

(Oslers)

One commenter strongly supports any initiative that wouldharmonize the dealer registration requirements of allprovinces and territories of Canada

The commenter does not believe that registration as adealer should be required in order to make trades toinstitutional or other sophisticated purchasers who wouldbe permitted to acquire securities under prospectusexemptions.

The commenter is concerned that if Ontario andNewfoundland & Labrador choose to enact local rules tocontinue some aspects of the universal registration system,the categories of registration set out in the USL may betoo narrow to replace the current limited market dealer andinternational dealer registration categories. Presumably,entities currently registered in those categories would berequired to register as a “restricted dealer”.

The commenter urges the CSA to ensure that, if universalregistration is maintained in any jurisdiction, it remainspossible to register as a restricted dealer for the purpose ofmaking trades to prospectus-exempt purchasers and thatthe procedure, conditions and requirements for that

The CSA support the harmonization of registrationcategories and are considering what changes should bemade.


registration not be made any more onerous than thosewhich currently apply to registration as a limited marketdealer.

Further, the commenter submits that non-Canadianresident dealers should be able to register as a restricteddealer for the purpose of making prospectus-exempt tradeson a basis that is no more onerous than the current processfor registration as an international dealer.

Finally, the commenter urges the CSA to encourage anyjurisdiction maintaining a universal registration system toconsider recognizing registration status in anotherCanadian province as equivalent for that purpose. Inparticular, if Newfoundland & Labrador maintainuniversal registration, the commenter proposes that anOntario-registered international dealer should be permittedto make exempt-market trades in Newfoundland &Labrador without separately becoming registered in thatprovince.

68. Registration

Transitional matters

(Oslers)

As a transitional matter, one commenter urges the CSA toensure that existing registrants in all existing categoriesare granted deemed registration status in any newcategories that are created and that care is taken to ensurethat the scope of their existing business activities is notcurtailed by new restrictions or limitations imposed uponthe new registration categories. The commenter submitsthat the time and expense of requiring existing registrantsto register in the new categories, and the regulatoryresources that would be necessary to review and processthose applications, is not justified nor would any publicinterest be served. Further, current registrants should notbe required to reduce the scope of their current activitiesbecause of changes in the available registration categories,or be required to curtail them pending the processing of anapplication for registration in a less restrictive category.

The CSA agree with this comment and will keep it inmind during the drafting and implementation phases ofthe USL.


Regulation of financial planners

(Financial Planners Standards Council)

One commenter asks the CSA to recognize the CertifiedFinancial Planner certification for financial planners.

This recommendation goes beyond the scope of theUSL. However, the CSA note that such a change, ifappropriate, could be implemented through rulechanges in the future.

PROSPECTUS REQUIREMENTS

70. Prospectus Requirement

Prospectus trigger

(IFIC)

One commenter agrees that the existing prospectus triggershould be maintained as this trigger is an appropriate wayof permitting the distribution of securities. However, thecommenter is concerned by the statement in the ConceptProposal that the prospectus trigger will be retained in“most” jurisdictions. The commenter believes that theprospectus trigger should be adopted in all Canadianjurisdictions in order to have uniformity.

The intention under the USL is to have a uniformprospectus trigger.


Harmonization of long form prospectus rules

(Davies; PDAC; TSX Group)

Three commenters support the CSA’s initiative toharmonize the rules relating to the form and contentrequirements for long form prospectuses.



Integrated disclosure system

(Davies; KPMG; PDAC; Romano andNicholls; TSX Group)

Several commenters support facilitating the developmentof an integrated disclosure system (IDS).

One commenter cautions that if additional continuousdisclosure requirements are required, there is a risk ofincreasing compliance costs for issuers. The commenteris unclear as to how costs and professional fees will bereduced by requiring an alternative form of offeringdocument rather than a prospectus. The commenterwonders if the alternative offering document will besimilar to an AIF.


The CSA are sensitive to the issue of compliancecosts. Under the CSA’s IDS proposal, the documentthat an issuer would prepare to go to market would bea prospectus focussed on the description of theoffering and would generally be briefer than a shortform prospectus. It would incorporate the AIF andother continuous disclosure documents by reference.



(Barclays Global Investors)

One commenter notes that the Concept Proposal includesonly limited information regarding how the USL willaccommodate an IDS. The commenter points out thatthere are a number of different initiatives in this area andthat it is essential that these initiatives and any detailedproposals adopted as a result of the USL be consistent.

The USL will provide a flexible framework toaccommodate alternative offering systems in thefuture.



Alternative offering systems

(Canadian Listed Company Association;IDA; Members of the Listed CompanyAssociation; Phillips, Hager & North; TSXGroup)

Several commenters express support for the replacementof the prospectus system with a system based oncontinuous disclosure under a material informationstandard. They specifically support the BCSC’s proposedcontinuous market access system (CMA).

One such commenter further notes that investors wouldreceive sufficient information on which to make adecision with an AIF and more timely continuousdisclosure. The commenter believes that currently, certainprospectus information is stale by the time it reachesinvestors.

Another commenter considers it vital that the CSA adopt aCMA system to improve the ability of issuers to accesscapital quickly, easily and on a national basis. Thecommenter is very concerned that the CSA may take apiecemeal approach and escalate costs with enhancedcontinuous disclosure and broad civil remedies withoutany move towards deregulation. Another commenter is ofthe view that the adoption of a CMA system is essential tooffset the increased costs of enhanced continuousdisclosure and increased liability.

The CSA have concluded that the USL will include amodified version of the IDS model proposed by theCSA in January 2000. The USL will be drafted in amanner that will accommodate other future offeringsystems.


Alternative offering systems

(IDA)

One commenter notes that the USL will be draftedflexibly to incorporate an eventual move to an integrateddisclosure regime. This raises the issue of eventualintegration into the USL. If the intention is to incorporatethe streamlined issuance model, the time lag will beconsiderable given the need for comprehensiveamendments to provincial legislation. On the other hand,if the IDS model is included in the rules and regulations,rather than legislation, there is no certainty the streamlinedissuance proposal will be uniform across jurisdictions.

The commenter suggests that the USL, particularly as itrelates to public and private financings, would be moreeffective if it incorporates IDS. It would facilitate theharmonization of inter-jurisdictional regulations andfurther, it would obviate the need for harmonizing thelong form prospectus rules.

The CSA believe that the proposed Uniform Actshould contemplate alternative offering systems, andthe systems themselves should be contained in therules. The CSA agree that any alternative offeringsystem that is to have national reach must be uniformacross jurisdictions but note that including it in thelegislation is not necessary for that purpose.

The CSA have accelerated work on IDS and it will beimplemented in as timely a manner as possible. Longform prospectuses would still be necessary for initialpublic offerings, issuers who are not eligible to useIDS and issuers who do not wish to use IDS.



Foreign prospectuses

(AIMR; Barclays Global Investors; IFIC;Romano and Nicholls; SHARE)

Several commenters support the move towards acceptingforeign prospectuses.

One commenter states that the proposed test, that aregulator must positively determine that a “foreignprospectus contains full, true and plain disclosure”, seemsinappropriate because it would be difficult for a regulatorto meet that test. The commenter suggests the alternativeof specifying acceptable jurisdictions and authorizingminimal review. The commenter also notes that CanadianGAAP issues, continuous disclosure and other ongoingrequirements would likely need to be adapted to acceptforeign standards.

Two commenters believe that prospectuses prepared in aforeign jurisdiction, even if they contain full, true andplain disclosure, should only be recognized if certainconditions are met.

One commenter expresses concern about the potentialpolicy ramifications of accepting foreign prospectuses.The commenter acknowledges the potential efficiencybenefits both for issuers and investors in allowing issuersto issue one prospectus, but does not believe thatacceptance of prospectuses prepared in accordance withthe laws of a foreign jurisdiction, where the securitiesregulatory authority determines that the foreign prospectuscontains full, true and plain disclosure, is sufficient.

The commenter submits that the minimum standardshould be disclosure equivalent to prescribed Canadianstandards. While this presumes full, true and plaindisclosure, it reassures investors that prescribed standardsare being complied with rather than reliance on aprinciples-based evaluation which is open to subjectiveinterpretation. The commenter submits that the CSAshould study the regulatory regimes in other countries todetermine credibility in advance of reforms that allow theCSA to accept foreign prospectus. Lastly, the commenteropposes any policy regime that results in reducingdisclosure requirements for issuers.


The CSA agree that the test to accept a foreignprospectus should not impose an obligation on asecurities regulatory authority to determine full, trueand plain disclosure and intend to draft the provisionaccordingly. The CSA have initiatives under way,such as proposed NI 52-107 dealing with accountingand audit standards, to facilitate offerings by foreignissuers.

The discussion in the Concept Proposal on this pointwas intended to advise that the prospectus requirementprovisions in the USL would contemplate acceptanceof foreign prospectuses. However, the conditions onwhich the CSA will accept a foreign prospectus arebeing developed. The CSA acknowledge thecommenters’ suggestions.

The CSA agree with the commenter about the need toconsider carefully the ramifications of acceptingforeign prospectuses. The USL would do no morethan facilitate the use of foreign prospectuses if andwhen securities regulatory authorities or regulatorsconsider it appropriate or when rules prescribe theterms and conditions on which they will be acceptedwithout the need for discretionary relief. The CSAanticipate that in the near term, acceptance of foreignprospectuses would occur only case by case.

The CSA agree that any foreign prospectus accepted inCanada should be prepared in accordance withcomparable standards. Through initiatives such asproposed NI 52-107 and proposed NI 71-102,consideration has already been given to standards inother jurisdictions. The CSA are familiar with theregulatory regimes in the jurisdictions from which weare most frequently asked to accept disclosuredocuments. The CSA agree that acceptance of foreigndocuments should not result in disclosure that isinferior.



Needs of emerging issuers

(TSX Group)

One commenter suggests continuing the capital poolcompany (CPC) prospectus program to address the needsof emerging issuers.

The CSA agree and intend to maintain the CPCprogram. In addition, the CSA, through theProportionate Regulation Project, are studying theregulatory system as a whole to determine whether itimposes an appropriate level of regulation on juniorand senior issuers.

DERIVATIVES

78. Derivatives

The “exchange contract” model of regulationof derivatives

(Bennett Jones)

One commenter supports the effort to harmonize the basicconcepts and approach of securities law to derivativestrading and, in particular, the effort to regulate derivativeswith reference to “futures contracts” and “exchangecontracts” as is currently the case in B.C. and Alberta.


79. Derivatives

Regulation of exchange contracts assecurities

(Ogilvy Renault)

One commenter sees no difficulty with regulatingexchange contracts as securities provided that appropriateexemptions are in place.

Exchange contracts will not be included in thedefinition of “security” in Ontario and Manitobabecause the equivalent products are regulated undercommodity futures legislation.

80. Derivatives

Definition of “exchange contract”


One commenter is of the view that a harmonizeddefinition of “exchange contract” would be helpful. Thecommenter recommends the definition proposed under theUSL, which provides that futures contracts and optionsguaranteed by a clearing agency and traded on anexchange according to standardized terms are exchangecontracts.

The definition of “exchange contract” will beharmonized in all jurisdictions except Ontario andManitoba.

81. Derivatives

Definitions of “futures contract” and“exchange contract”

(Bennett Jones)

One commenter recommends updating the existingdefinitions of both “futures contract” and “exchangecontract”. The commenter notes that the existingdefinitions were originally formulated some years agowith reference to the perceived characteristics ofderivative instruments as they then existed. However, thecommenter points out that developments in financialproducts have been significant in recent years, with theresult that the “futures contract” and “exchange contract”definitions, as they currently exist, appear to beinadequate.

The CSA will consider this comment in developingdefinitions under the USL for jurisdictions other thanOntario and Manitoba.


82. Derivatives

Registration exemptions for exchangecontracts


One commenter recommends incorporating registrationexemptions for exchange contracts into the USL and offersits assistance in determining whether other exemptions areneeded.

In provinces other than Ontario and Manitoba, theUSL will provide registration exemptions for trades inexchange contracts that are similar to the onescurrently available in Alberta and B.C.

83. Derivatives

Prohibited representations respectingcommodity exchanges

(Bennett Jones)

One commenter encourages the CSA to consider whetherexisting prohibitions on the making of representations are,in all respects, consistent with the functions ofcommodities exchanges. In particular, the commenternotes that s. 92(1)(d) of the Securities Act (Alberta), whichprovides that unless otherwise permitted by the ExecutiveDirector of the ASC, no person or company shall representthat the person or company or any other person orcompany will assume all or any part of an obligation underan exchange contract. The commenter states that as itunderstands the operations of certain commoditiesexchanges, if one of the parties to an exchange contractdoes not perform its obligations, the relevant commoditiesexchange will, in effect, guarantee performance and willassume the obligation of the defaulting counter-party, soas to ensure the expectations of the other counter-party arerespected. The commenter points out that this basicfunction of commodities exchanges is designed to ensuremarket integrity and stability, both of which are desirableobjectives from the perspective of commodities regulation.Therefore, the commenter does not believe that it isappropriate that a guarantee of such nature or the prospectof assumption of an obligation under an exchange contractby a commodities exchange should constitute a prohibitedrepresentation in connection with a trade in an exchangecontract.

The CSA will consider whether this prohibition isappropriate given the basic functions and operations ofcommodity exchanges.

84. Derivatives

Retention of commodity futures legislationin Ontario and Manitoba

(AIMR; Barclays Global Investors; Boursede Montréal Inc.; Fasken Martineau; IFIC;Phillips, Hager & North; Romano andNicholls)

A number of commenters suggest eliminating theregulation of commodity futures and commodity optionsunder separate commodity futures legislation. Severalcommenters submit that there should be no carve out fromderivatives regulation for jurisdictions with their owncommodity futures legislation. One commenter states thatthe Ontario approach is vague, confusing andmisunderstood.

Ontario and Manitoba will maintain their commodityfutures legislation and will be carved out from the partof the USL that regulates exchange-traded derivatives.

33# Theme Comments Responses 85. Derivatives

OTC derivatives

(Canadian Bankers Association; ISDA;Oslers; Romano and Nicholls)

Several commenters discourage the regulation bysecurities regulatory authorities of OTC derivatives andnote that the Concept Proposal reflects an approachrejected by the Ontario Minister of Finance. Thesecommenters also submit that that national implementationof the Alberta/B.C. approach to the regulation of OTCderivatives will impede the financial markets in whichderivatives operate.

The USL will be drafted to maintain the status quo inboth Ontario and the other jurisdictions with respect tothe regulation of OTC derivatives. However, anexemption for financial institutions and registrantstrading in financial derivatives will be incorporatedinto the regulatory regime for OTC derivatives thatwould apply in jurisdictions other than Ontario.

CAPITAL RAISING EXEMPTIONS

86. Capital Raising Exemptions

General comments

(Barclays Global Investors; Canadian ListedCompanies Association; Clark, Wilson;Fasken Martineau; IFIC; PDAC; Phillips,Hager & North; Royal Bank of Canada;Torys; TSX Group)

A number of commenters recommend reconciling thecapital raising exemptions available in various Canadianjurisdictions and express the view that the capital raisingexemptions contained in MI 45-103 are more appropriatefor Canadian capital markets than those in OSC Rule 45-501, especially for emerging issuers.

Two commenters observe that MI 45-103 does notharmonize capital raising exemptions in Canada since ithas not been adopted by all jurisdictions and containsvarying rules for participating jurisdictions within the ruleitself. The commenters submit that these inconsistenciesmust be eliminated if a truly uniform securities regime isto be created.

The CSA are in the process of drafting a uniformexemptions rule and will be considering anddiscussing all of the capital raising exemptions. Thesecomments will be considered in the context of thosediscussions. The CSA recognize the importance ofharmonized capital raising regimes.


Prescribed minimum amount exemption

(Clark, Wilson; Davies; Fasken Martineau;IFIC; Ogilvy Renault; Oslers; Romano andNicholls)

A number of commenters support including the prescribedminimum amount exemption in the USL. Some of thesecommenters note that in the absence of clear evidence ithas been used in an abusive or fraudulent manner, theexemption should not be removed, although theyacknowledge that it has some flaws.

Two commenters believe that the exemption should beremoved. One of these commenters submits that use ofthe exemption results in inadequate diversification ofinvestments in some cases since it requires investors toinvest a minimum amount of money in one transaction.

This exemption has been considered in the context ofthe capital raising exemptions in MI 45-103. Thejurisdictions that have adopted MI 45-103 aremonitoring the continued usefulness of thisexemption. The OSC recently considered the meritsof a prescribed minimum amount exemption as part ofthe extensive public consultation and review processthat preceded the November 2001 amendments (whichintroduced the accredited investor model) to theOntario exempt distributions rule, OSC Rule 45-501.As a result of this consultation and review process, theOSC concluded that the accredited investor exemptionwas an appropriate replacement for the formerprescribed minimum amount exemption, and that itwould not be appropriate to retain the prescribedminimum amount exemption in addition to theaccredited investor exemption. The CSA will considerthe comments raised by the commenters, the


experience of jurisdictions that have adopted MI 45-103 and the experience of Ontario following theimplementation of OSC Rule 45-501 in the context ofdeveloping a proposed uniform exemptions rule.


Closely-held issuer exemption

(Clark, Wilson; Davies; Ogilvy Renault;Oslers; Ontario Bar Association; Romanoand Nicholls; Torys)

One commenter recommends adopting the closely-heldissuer exemption contained in OSC Rule 45-501 oncecertain clarifying changes are introduced.

Two commenters specifically recommend that Ontarioeliminate the closely-held issuer exemption while severalcommenters identify problems with the exemptionincluding the $3,000,000 cap being arbitrary andrestrictive, the difficulty of determining beneficialownership for the purposes of the 35 shareholder test, thedifficulty of determining if an issuer is still closely-heldfor resale purposes and the application of statutory rightsof action and other offering memorandum requirements inrespect of offering memoranda delivered in connectionwith a trade.

In the process of drafting a uniform exemptions rule,the CSA will be considering and discussing all of thecapital raising exemptions. These comments will behelpful in the context of those discussions.


Private issuer exemption

(Davies; Ontario Bar Association; Oslers;Romano and Nicholls; Torys)

Several commenters support including the private issuerexemption in the USL. Two of these commentersrecommend including the private issuer exemptioncontained in MI 45-103 in the USL.

One commenter submits that the number of securityholders should be based on registered as opposed tobeneficial ownership. The commenter notes that theprivate issuer exemption in MI 45-103 achieves theobjective of identifying, in a non-exhaustive manner,persons who are not members of the public to which aprivate issuer could issue securities. It provides certaintyand utility for small and medium-sized business financingsand can be used in the context of private merger andacquisition transactions and internal reorganizations.

Another commenter submits that the requirement underthe private issuer exemption that an issuer haverestrictions on the transfer of designated securities in itsconstating documents is not necessary because theexemption is only available to “non-public holders”.


The CSA would expect issuers to take reasonablesteps to ascertain the beneficial holders of theirsecurities as is currently the case for other purposessuch as an application by a reporting issuer to cease tobe a reporting issuer. The CSA will considerclarifying what taking “reasonable steps” may involve.

35# Theme Comments Responses 90. Capital Raising Exemptions

Accredited investor exemption

(Clark, Wilson; Davies; IFIC; OgilvyRenault; PDAC)

Several commenters support including a uniformaccredited investor exemption in the USL.

One commenter criticizes the accredited investor networth test contained in OSC Rule 45-501 and MI 45-103(“financial assets” having a net realizable aggregate valueof over $1,000,000) for being far too restrictive andsuggests that it be expanded to include all assets (insteadof only cash and securities), perhaps other than the familyhome.



Offering memorandum exemption

(Clark, Wilson; Davies; IFIC; OgilvyRenault; PDAC)

Several commenters recommend adopting the offeringmemorandum exemption on a national basis. Onecommenter notes that the offering memorandumexemption is very important for junior issuers as itprovides an opportunity to raise funds in the exemptmarket quickly. Another commenter submits that anoffering memorandum delivered to an investor prior toinvesting should be sufficient to allow investment withoutfurther requirements. Another commenter submits that allmutual funds in all jurisdictions should be allowed to usethe offering memorandum exemption.

One commenter submits that the offering memorandumexemption, as it is currently set out in MI 45-103, shouldnot be included in the USL since the extensive disclosuremandated for the offering memorandum creates asimplified prospectus regime that will exist alongside thecurrent prospectus regime.



Family, close friends and business associatesexemption

(Clark, Wilson; Davies; Ontario BarAssociation; PDAC; Torys)

Several commenters support including the family, closefriends and business associates exemption. Onecommenter submits that this exemption should beavailable to both private issuers and reporting issuers.



OTHER EXEMPTIONS

93. Other Exemptions

DRIP exemption


One commenter recommends that the dividendreinvestment plan (DRIP) exemption be extended toincome trusts and similar issuers.

In the process of drafting a uniform exemptions rule,the CSA will be considering and discussing all of theexemptions. This comment will be helpful in thecontext of those discussions.


Securities issued under the Bankruptcy andInsolvency Act (Canada)


One commenter submits that the exemption that applies totrades made in connection with an amalgamation, merger,reorganization or arrangement should be extended totrades made in connection with a proposal under theBankruptcy and Insolvency Act (Canada). The commenternotes that a proposal under that act is court supervised andtherefore similar to an arrangement, but is used by smallerissuers for cost reasons.

Trades in connection with a proposal under theBankruptcy and Insolvency Act (Canada) would fallunder the proposed exemption since the securitieswould be traded in connection with a statutoryprocedure. Please see the description of thisexemption at Appendix C, Item 16, at page 73 of theConcept Proposal.


Internal reorganization exemption

(Torys)

One commenter notes that Appendix C of the ConceptProposal does not contain an exemption for “internalreorganizations”. The commenter submits that anexemption for these types of transactions should be added.

The CSA believe that the proposed exemptioncontained in Appendix C, Item 16, at page 73 of theConcept Proposal covers such a transaction but if thecommenter has examples of internal reorganizationsthat would not fall within this exemption, thecommenter should provide details.


Mining claims exemption

(PDAC)

One commenter supports including an exemption fortrades in securities as consideration for mining claims oroil and gas rights without the need for the vendor to enterinto an escrow agreement. However, the wording of theexemption needs to be broad enough to deal not only withmining claims but any mineral properties or mineralinterests including options to acquire such properties orinterests as well as royalties. The commenter favours theB.C. approach.

The USL contemplates an exemption for miningclaims. Please see Appendix C, Item 8, at page 73 ofthe Concept Proposal.


Securities for debt

(PDAC)

One commenter supports the inclusion of an exemptionfor trades by an issuer of securities of its own issue tosatisfy a bona fide debt, regardless of the amount.

The CSA acknowledge the comment but advise thatthe exemption will have conditions that may include alimit on the amount of debt that can be satisfied.

98. Other Exemptions One commenter questions the protection afforded by anapproved rating given that the credit worthiness of aparticular issuer often deteriorates well in advance of the

The CSA do not propose to change the proposal forthis exemption. The CSA are proposing to impose theapproved rating requirement because it shows that the


Commercial paper exemption


issuer losing its approved rating. The commenter submitsthat the suggested change may lead to issuers offeringdealers high commissions to sell their commercial paper tothe public as their credit worthiness deteriorates, butbefore the rating agency downgrades the issuer. Inaddition, the commenter notes that it is unclear as to howthe condition of the exemption that requires that the “debtis not convertible or exchangeable into or accompanied bya right to purchase another security other than the short-term debt in question” works. The commenter wonders ifthe words “short-term debt in question” refers to a right torenew or roll-over existing commercial debt?

issuer is substantial enough to get a rating. The CSAbelieve that this, together with the requirement that thedebt not be convertible into another type of security ofthe issuer, provides better protection for investors thanthe $50,000 minimum amount.

The CSA will consider clarifying issues such as thesein a uniform exemptions rule.


Security issuer exemption

(Torys)

One commenter agrees in principle that issuers should beallowed to distribute their securities on an exempt basiswithout the need for registration as a “security issuer”.The commenter would like to know, however, what the“appropriate conditions” will be.

The CSA are considering the appropriate conditionsand will look to the terms and conditions currentlyimposed on registrants in the security issuer category.



(IDA)

One commenter notes that IDS as proposed by the CSAtwo years ago would enable a reporting issuer to offersecurities by issuing an abbreviated short form prospectus.The commenter is of the view that a streamlined issuancesystem would eliminate the need for exempt marketofferings and the need to harmonize the capital raisingexemptions.

Implementation of IDS as currently contemplated bythe CSA would not eliminate the need for exemptmarket offerings. IDS would facilitate quicker accessto capital for companies that are reporting issuers witha history of continuous disclosure. The system wouldnot facilitate capital raising for non-reporting issuers.It is essential that companies that have not filed aprospectus to become reporting issuers have a meansto access capital and grow. If an effective IDS iseventually adopted and integrated into the USL, it maybe that the prospectus and registration exemptions willbe rendered unnecessary for reporting issuers.However, as stated above, there will still be a need forprospectus and registration exemptions to allow non-reporting issuers to access capital.


Manitoba exemption for trades in exemptsecurities of a non-reporting issuer

(Ogilvy Renault; Oslers)

Two commenters submit that in the interest ofconsistency, Manitoba should remove its exemptionregarding trades in exempt securities of a non-reportingissuer.

The exemption which will only apply in Manitoba fitsa perceived need within its local exempt market. Thisexemption will only be available for trades betweenManitoba residents.

38# Theme Comments Responses 102. Other Exemptions

Exemption for direct purchase plans

(STAC)

One commenter asks the CSA to consider including anexemption for direct purchase plans (DPPs) in the USLexemptions instrument. The commenter indicates thatthree jurisdictions have either implemented or areconsidering the implementation of a DPP exemption. Thecommenter supports the conditions attached to theexemption in those jurisdictions.

The CSA will consider including an exemption forDPPs in the process of drafting a uniform exemptionsrule.

RESALE RESTRICTIONS

103. Resale Restrictions

Recognition of markets

(Clark, Wilson)

One commenter recommends recognizing all securitiesmarkets. The commenter submits that an issuer should notbe prevented from complying with and benefiting fromsecurities rules simply because it is trading in a marketover which Canadian regulators have no control providedthat the market offers appropriate regulatory oversight inits home jurisdiction. The commenter suggests that, forinstance, if a public company trading in the U.S. complieswith its reporting obligations in the U.S. as well asapplicable Canadian legislation, it should have benefitsaccorded Canadian reporting issuers, particularly withrespect to the tolling of hold periods.



Elimination of resale restrictions

(Canadian Listed Company Association)

One commenter endorses the BCSC proposal to eliminatehold periods and resale restrictions on securities of publiccompanies in a continuous disclosure regime. The marketwill impose resale restrictions on private placements whenappropriate.

The implementation of the IDS system, which is acontinuous disclosure-based system, would facilitatethe same result.


Differing resale restrictions across Canada

(Oslers)

One commenter submits that the USL must contemplateand address conflicts between the resale rules of variousprovinces. There should be a basis for determining whichprovince or territory has the closest connection to aparticular transaction and the laws of that jurisdictionshould be paramount in the event of any conflict.

MI 45-102 already largely harmonizes the resale rulesamong jurisdictions. The CSA believe that the USLwill remove any remaining differences.

39# Theme Comments Responses 106. Resale Restrictions

Legending of certificates

(Bennett Jones; Canadian Capital MarketsAssociation; Ogilvy Renault; Ontario BarAssociation; Oslers; Romano and Nicholls)

A number of commenters note that there are severalsections in the Concept Proposal that refer to placing alegend on certificates evidencing securities. Thesecommenters do not think that legends achieve theirpurpose and feel that their usefulness will further diminishgiven that securities are increasingly issued, cleared andsettled in electronic form.

One of these commenter notes that the related requirementto certify the security holding creates significantinefficiencies and risks for all parties involved in theclearing and settlement system. The commenter advisesthat it is proposing alternatives that will give effect toregulatory restrictions, while avoiding the use ofcertificates.

In addition, one of these commenters notes that non-Canadian depositories are often unwilling or unable toaccept certificates bearing restrictive legends other thanthose required by the laws of their own country andsubmits that a preferable approach to legending is torequire that disclosure of the restricted period be made tothe ultimate beneficial holders of the security.

The CSA agree that legending is problematic in abook-based system. The CSA will consider this issuein developing the USL.


Legending of certificates - Manitoba

(Oslers)

One commenter notes that the proposal for legendingsecurities of a non-reporting issuer that are privatelyplaced in Manitoba may be problematic in the context ofan international offering being extended into Canada by anon-Canadian issuer.

The Manitoba legending requirement only applies fortrades between Manitoba residents.

40# Theme Comments Responses 108. Resale Restrictions

Alternatives to legending

(Oslers)

One commenter suggests that purchasers could be requiredto covenant not to make resales into Canada (except on anexempt basis) during a restricted period. However, thecommenter notes that, as there is no subscriptionagreement or other written documentation signed by thepurchaser in such an offering, the USL should specify thatthis covenant could be obtained through a unilateralcontract formed by appropriate disclosure in the offeringdocument, coupled by the investor’s act of purchasing thesecurity. The commenter states that the same concernsregarding legending apply to the requirement to have debtsecurities represented by a temporary global certificate.The commenter notes that a temporary global certificate isonly required by Regulation S under the U.S. SecuritiesAct of 1933 in very limited circumstances.

The CSA acknowledge the comment and will considerit in developing the uniform rules.

DISTRIBUTIONS OUTSIDE A JURISDICTION

109. Distributions Outside a Jurisdiction

Regulation of distributions outside ajurisdiction

(BD&P; Bennett Jones; Clark, Wilson;Oslers)

Several commenters suggest that Canadian regulatorsshould not be concerned with the protection of investorsoutside Canada. One of these commenters submits that alljurisdictions should adopt B.C. Instrument 72-503 or itsequivalent.

The CSA will consider this comment in developingthe uniform rules.


Need for a harmonized approach

(PDAC)

One commenter notes that a harmonized approach to theregulation of trades outside a jurisdiction is critical. Thecommenter observes that as securities legislation isessentially “consumer protection” legislation, the focus ofthe rules should be on the jurisdiction of the purchaser, notthe vendor. The commenter recommends that the USLcontain an explicit statement as to the scope of applicationof each provincial act.



Prospectus offerings versus exempt offerings

(Davies)

One commenter agrees with the USL approach ofdistinguishing between distributions by way of an exemptoffering and distributions qualified by prospectus and alsoagrees with the criteria proposed for regulating the resaleof distributions qualified by prospectus. The commenterassumes that the conditions would only have to besatisfied if there are sufficient connecting factors betweenthe issuer and the local jurisdiction and prefers a safe



harbour approach.


Distributions outside a jurisdiction that arequalified by prospectus

(Oslers)

One commenter endorses the approach of proposed MI72-101 for prospectus offerings outside a jurisdiction.However, the commenter sees no reason to restrict anissuer from making concurrent exempt offerings toeligible Canadian purchasers and therefore recommendsthe following:

� Modifying the proposed restriction that theunderwriting agreement prohibit the sale ofsecurities locally to provide that theunderwriting agreement must prohibit salesto any person in the local jurisdiction, exceptfor persons who are eligible to purchasethose securities under an availableexemption; and

� Modifying the condition that no efforts bemade to prepare the local market so that actsin furtherance of prospectus-exempt trades topersons who are eligible to purchase thosesecurities under an available exemption arenot prohibited.

The CSA do not intend to prevent a private placementof securities inside Canada at the same time as aprospectus offering outside Canada. In developing theuniform rules, the CSA will revise the applicableconditions to make it clear that they do not preclude aconcurrent private placement to purchasers in Canada.


Private placements by Canadian issuers topurchasers outside Canada - connectingfactors

(Davies)

One commenter is concerned with the proposed structureof the exemption for private placements by Canadianissuers to purchasers outside Canada as it would appearthat any Canadian issuer engaged in a private placementoutside Canada would be required to meet the conditionsof this exemption, despite a lack of connecting factorswith Canada that would make it unlikely that anysecurities would “flowback” into Canada. The approach istherefore inconsistent with the goal of preventingflowback.

The commenter notes that current regimes are designedprimarily to prevent flowback without automaticallydeeming a distribution by a Canadian issuer to be adistribution in Canada based solely on the fact of status asa Canadian issuer.

The commenter submits that connecting factors that arenot related to flowback concerns should be discarded. For



example, factors such as the location of the mind andmanagement or location of an issuer’s administration andoperation are not related to flowback concerns and shouldnot be included in the USL.


Private placements by Canadian issuers topurchasers outside Canada - exemptionversus safe harbour

(Davies)

One commenter notes that the Concept Proposal proposesan exemption for exempt offerings by Canadian issuersoutside Canada and would prefer a safe harbour. Thecommenter is concerned that, in providing an exemption,filings with their attendant expense will have to be madein situations where appropriate restrictions are already inplace.



Private placements by Canadian issuers topurchasers outside Canada - general


One commenter has concerns about the proposal dealingwith private placements by Canadian issuers to purchasersoutside Canada. The commenter notes that the proposal iseither too restrictive or overlooks relatively commonsituations. For example, there is no differentiationbetween offerings that are exclusively private placementsand private placements that are an adjunct to a prospectusoffering in Canada. The commenter submits that in thelatter case, there appears to be no reason to impose a 4-month hold period.

The CSA agree that, if there is prospectus leveldisclosure for an offering in Canada, there is no needto impose a hold period on a concurrent privateplacement offering outside Canada. In developing theuniform rules, the CSA will make this clear.


Private placements by Canadian issuers topurchasers outside Canada - resales ofprivately-placed securities to non-Canadianpurchasers

(Oslers)

One commenter requests that specific reference be madeto the ability of a Canadian private placement purchaser toresell its securities outside of Canada. The commentersubmits that often, these securities will not have beenissued by a Canadian reporting issuer and will thereforenever become freely tradeable in Canada. In addition, thecommenter suggests that if the securities were issued by aCanadian reporting issuer, it is not clear why the Canadianhold period should apply if the holder wishes to make aresale outside of Canada. The commenter submits thatthere is no Canadian public policy to restrict resales ofprivately-placed securities to other non-Canadianpurchasers, at any time, and that an exemption from boththe prospectus and registration requirements should beavailable for that purpose. The commenter suggests that ifthought necessary, these exemptions could be madesubject to a requirement that the seller have no reason tobelieve that the purchaser is Canadian or is acquiring thesecurities on behalf of a Canadian. The commenter statesthat Rule 904 of Regulation S under the Securities Act of



1933 (United States) provides an example of how theconditions for such an exemption might be framed.


Private placements by Canadian issuers topurchasers outside Canada – conditions –concurrent exempt offerings

(Bennett Jones; Ogilvy Renault; Oslers;PDAC)

Several commenters submit that the USL should expresslycontemplate Canadian issuers concurrently makingexempt offerings of their securities to non-Canadian andCanadian purchasers. Therefore, the commentersrecommend that:

� The condition that purchasers of the securitiesmust be outside Canada should be reworded toclarify that Canadian purchasers may alsoconcurrently acquire securities in the sameoffering provided that they are eligible to do so;

� The condition that the underwriting agreementprohibit the sale of the securities to any person inCanada should be reworded to clarify that salesto eligible exempt purchasers or purchasersacting through a registered dealer are permitted;and

� The condition that there are no directed sellingefforts in Canada should be reworded to clarifythat it does not preclude concurrent privateplacement sales within Canada and the relatedacts in furtherance of those trades.

The CSA do not intend to prevent concurrent privateplacements of securities inside and outside Canada.An issuer can rely on different exemptions for sales todifferent persons. In developing the uniform rules, theCSA will revise the applicable conditions to make itclear that they do not preclude a concurrent privateplacement to purchasers in Canada.


Private placements by Canadian or foreignissuers to purchasers outside Canada –conditions – “directed selling efforts”

(BD&P)

One commenter takes issue with the term “directed sellingefforts” in the context of private placements that occuroutside Canada. The commenter submits that, as the termis very unclear, a definition should be provided or the termshould be removed altogether. In any event, thecommenter believes the “directed selling efforts”prohibition is unnecessary to prevent indirect distributionsinto Canada given the imposition of restricted periods onany securities sold.


44# Theme Comments Responses 119. Distributions Outside a Jurisdiction

Private placements by Canadian issuers topurchasers outside Canada – conditions –resale restrictions

(Bennett Jones; Oslers)

Two commenters submit that the proposed conditionrequiring compliance with a restricted period during whichthe securities cannot be resold to a person in Canadashould not be necessary in all cases, provided that otheradequate measures are taken to ensure that the securitiescome to rest outside Canada. One relevant factor shouldbe whether the securities have a principal trading marketin Canada. One commenter suggests that seriousconsideration be given to adopting an approach similar tothe tiered approach in the U.S.

The commenters submit that if a restricted period isdeemed necessary, it should be made clear that resales arepermitted to a Canadian purchaser who acquires securitiesunder an available exemption. In addition, it should bemade clear that the restricted period runs from the date ofthe initial distribution outside Canada.



Private placements by Canadian issuers topurchasers outside Canada – conditions –disclosure

(Oslers)

One commenter does not object to the requirement thatdisclosure be made that the distribution is exempted fromthe laws of the relevant Canadian jurisdiction in principlebut suggests that it is not clear what the “relevantCanadian jurisdiction” is meant to refer to. Thecommenter recommends that the requirement be rewordedto require disclosure that sales made outside Canada arenot subject to the prospectus requirements of Canadiansecurities laws.

The CSA will consider this comment in developingthe uniform rules and clarify what is meant by“relevant Canadian jurisdiction”.


Private placements by Canadian issuers topurchasers outside Canada – conditions –compliance with foreign laws

(BD&P; Bennett Jones; Oslers)

One commenter notes that, for private placements byCanadian issuers outside of Canada, one of the proposedconditions is that the offering comply with the laws of thejurisdiction in which it is made. The commenter notes thatthis condition was considered and rejected in developingASC Rule 72-501 because it was deemed unnecessary, asa matter of Alberta law, to require that foreign laws becomplied with. The commenter also states that it wasrecognized that such a condition could greatly increasecosts by requiring a legal opinion from the foreignjurisdiction to confirm compliance.


45# Theme Comments Responses 122. Distributions Outside a Jurisdiction

Private placements by foreign issuers topurchasers outside Canada

(Oslers)

One commenter submits that Canadian securitiesregulatory authorities have no jurisdiction over an offeringof securities by a non-Canadian issuer to a purchaseroutside Canada. Therefore, the commenter submits thatthe USL should provide that Canadian securities laws donot apply to such a transaction, even if the issuer’ssecurities trade on a Canadian exchange. The commenteralso submits that an issuer should not be held responsiblefor any indirect distribution of its securities into Canadaunless it knew that sales being made to a purchaserresident in another jurisdiction were not being made withinvestment intent, but rather for the purpose of making anindirect distribution into Canada.

A foreign issuer needs to take precautions against anindirect distribution if the issuer knows or couldreasonably foresee that its securities might be resold inCanada. The CSA will make this clear in developingthe uniform rules.


Availability of foreign issuer offerings inCanada

(Phillips, Hager & North)

One commenter notes that Canadian investors are oftenput at a disadvantage relative to non-Canadian investorswhen foreign issuers do not include Canada indistributions that are exempt distributions in Canada. Insome cases including Canada would require filing of anotice and payment of a fee. Therefore, the commenterrecommends the adoption of an exemption for registeredportfolio mangers who already own the securities, withrestrictions on resale to persons in Canada and solicitationin Canada for foreign-issued securities.

This comment raises policy issues that are outside thescope of the USL Project.


Private placements and prospectus offeringsby foreign issuers to purchasers outsideCanada - offering restrictions


One commenter is concerned that the proposal relating toprospectus offerings and private placements by foreignissuers to purchasers outside Canada appears tocontemplate imposing offering restriction requirements onforeign issuers that have a minimal market connection toCanada. In the case of foreign issuers that are listed on theTSX, but whose primary market is clearly elsewhere,imposing Canada-specific offering restrictions runs therisk of causing such issuers to consider delisting from anexchange in Canada.



Private placements by foreign issuers topurchasers outside Canada

(Davies)

One commenter agrees with the Concept Proposal for asafe harbour as opposed to an exemption for privateplacements by foreign issuers to purchasers outsideCanada. However, the commenter notes that manyforeign issuers would not consider that Canadian securitieslaws would apply unless there was a clear and unequivocalconnection to suggest that securities might besubsequently distributed in Canada. The commenter



therefore suggests that either the USL not apply to thesedistributions at all or that a very high threshold be adoptedfor defining connecting factors that must exist before aforeign issuer is deemed to have made an indirectdistribution in Canada.


Private placements by foreign issuers topurchasers outside Canada – conditions –concurrent offerings

(Bennett Jones; Oslers)

Two commenters recommend that a foreign issuer bepermitted to make concurrent exempt offerings topurchasers inside and outside Canada and suggest thefollowing:

� No offering restrictions be imposed;

� Not requiring the offering document to state thatthe securities are not qualified for sale in Canada;and

� Allowing directed selling efforts for exemptofferings.

The CSA do not intend to prevent concurrent privateplacements of securities inside and outside Canada.An issuer can rely on different exemptions for sales todifferent persons. In developing the uniform rules, theCSA will revise the applicable conditions to make itclear that they do not preclude a concurrent privateplacement to purchasers in Canada.


Private placements by foreign issuers topurchasers outside Canada – conditions -resale restrictions

(Oslers)

One commenter submits that there may be circumstancesin which a restricted period should not be imposed such aswhen securities are not listed on a Canadian exchange orthe principal trading market for the securities is outsideCanada.



Offerings outside Canada – conditions –resale restrictions

(Oslers)

One commenter questions the rationale behind thedifferent restricted periods for equity and debt securities(four months versus 40 days) proposed under the USL.



Exempt distributions outside Canada -mergers and take-over bids


One commenter notes that it would be highly desirable todeal with the “flowback” jurisdictional issues arising outof other exempt distributions that occur outside Canada,specifically in the context of mergers and take-over bids.Given the nature of such transactions, concerns about“indirect distributions” into Canada would seem to belargely misplaced. However, in certain cases, particularlyin the context of bids, the law is very uncertain. It is not

The CSA will consider introducing an exemption formergers and take-over bids involving the issuance ofsecurities made to persons outside Canada.


commercially reasonable to disadvantage Canadian issuersin making foreign acquisitions by seeking to impose “holdperiods” on such transactions where hold periods wouldnot be imposed by the foreign law and no such hold periodwould apply if the transaction occurred in Canada.


Distributions outside the local jurisdiction -“flowback” prospectus


One commenter notes that the necessity or ability to file a“flowback” prospectus is another area of non-uniformityas demonstrated by the different approaches adopted byB.C., Alberta and Québec versus the other provinces as setout in Part 4.2 of the Companion Policy to NI 71-101.

Changes to MJDS are outside the scope of the USL.


Distributions outside the local jurisdiction -securities that trade on an ATS

(RS Inc.)

One commenter notes that under NI 21-101, an ATS maytrade a “foreign exchange-traded security”. Thecommenter further notes that a “foreign exchange-tradedsecurity” is defined as a security that is not listed on aCanadian exchange or quoted on a QTRS but is listed orquoted on an exchange or QTRS that is regulated by anordinary member of IOSCO. The commenter submits thatany exemptions should recognize that many issuers mayhave securities that trade on an ATS which may effect thesteps that must be taken to ensure that the securities do notcome to rest in Canada.


REPORTING ISSUER STATUS

132. Reporting Issuer Status

General support

(PDAC; TSX Group)

Two commenters recognize and support the need toharmonize the “trigger” for reporting issuer status in alljurisdictions.



General concerns

(Ogilvy Renault; Ontario Bar Association)

Two commenters criticize the USL for potentiallyretaining different definitions of reporting issuer in B.C.and Québec. One of the commenters submits that if thedefinitions are harmonized, an issuer can become areporting issuer in every Canadian jurisdiction.

Slight differences in the definitions will not precludean issuer from becoming a reporting issuer in any (orall) Canadian jurisdictions of its choice.



Becoming a reporting issuer – filing of acomprehensive disclosure document

(Clark, Wilson)

One commenter recommends that an issuer be able tobecome a reporting issuer upon the filing of acomprehensive disclosure document in a manner similar tothe procedure whereby an issuer can become a registrantunder the Securities Exchange Act of 1934 (United States)by filing a registration statement. The commenter submitsthat any company that wants to become a reporting issuer,regardless of whether it is trading, should have that optionif it files the proper information.

The ability to become a reporting issuer through thefiling and receipting of non-offering prospectuses willcontinue under the USL.


Becoming a reporting issuer – listing on arecognized or designated exchange

(Davies; PDAC; TSX Group)

One commenter submits that the trigger of “being listed onan exchange that carries on business in and is recognizedor designated in that jurisdiction” is restrictive and may beconfusing to issuers. Although the USL is an attempt toharmonize current triggers across jurisdictions, it would bemore appropriate to only require that an issuer become areporting issuer in a jurisdiction if it is listed on anexchange that is recognized by that jurisdiction, since anexchange carrying on business in a jurisdiction must berecognized.

One commenter requests clarification of the statement that“an exchange must be carrying on business within ajurisdiction and must be recognized or designated forreporting issuer purposes in that jurisdiction before alisting on that exchange results in reporting issuer status”.Many issuers that were reporting issuers in onejurisdiction and became reporting issuers in threejurisdictions when CDNX was formed have complainedabout the extra costs associated with becoming a reportingissuer in multiple jurisdictions. The commenter believesthat a listed issuer should become a reporting issuer in atleast one province. However, it is not appropriate tobecome a reporting issuer in multiple jurisdictions simplybecause the issuer is listed on the TSX Venture Exchange.

One commenter submits that a standardized list of“recognized exchanges” should be adopted for thepurposes of the definition of reporting issuer on a uniformbasis across Canada.

The CSA will consider this comment during thedrafting of the Uniform Act and Uniform Rules.

The effect of becoming a reporting issuer in ajurisdiction as a result of being listed on a recognizedexchange may not be a desired result for some issuers,but the decision to impose reporting issuer status as aresult of trading on a particular exchange is a matterfor each Canadian jurisdiction to decide. The CSAnote that one of the regulatory requirements associatedwith becoming a reporting issuer in multiplejurisdictions will be considerably mitigated by theimplementation of uniform disclosure requirements.

The CSA intend to compile a consolidated list of theexchanges recognized in the various jurisdictions butsince jurisdictions recognize different exchanges, aharmonized list cannot be adopted.



Becoming a reporting issuer – completion ofa business combination

(Davies)

One commenter notes that the USL makes reference to theprovisions in certain jurisdictions that deem parties tocertain business combinations to be reporting issuers.Presently there are inconsistencies with respect to the typeof transactions that trigger this deeming provision amongvarious jurisdictions. The commenter submits that effortsshould be made to standardize these provisions in order toprevent uneven continuous disclosure obligations acrossCanada, particularly given the enhanced continuousdisclosure obligations and corresponding civil liabilitywhich are being proposed by the USL.

Slight differences in the definitions will not precludean issuer from becoming a reporting issuer in any (orall) Canadian jurisdictions of its choice.


Becoming a reporting issuer – reportingissuer status in all jurisdictions

(Oslers)

One commenter submits that the USL should provide thatan issuer that has become a reporting issuer in anyCanadian jurisdiction, in accordance with harmonizedrules in the USL for becoming a reporting issuer,automatically and immediately, is deemed to have becomea reporting issuer in each province and territory of Canada.

Harmonizing the reporting issuer trigger andcontinuous disclosure requirements will make it easierto become a reporting issuer in multiple jurisdictions.However, it may not be in the interest of all issuersthat a reporting issuer in one jurisdiction automaticallybecomes a reporting issuer in all jurisdictions. Thiscould result in a junior issuer with limited resourcesbeing required to pay fees and seek relief whenrequired, from certain jurisdictions, despite the factthat its shareholder base does not justify this.


Becoming a reporting issuer – foreign issuers


One commenter submits that the definition of reportingissuer should be more flexible concerning foreign issuerswho participate in transactions with Canadian issuers (e.g.securities exchange take-over bids of a Canadian issuer orother acquisitions of a Canadian entity in exchange forsecurities). The commenter submits that foreign issuersshould either not become Canadian reporting issuerswhere their Canadian security holdings will beinsubstantial or full exemptions from Canadianrequirements should be provided.

The CSA will consider this comment when developingthe de minimus threshold. Proposed NI 71-102exempts a foreign reporting issuer from Canadiancontinuous disclosure requirements if it complies withforeign disclosure requirements and files thedocuments in Canada.



Becoming a reporting issuer - de minimusexemption from reporting issuer status

(Davies; Torys)

One commenter submits that the de minimus threshold forexempting an issuer from being a reporting issuer shouldbe reformulated in order to establish a uniform standardacross Canada. The commenter suggests that the deminimus threshold be expressed in terms of a particularnumber of security holders of the issuer in the jurisdiction,rather than as a percentage of the market capitalization inthe jurisdiction.

One commenter notes that reporting issuer status in ajurisdiction would not be triggered if there is a de minimusnumber of shareholders within a jurisdiction. Thecommenter asks how this will work in practice givenCanada’s book-based securities registration system.

The CSA will consider these suggestions whendeveloping the de minimus threshold.

The CSA would expect issuers to take reasonable stepsto ascertain the beneficial holders of their securities asis currently the case for other purposes such as anapplication by a reporting issuer to cease to be areporting issuer. The CSA will consider clarifyingwhat taking “reasonable steps” may involve.


Ceasing to be a reporting issuer – voluntarysurrender of reporting issuer status

(Clark, Wilson; Oslers; Torys)

One commenter supports the proposal to provide amechanism in the USL for the voluntary surrender ofreporting issuer status similar to that provided by B.C.Instrument 11-502.

One commenter notes that a company can voluntarilysurrender its reporting issuer status if, among other things,the company has fewer than 25 security holders. Thecommenter asks how this will work with book-basedregistrations and notes that the test for exempt bids isbased on registered holders.

One commenter submits that a company should bepermitted to cease being a reporting issuer in a particularCanadian jurisdiction even if its securities continue to betraded on a market in the U.S., provided that it continuesto be subject to the reporting requirements of U.S.securities legislation. The commenter does not see anycompelling reason why a company should continue to berequired to report in Canada if it has only a few or noshareholders in Canada and its trading market is outsideCanada.


The CSA are of the opinion that beneficial ownershipis the relevant factor and expect issuers to takereasonable steps to ascertain the beneficial holders oftheir securities when seeking to voluntarily surrenderreporting issuer status. The CSA will considerclarifying what taking “reasonable steps” may involve.

The CSA agree that being listed on a marketplaceshould not preclude a reporting issuer from using thevoluntary surrender provisions. The condition of notbeing listed on any marketplace will be removed.


CONTINUOUS DISCLOSURE REQUIREMENTS

141. Continuous Disclosure Requirements

Definition of “solicit”

(SHARE)

One commenter recommends that the definition of“solicit” currently in NI 51-102 be amended to agree withthe definition of that term in the Canada BusinessCorporations Act (Canada).

Under the current legislative framework, this changecould not be made in NI 51-102, as it would requireamendment of the various Securities Acts. The CSAagree that a uniform Securities Act should contain therule making authority so the definition of solicit can beamended to agree with the definition in the CanadaBusiness Corporations Act (Canada).


Recognizing reporting issuer history

(PDAC)

One commenter recommends that a securities regulatoryauthority be obliged rather than enabled to recognize anissuer’s reporting issuer history in another jurisdictionunless the securities regulatory authority determines that itis against the public interest to do so.

The CSA will consider whether, and to what extent, asecurities regulatory authority should be obligated toaccept an issuer’s reporting issuer history in anotherjurisdiction.


Material change reporting

(SHARE)

One commenter states that the appropriate standard fordisclosure should be all material information, not justmaterial changes. The commenter also believes thatguidance should be provided to issuers on the types ofinformation that may be considered material.

This recommendation would represent a significantchange to the current laws. However, the CSA notethat NP 51-201 provides guidance on the types ofinformation that may be considered material.


Disclosure of transaction negotiations priorto agreement


One commenter submits issuers must be able to shelterthemselves from disclosure requirements duringconfidential transaction negotiations since disclosure maydisrupt employee, customer, or supplier relations or causea run-up in a target’s share price or a decline in anacquiror’s share price. The liability in Ontario’s Bill 198for a failure to make timely disclosure is relevant in thisregard given the tremendous uncertainty that existsregarding disclosure of confidential ongoing negotiations.Therefore, the commenter submits that it is important toadd statutory language confirming that there is no need todisclose confidential ongoing negotiations. Thecommenter notes that if confidentiality is not present,disclosure would be required and states that confidentialmaterial change reports are not a satisfactory answer asthey cause substantial problems (and may forcedisclosure) for companies that are also public in the U.S.Also, it is not clear what happens to the reports if thetransaction is abandoned.

The CSA believe that the ability of an issuer to file aconfidential material change report and the defenceavailable under Bill 198 if a confidential materialchange report is filed is the correct approach.



Deeming certain documents superseded

(KPMG)

One commenter recommends that consideration be givento incorporating a concept from the short form prospectusdistribution system into the secondary market liabilityregime by deeming certain continuous disclosuredocuments (e.g., AIF, annual and interim MD&A andannual and interim financial statements) to be supersededby the filing of the comparable succeeding year’scontinuous disclosure documents.

No change is required since the continuous disclosurerecord speaks as of its date.


Continuous disclosure reviews

(Davies)

One commenter submits that continuous disclosurereviews should be administered through MRRS or asimilar system. This would promote a more evenapplication of the continuous disclosure provisions acrossCanada through the designation of a lead regulator withprimary authority over such reviews.

Further, the commenter states that an issuer's response torequests made by a securities regulatory authority in thecontext of a continuous disclosure review should beafforded some protection in the event that an action issubsequently brought against the issuer for an allegedbreach of the continuous disclosure requirements ofsecurities legislation. The commenter submits thatwithout some enhanced protection being afforded to anissuer with respect to its responses in the context of acontinuous disclosure review, the continuous disclosurereview regime could have the unintended result of makingissuers unwilling to discuss or rectify any perceiveddeficiencies identified by securities regulatory authorities.

The CSA are developing an MRRS system forcontinuous disclosure reviews as a separate project.

The CSA acknowledge the comment and believe thatthe risk of liability will ensure that disclosure isappropriate at the first instance.


Streamlined issuance system

(IDA)

One commenter is concerned that the USL willincorporate NI 51-102 which contains measures toenhance continuous disclosure with a view to relying moreon continuous disclosure and less on prospectuses.However, the USL will continue to be a prospectus-basedsystem and does not incorporate a streamlined issuanceregime. Issuers will have added disclosure costs withoutthe benefit of a streamlined issuance system.

The CSA have accelerated work on IDS and it will beimplemented in as timely a manner as possible.



Differential requirements

(Canadian Listed Company Association;TSX Group)

One commenter submits that continuous disclosureobligations should be based on a two-tier regime in orderto reflect the need for proportionate regulation for seniorand emerging issuers. In the case of emerging issuers, thecommenter submits that the costs of complying withcertain onerous continuous disclosure obligations clearlyoutweigh any potential benefits to investors. In thosecircumstances, emerging issuers should be subject toslightly different requirements from those that wouldapply to senior issuers.

One commenter suggests a simple definition fordetermining size category for certain differentialrequirements, specifically the TSX and TSX Venturecategories.

The CSA are aware that the needs of larger andsmaller issuers are not always the same. The CSA,through its Proportionate Regulation Project, areinvestigating ways to differentiate between larger andsmaller issuers. For example, proposed NI 51-102would differentiate between larger and smaller issuers.

TRADE DISCLOSURE

149. Insider Reporting

Function-based approach

(AIMR; BD&P; Davies; Fasken Martineau;IFIC; Ogilvy Renault; PDAC; TSX Group)

A number of commenters support the proposed function-based approach to the definition of “insider”. Onecommenter asks the CSA to provide sufficient guidance todetermining insiders. Another commenter submits that theproposal to include in the definition of “insider” anindividual working for an issuer in an executive capacitywith the usual responsibilities that expose the individual tonon-public material information about the issuer is notclear and specific enough and notes that individuals, suchas employees, would be in a “special relationship” andthus restricted from trading on undisclosed information.

One commenter encourages the CSA to repeal NI 55-101and similar instruments with the adoption of uniforminsider reporting obligations.

The CSA believe that the proposal provides sufficientcertainty as to who is subject to reportingrequirements.

The CSA intend to review all national instruments inthe context of the USL Project.


Equity monetization transactions

(AIMR; Davies; IFIC; PDAC)

Several commenters support requiring the reporting ofequity monetization transactions by insiders under theUSL. One of these commenters also expresses generalsupport for the adoption of a broader approach to thedisclosure of changes in beneficial ownership that wouldrequire an insider to report an acquisition or disposition ofany right or obligation to purchase or sell securities of thereporting issuer.

The CSA agree with these comments and areproceeding accordingly.

54# Theme Comments Responses 151. Insider Reporting

Filing of insider reports

(Fasken Martineau; TSX Group)

One commenter agrees that the obligation to file an insiderreport should not be on the registered owner of thesecurities but on the person who beneficially owns them.Another commenter does not support the proposedremoval of the requirement that a registered owner mustfile an insider report where the registered owner knowsthat the beneficial owner did not file one.



Transfer reports

(Ogilvy Renault)

One commenter submits that the USL should not requirean insider to file a transfer report if it owns securities thatare placed in the name of a nominee or agent since insiderreports should reflect direct ownership by persons whohold shares through nominees or agents and the reportswill not be filed through SEDI.

The CSA agree with this comment and propose todelete this requirement.

153. Early Warning System

Exemption for offerors acquiring securitiesunder a formal bid

(Davies; Oslers)

One commenter supports including an exemption from theearly warning requirements for offerors acquiringsecurities under a formal bid in the USL.

Another commenter suggests that careful consideration begiven to the ambit of the proposed exemption from theearly warning requirements for offerors acquiringsecurities under a formal bid. The commenter states thatwhere an offeror under a formal bid is reporting purchasesunder ss. 94(3) or 95.13 of the Securities Act (Ontario),reporting under the early warning requirements is clearlyduplicative and unnecessary. However, the commentersubmits that a deemed acquisition of shares agreed to bedeposited pursuant to a bid, which is exempt from s. 94(2)pursuant to s. 185 of the Ontario Regulations, shouldcontinue to be reported under the early warningrequirements. Accordingly, the commenter submits thatthe exemption should not extend to the reporting oflocked-up shares.


The proposed exemption for formal bids is a reflectionof the view that the primary purpose of an earlywarning report is to give the marketplace promptnotice of, and an explanation for, an acquisition thatcould indicate the intention of the acquiror to obtain acontrol position in the issuer. In the context of aformal bid, an early warning report by the bidder is notconsidered necessary for this purpose. Moreover, ifthe bidder is required to file an early warning report oflock-up agreements after the bid is launched,difficulties may arise in regard to the legislativerestrictions on additional acquisitions or offers toacquire that apply to transactions that are subject toearly warning reports.

55# Theme Comments Responses 154. Control persons

Definition of “control person”

(Davies)

One commenter supports the adoption of a harmonizeddefinition of “control person” based on the currentAlberta, Ontario and B.C. provisions. The commenterstates that while the application of the definition of“control person” sometimes presents difficulties, aharmonized definition will at least reduce costs byeliminating the need to analyze multiple, differingdefinitions in the event of trades by a significantshareholder of an issuer that are to be completedcontemporaneously in a number of provinces. Thecommenter recommends a harmonized definition thatprovides more objective criteria for determining whether adistribution is a control block distribution; for example, arule based on ownership of 20% of the voting securities,rather than a rebuttable presumption.

The CSA acknowledge the comment and note thatdeparting from the rebuttable presumption approachwould constitute a significant change that goes beyondthe scope of the USL Project.

155. Control persons

Notice requirements

(Bennett Jones; Davies; Oslers; PDAC;Romano and Nicholls; TSX Group)

One commenter supports the requirement on controlpersons to file a pre-trade notice and comply with insiderreporting requirements for both public and privatetransactions while several commenters disagree with theproposal to extend the pre-trade notice requirement toprivate transactions.

Another commenter is concerned that the filingrequirements and waiting periods imposed by the USL forcontrol block distributions are not necessary in all controlblock distributions. The commenter submits that therequirement to file a notice and the waiting periodrequirements should only apply to trades made under theexemption in section 2.8 of MI 45-102 and trades madeunder another exemption if they are of a size (individuallyor in the aggregate with similar trades made over areasonable period of time) sufficiently large that they mayaffect the control of the issuer or move the price of theissuer’s securities. The commenter submits that if thenotice and waiting period requirements are to extendbeyond trades made under the exemption in section 2.8 ofMI 45-102, trades in securities of non-reporting issuersshould be excluded and consideration should be given toshortening the 7-day waiting period.

The CSA are considering removing the pre-tradenotice requirement for control persons for publictransactions. The CSA have decided not to extend thepre-trade notice requirement to private transactionssince we do not believe that such a requirement isappropriate.

56# Theme Comments Responses 156. Control persons

Disposition by a pledgee

(Bennett Jones)

One commenter suggests that it is not clear that thedisposition procedure for a pledgee to liquidate a bonafide debt is compatible with personal property securitylegislation.

The CSA understand this to be a specific commentrelating to ss. 2.8 and 2.9 of MI 45-102. The CSAhave forwarded the comment to the committeeresponsible for future amendments to MI 45-102 fortheir consideration.

INVESTMENT FUNDS

157. Investment Funds

General support

(Fasken Martineau)

One commenter generally supports the various investmentfund initiatives currently being considered. Thecommenter notes that ideally, it would be beneficial if therecommendations for a new mutual fund governanceregime could be incorporated into the USL as this mightallow certain other self-dealing and conflicts of interestprovisions to be revised or eliminated.

The CSA acknowledge the comment. The CSA areworking on a mutual fund governance regime that willnot be completed in time for introduction with theUSL. Therefore, the harmonized self-dealing andconflicts of interest provisions will reside in theUniform Rules.


Definitions

(Fasken Martineau)

One commenter supports the adoption of a harmonizeddefinition of “mutual fund”, “non-redeemable investmentfund” and “investment fund”.



Regulation of loan and trust pools, pooledfunds managed by a portfolio manager andinvestments clubs

(Barclays Global Investors; FaskenMartineau; IFIC)

Several commenters agree with the proposal to regulateloan and trust pools in the same manner as pooled fundsmanaged by a portfolio manager. One of thesecommenters agrees with the proposal to adopt anexemption for an investment club which would beuniformly applied across Canada.


57# Theme Comments Responses 160. Investment Funds

Private funds versus prospectus qualifiedfunds

(Barclays Global Investors; IFIC; Oslers)

Several commenters note that Title VII of the QuébecSecurities Regulation currently requires private funds tocomply with many of the same concentration and controlrestrictions requirements with which traditional mutualfunds must comply. The commenters submit that theserequirements should be eliminated so that private fundsare treated in the same manner in all Canadianjurisdictions and so that the distinction between mutualfunds and private funds is maintained. The commentersfurther submit that in connection with the adoption ofUSL, to ensure that mutual funds benefit from uniformsecurities legislation in all respects, Québec should notkeep Title VII as a local rule.

Québec will address this issue in the context of aglobal review of prospectus exemptions to be carriedout for the purposes of the USL.


Self-dealing and conflicts of interest

(Oslers)

One commenter agrees with the proposal to harmonize thecurrent securities laws related to mutual fund self-dealingand conflicts of interest until the entire regime is replacedby the CSA in connection with its work to develop agovernance regime for mutual funds. The commentersuggests that harmonization of these laws on an interimbasis will alleviate confusion and the administrativeburden on mutual funds of complying with differentprovincial laws in this area or obtaining exemptive relieffrom such laws.



Point of sale disclosure

(Barclay Global Investors; IFIC)

Two commenters encourage the CSA to work with theJoint Forum of Financial Market Regulators regarding auniform and effective point of sale disclosure regime. Onecommenter notes that in Consultation Paper 81-403, theJoint Forum of Financial Market Regulators proposes toreview an investor’s rights of rescission and withdrawal.

The CSA agree and are currently working with theJoint Forum towards the suggested end.

TAKE-OVER AND ISSUER BIDS

163. Take-over and Issuer Bids

General comments

(Davies)

One commenter supports the CSA’s initiative under theUSL to introduce take-over and issuer bid laws in theCanadian jurisdictions that do not currently regulate thesetransactions and to eliminate the differences that currentlyexist between Québec’s provisions and those of the otherjurisdictions.


58# Theme Comments Responses 164. Take-Over and Issuer Bids

Indirect bids

(Davies; PDAC; Romano and Nicholls)

One commenter suggests that the current indirect bidprovisions are very broad and troublesome. Thecommenter submits that they should be expressly limitedto situations involving clearly abusive transactions. Thecommenter notes that many public companies legitimatelyhold over 20% interests in other public companies and theapplication of the current provisions in such situations isextremely unclear and difficult. The same problem existsin situations involving convertible securities. Thecommenter further notes that CSA staff generally refuse togive relief on the theory that it is inappropriate unless the115% exemption is not available and unnecessary where itis. The commenter submits that defining the effectiveprice for a second tier entity is unworkable where the realtarget has other bona fide businesses or assets.

Another commenter suggests that a provision similar to s.92 of the Securities Act (Ontario) which deals with directand indirect offers would be acceptable.

Two commenters generally support (subject to reviewingproposed language) the concept that the take-over andissuer bid requirements apply to both direct and indirectoffers so as to prevent an offeror from avoiding regulationby acquiring control of an entity that controls the ultimatetarget.

The change that this comment suggests goes beyondthe scope of harmonization but, under the USL, thiscomment could be considered through rule making ora policy statement. The application of the indirect bidconcept will not necessarily be confined totransactions that are clearly abusive because securitiesregulatory authorities may determine that the principleof equal treatment of security holders in the context ofan indirect bid may need to be upheld even undercircumstances that may not be characterized asabusive.

It is likely that a provision similar to s. 92 of theSecurities Act (Ontario) will be included the USL.Any guidance as to the application of the concept willbe contained in a rule or policy statement.


165. Take-over and Issuer Bids

Acting jointly or in concert

(Davies; Ogilvy Renault)

Two commenters generally support the proposal to includea list of the situations in which persons or companies aredeemed to be acting jointly or in concert with an offeror,subject to reviewing the proposed list of situations.


59# Theme Comments Responses 166. Take-over and Issuer Bids

Exempt take-over bids

(Clark, Wilson; Davies; Ogilvy Renault;Oslers; Romano and Nicholls)

One commenter submits that the domestic de minimusexemption has too low a threshold and should beexpanded to apply where there are fewer than 50 offereesecurity holders in a jurisdiction provided that theybeneficially hold less than 5% of the securities subject tothe bid.

Another commenter submits that the de minimusexemption for bids made for Canadian targets shouldapply across the country and that Québec should not applya separate de minimus exemption in respect of thetranslation of documentation.

Another commenter submits that the proposed take-overbid exemption for foreign targets should be extended toforeign mergers as well as take-overs and in both cases itshould be clarified that Canadian prospectus disclosurerequirements do not apply and the foreign issuer does notbecome a reporting issuer in Canada.

Two commenters express support for the proposedmodifications to the take-over exemption for foreignofferees and the inclusion of an exemption for modifiedDutch auction issuer bids.

The CSA are not prepared to make the recommendedchange to the de minimus exemption. Bids fordomestic offeree issuers (or foreign issuers that do notqualify for the exemption based on Canadian securityholdings of less than 10%) will normally have tocomply with the Canadian bid requirements in at leastone Canadian jurisdiction. There does not appear to bea strong public interest reason for requiringcompliance with the Canadian bid requirements insome Canadian jurisdictions and not others unless thesecurity holding in a particular jurisdiction is trulynominal.

Québec does not propose a separate de minimusexemption for translation.

Proposed NI 71-102 would provide an exemption fromthe securities legislation of the Canadian jurisdictionsin regard to disclosure in the information circularwhere applicable. The take-over bid circular form inthe legislation, where prospectus disclosure isprescribed for securities exchange bids, is not requiredto be used for an exempt bid. With respect to thereporting issuer status, it seems justified on the basisthat Canadian security holders of the target shouldcontinue to hold securities of a reporting issuer. If theissuer meets the requirements of proposed NI 71-102,it can be exempt from Canadian continuous disclosuredocuments. If appropriate, it can apply to cease to be areporting issuer.



Several commenters are concerned with the proposal tobase the percentage threshold in the domestic de minimusexemption on beneficial rather than registered ownershipbecause such information is difficult to obtain. One ofthese commenters suggests that the requirement toascertain beneficial ownership be limited to the non-objecting beneficial owner list available pursuant to NI 54-101. Another commenter suggests that the exemption bebased on registered ownership and that a 10% test shouldbe applied. The commenter also states that if beneficialownership is used as the threshold, the CSA shouldprovide a detailed set of rules for determining beneficialownership that gives full consideration to the informationavailable to a hostile bidder and the need for certainty.The commenter also urges the CSA to consider rules thatwould cover the situation where a Canadian target is notsubject to the obligation to disclose its beneficial holdings,perhaps because it is not a reporting issuer in Canada, orsimply fails to comply with them.

One commenter agrees with basing the proposedexemption for foreign offerees on registered ownershipand suggests also providing that the test is satisfied ifregistered ownership of the foreign offeree by Canadiansis less than 10% on any day within 60 days prior to thebid.

The CSA thank the commenters for these suggestions.They will be considered in the course of developingthe rules relating to take-over bid requirements.


CIVIL LIABILITY

167. Civil Liability

General support

(Fasken Martineau)

One commenter supports the proposed modifications tothe rights of action for either damages or rescission thatwill be made available to an investor purchasing a securityunder a prospectus exemption.

The commenter also supports the exclusion of aninvestor’s rights as set out in Section 3(g) of Part XIV ofthe Concept Proposal and the harmonization of limitationperiods as set out in Section 3(h) of Part XIV of theConcept Proposal.


61# Theme Comments Responses 168. Civil Liability

Current civil liability regime

(IDA)

One commenter agrees with the Concept Proposalregarding maintaining the existing civil liability regime forprimary market investors, the proposals regarding offeringmemoranda, take-over bid and issuer bid circulars,liability for failure to deliver documents and the rights ofaction regarding “front-running” related to investmentprograms.



Secondary market liability generally

(AIMR; IDA; KPMG; Ontario BarAssociation; Oslers; PDAC; Torys; TSXGroup)

A number of commenters support including a civil liabilityregime for continuous disclosure in the USL wherebyinvestors that purchase securities on the secondary marketmay bring a civil action against issuers and otherresponsible parties for misrepresentations in disclosuredocuments. One of these commenter hopes that, for thesake of harmonization of securities laws across Canada,the USL will conform in all respects with the civil liabilitylegislation to be introduced shortly in Ontario (Bill 198).

Some of these commenters note the importance of theavailability of reasonable defences and limitations onliability such as those set out in Ontario’s Bill 198.

One commenter submits legislative provisions to deal withsecondary market liability in the event that the USL doesnot proceed.

The CSA acknowledge the comments and note that theUSL secondary market civil liability regime ismodelled on Ontario’s Bill 198.

62# Theme Comments Responses 170. Civil liability

Timing of secondary market in USL

(Davies)

One commenter is concerned that while certain elementsof the Concept Proposal may aid in enhancing publicconfidence in the integrity of Canadian capital markets,certain proposals dealing with secondary market liabilitymay fail to achieve this goal and may result in unintendedconsequences. The commenter questions whetherimmediate implementation of civil liability for secondarymarket disclosure is necessary given the need to determinethe efficacy of improved disclosure rules and enforcement.

The commenter agrees that market participants responsiblefor misrepresentations should be held accountable and thatthe investing public is entitled to full, true and plaindisclosure. The commenter is not convinced that the mosteffective means of achieving these goals are through aclass-action based private statutory right of action. Thecommenter is concerned that, notwithstanding theproposed safeguards, the lack of a requirement to provideproof that an investor relied on the misrepresentation orfailure to disclose may lead to entrepreneurial lawsuits.The commenter suggests that well-publicized regulatoryintervention based on enhanced disclosure rules andregulatory review and enforcement powers may have amore immediate corrective impact.

The secondary market civil liability system in the USLincorporates entirely the CSA’s civil remediesproposal, which is also the basis for passed butunproclaimed legislation in Ontario. The impetus forthe civil remedies proposal was a recommendation bythe Allen Committee in 1997 that Canada have asecondary market civil liability regime. During thedevelopment of the civil remedies proposal, the CSAgave very careful consideration to whether the systemwas actually necessary and to ensuring adequatedeterrents to unmeritorious litigation. The CSA aresatisfied that these issues have been addressed.

The CSA agree that enhanced disclosure rules coupledwith effective enforcement will also be helpful inimproving the quality of continuous disclosure.However, the CSA remain committed to seekingimplementation of the secondary market civil liabilityregime so that investors have the tools to seek redresswhen they suffer damages as a result of misleadingdisclosure.

171. Civil liability

Merits of a suit

(Canadian Listed Company Association)

One commenter is concerned that the Concept Proposalrelies on the court to determine whether an allegation hassufficient merit to proceed to avoid frivolous suits. Thecommenter is doubtful as to whether the court has theexpertise and resources to process these types of reviewsin an efficient manner. The commenter notes that theinvestment industry has established an arbitrationprocedure for handling disputes and suggests that sometype of administrative tribunal or procedure would bemore effective in weeding out frivolous actions.

The screening provision contemplated as part of theUSL is based on a test that was recommended by theOntario Law Reform Commission (OLRC) in its 1982Report on Class Actions. The OLRC was notconcerned about the practicality and feasibility ofasking a court to, in effect, determine the merits of aproposed action at a very preliminary stage of theproceeding. In support of its recommendation, theOLRC cited a number of different statutes in whichcourts are called upon to play a similar “gatekeeper”role. The CSA continue to believe that courts havesufficient expertise to deal with these issues.


Displacing the role of the securitiesregulatory authority

(SHARE)

One commenter supports the implementation of acomprehensive civil liability regime for secondary liabilitybut cautions against allowing such a regime to displace therole of securities regulatory authorities in protectinginvestors. Civil liability should not replace the ability of asecurities regulatory authority to pursue claims on behalfof investors or provide a rationale for governments orsecurities regulatory authorities to reduce theirenforcement budgets.

The commenter also endorses the proposal for a classaction regime advanced by BCSC in its deregulationproposals.

The CSA do not intend to diminish their enforcementactivities as a result of secondary market civil liability.

The CSA do not believe that it is necessary to enact aseparate class action regime under the USL forinvestors to exercise their statutory rights of action.Class action legislation has been passed or is alreadyin force in a number of provinces (e.g., Alberta, B.C.,Manitoba, Newfoundland & Labrador, Ontario,Québec and Saskatchewan). In those provinces that donot have comprehensive class action legislation, aplaintiff can bring a “representative action” undercourt rules. Finally, most Canadian jurisdictionsalready allow for the certification of national classactions.


Secondary market liability – U.S. case law


One commenter notes that under U.S. case law, rights ofindemnity are not available for directors, officers andothers facing civil liability since it is seen to be a policy ofthe government that they be liable. The commentersuggests that while the law in Canada is unclear, the sameresult may well apply and therefore, the addition of thefollowing clause to the Uniform Act should be considered:“Nothing in this Act derogates from any right ofindemnification that any person may have otherwise,under contract or at law or in equity.”

The CSA understand that the case law in the U.S. isnot as clear, as the commenter suggests, and is morelimited in its application (i.e., has been considered inthe underwriter context). The CSA are not aware ofany Canadian case law that suggests that this would bean issue in Canada and thus necessitate the inclusionof the suggested provision. The CSA note that theAllen Committee also considered the issue ofindemnification in its Interim Report. While the AllenCommittee supported allowing an issuer to indemnifyits directors and officers, the Committee did notconsider it necessary to include specific language tothis effect in its draft legislation.


Prospectus and offering memorandumwithdrawal rights

(Davies; Fasken Martineau; IFIC; OgilvyRenault; Romano and Nicholls; Torys)

A number of commenters suggest repealing the two-daywithdrawal right.

One commenter questions whether it is necessary toprovide a two-day withdrawal right to purchasers under anoffering memorandum in addition to the right of action fordamages or rescission in the event of a misrepresentation.Another commenter supports giving investors whopurchase a security under an offering memorandum a two-day right of withdrawal. The commenter encourages theCSA to adopt this right of withdrawal across the country.Another commenter suggests that the two-day right ofwithdrawal for investors who buy securities under anoffering memorandum is appropriate for purchasers underthe family and friends exemption but may be unnecessaryfor purchases by accredited investors and possibly others.

One commenter submits that withdrawal rights in theprospectus or private placement context should berepealed since they are outdated and not in step with U.S.practices. Another commenter agrees that withdrawalrights are outdated and not in step with U.S. practices andis of the view that a right of action for damages orrescission provides an adequate remedy for investors.

The USL will continue to include a right of withdrawalfor prospectuses and will include a withdrawal rightwherever an offering memorandum is required to bedelivered.

The CSA considered this issue carefully but concludedthat the removal of the right of withdrawal under aprospectus would amount to a policy change thatexceeds the harmonization mandate of the USLProject.


Defences – “reasonable basis” requirements

(Torys)

One commenter submits that there should be a clear safeharbour from liability in circumstances where aconfidential material change report is filed and notes thatunder Ontario’s Bill 198, defendants are not liable for afailure to make timely disclosure where a confidentialmaterial change report is filed if, among other things, theresponsible issuer had a reasonable basis for forming theopinion that an earlier public announcement would beunduly detrimental to the interests of the issuer. Thecommenter suggests that in practice, the “reasonablebasis” requirement could become a lightning rod forlitigation.

The “reasonable basis” requirement is based on therecommendations of the Allen Committee. The AllenCommittee believed that issuers must be required toaccount for the reasonableness and validity of theirjudgement in making a confidential filing. If an issuercan escape liability for failing to make disclosure (thatwas filed confidentially) only if it can satisfy a“reasonableness test”, then the decision to withholdpublic disclosure will not be made capriciously or outof expedience. The CSA continue to believe that theinclusion of this test strikes a reasonable balancebetween competing objectives.


Defences and safe harbours

(Members of the Canadian Listed CompanyAssociation)

A number of commenters submit that the USL shouldinclude defences and safe harbours for issuers and theirmanagement against liability for failure to make timelydisclosure of material information when they haveexercised business judgement and have systems in place.The commenters suggest that directors be permitted to relyon third party expert reports as part of a due diligencedefence.

The USL’s proposed secondary market civil liabilityregime is based on the civil liability amendments thatwere recently passed in Ontario and are awaitingproclamation. Ontario’s civil liability regime is in turnbased on draft legislation published by the CSA inNovember 2000. Ontario’s civil liability regimeprovides ten defences, including a separate duediligence defence and a defence where reliance isplaced on an expert. In determining whether adefendant has been duly diligent, the court is directedunder the legislation to consider all of the relevantcircumstances, including but not limited to, theexistence, if any, and the nature of any systemdesigned to ensure that the issuer meets its continuousdisclosure obligations. The CSA believe that thedefences available under the proposed civil liabilityregime are adequate.


Defences – forward-looking

(IFIC)

One commenter supports the forward-looking defence thatis included in the USL which allows a person or companyto use the defence if there is a misrepresentation in aprospectus provided that person or company can provethat it had a reasonable basis for believing that theinformation was accurate and included cautionarylanguage in the prospectus.



Defences – derivative information


One commenter submits that the derivative informationdefence should be extended to foreign issuers and otherpublic sources of information in the absence of knowledgeof the falsity of the information.

The derivative information defence is intended to berestricted to documents filed by other persons orcompanies with a securities regulatory authority orexchange in Canada because to the extent suchdocuments also contain a misrepresentation theywould be caught by the civil liability regime.


Costs

(TSX Group)

One commenter is concerned that, with respect toemerging issuers, experts whose reports may be excerptedin continuous disclosure documents may increase theirfees to issuers to take into account potential civil liabilityconcerns.

The CSA (and previously the Allen Committee) heardsimilar concerns when we were developing the civilliability regime and therefore will not be revisiting thisissue in the context of the USL.


Liability caps

(Canadian Bankers Association; SHARE)

One commenter opposes the imposition of caps ondefendants’ exposure. The commenter submits thatdefendant issuers who knowingly make misrepresentationsor fail to disclose material information in a timely mannerresulting in harm to investors should be subject topenalties commensurate with the harm caused.

Another commenter is concerned with the liability limitapplicable to public issuers under legislation recentlypassed by the Ontario Government (e.g., the greater of$1,000,000 or 5% of market capitalization). Thecommenter submits that an upper limit of 5% of marketcapitalization is excessive for large issuers, goes wellbeyond serving as a reasonable deterrent for improperdisclosure practices and could significantly reduceshareholder value and harm investors. The commenterstates that the need for such a massive financial penaltyneeds to be revisited in light of other events and regulatorydevelopments that have occurred since the 1997 AllenCommittee recommendations. The existence ofsignificant new deterrents, such as regulatory sanctions,public embarrassment and certification requirementsshould be taken into account when determining theappropriate level of financial penalty.

The CSA (and previously the Allen Committee) heardsimilar concerns when we were developing the civilliability regime and therefore will not be revisiting thisissue in the context of the USL.


Proportionate liability

(Canadian Institute of CharteredAccountants; SHARE)

One commenter strongly endorses the proposal concerningthe right of action with respect to secondary market tradesand proportionate liability. However, the commenterstrongly believes that the proposal should apply to allclaims under securities legislation for financial losswhether arising in primary or in secondary markets.

One commenter opposes the proposal for a proportionateliability regime. The commenter submits that knowledgeis not the appropriate threshold for distinguishing betweenjoint and several liability and proportionate liability. Jointand several liability should extend beyondmisrepresentations made knowingly to includemisrepresentations and unacceptable disclosure practiceswhere the defendant ought to have had knowledge.

The CSA believe that changing the nature of primarymarket liability to proportionate rather than joint andseveral would be a substantial policy change that fallsoutside the mandate of the USL.

The proportionate liability scheme contemplated underthe USL’s statutory secondary market civil liabilityregime is based on the recommendations of the AllenCommittee. The Allen Committee’s draft legislationprovided for proportionate liability unless thedefendant knowingly made a misrepresentation orfailure to disclose. The CSA are satisfied that thecircumstances under which proportionate liability willbe converted into joint and several liability do not needto go beyond what the Allen Committee recommendedin order to meet the legislation’s objective (e.g.,deterring misleading disclosure) or to meet thereasonable expectations of the marketplace.


Action to enforce issuer and mutual fundrights

(IFIC)

One commenter seeks clarification on the “Action toEnforce Issuer and Mutual Fund Rights” section of theUSL. The commenter believes that issues such asenforcing a mutual fund’s rights are better left to theCSA’s fund governance initiative as an independent boardis in the best position to make enforcement decisions forthe fund without subjecting the fund’s investors to thewhims of one or a few investors.

The CSA believe that the civil liability provisionsprovide an important tool for mutual fund investors toseek redress when any person or company buys orsells securities on the basis of portfolio information.In this regard, the CSA do not believe that theexistence of an independent governance body shouldhave a bearing on the appropriateness of a civil remedyavailable directly to investors of the mutual fund.


Liability for take-over bid circulars

(Clark, Wilson)

One commenter submits that directors should be liable fordamages relating to misrepresentation but should have afull defence of good faith reliance on officers or experts.The commenter also submits that experts should be liableonly with respect to misrepresentations contained in theirreports.

The same defences as are available to both directorsand experts in the prospectus context would apply inthe take-over bid context.


Experts – withdrawal of an expert’s consent

(KPMG)

One commenter suggests expanding the circumstances inwhich an expert can withdraw previously given consent onannual and interim financial statements to include:

� Changes to accounting principles;

� Sale of a component of an issuer’s businessthat requires a retroactive change in thepresentation and disclosure of its financialresults;

� Changes in an issuer’s internal structure thatcause the composition of its reportablesegments to change and therefore requirerestatement of prior period financialstatements;

� New litigation; and

� Adverse interim financial results.

The circumstances noted by the commenter all appearto relate to changes that may occur after the release ofannual or interim financial statements. In this context,the CSA do not believe it is necessary to expand thecircumstances in which an expert can withdraw apreviously given consent because under the secondarymarket civil liability regime, liability attaches onlywhere an issuer releases a document that contains amisrepresentation.


Experts – offering memoranda

(PDAC)

One commenter is concerned about the extension ofliability for offering memoranda and circulars to expertsand hopes that an expert’s liability will be restricted solelyto the “expertised” portions of such documents and thatthere will be appropriate limitations on the expert’sliability.

The CSA believe that confining an expert’s liability tothe expertised portion of an offering document is theappropriate limitation.


Experts – scienter requirement

(Clark, Wilson)

One commenter submits that the proposed right of actionagainst auditors or other experts for damages suffered incircumstances where an issuer makes, or fails to correct,public disclosure that contains an untrue statement shouldbe clear that experts, including auditors and lawyers,should not be liable in the absence of scienter.

Under the proposed secondary market civil liabilityregime for “expertised” portions of a document, anexpert must show that they were duly diligent in thepreparation of the opinion, report or statement toescape liability. The inclusion of a due diligencedefence versus a scienter requirement was intended toprovide a deterrent to poor continuous disclosure. Itshould be emphasized, however, that under the regime,expert liability will extend only to the “expertised”portions of the disclosure and only to the extent aconsent is provided and an issuer uses the expert’sopinion or report in the manner contemplated by theconsent. Finally, the secondary market civil liabilityregime is based on a proportionate liability schemeunless the defendant knowingly made amisrepresentation or failure to disclose.


Director chill

(Bennett Jones; Canadian Listed CompanyAssociation; Romano and Nicholls)

Several commenters express concern about the effect ofthe implementation of a secondary market civil liabilityregime on the availability of and premiums for directors’and officers’ liability insurance and the availability ofqualified directors who will be willing to act as directors.

The CSA believe that the caps on liability, defencesand mechanisms to discourage unmeritorious litigationthat are built into the proposed secondary marketliability regime will address these concerns to someextent.


Limitation on damages and applicability ofregime


One commenter submits that it may be appropriate to limitthe application of the secondary market civil liabilityregime to situations involving fraud, require that theplaintiff prove fraud rather than require directors andofficers to establish defences to avoid liability and limitdamages to the lesser of actual losses and the 10-daycalculations rather than require the defendant to establishdefences and limit damages to the lesser of actual costsand the 10-day calculations as recommended by the AllenCommittee.

The commenter appears to be advocating a liabilityregime similar to the U.S. Rule 10b-5 liability scheme.In the U.S., a plaintiff must prove that the defendantacted with “scienter”, defined by the U.S. SupremeCourt as a “mental state embracing intent to deceive,manipulate or defraud” with most U.S. courts holdingthat recklessness constitutes scienter as well. Underthe CSA regime for “core documents” (such asfinancial statements), a defendant must show that itwas duly diligent in the preparation of the document toescape liability. The inclusion of a due diligenceliability standard under the CSA’s regime wasintended to provide a deterrent to poor continuousdisclosure. By requiring a defendant to prove duediligence, there is a greater incentive to exercise duediligence in the preparation of disclosure documentswhich should, in turn, lead to better disclosure. Underthe CSA’s liability regime, defendants will have 10potential defences available to them. These defencescoupled with the procedural safeguards describedpreviously in the CSA’s responses to comments shouldimpose a discipline on the use of the Canadian privateright of action. The CSA believe that the proposedsecondary market liability regime continues to be bothnecessary and appropriate in scope.


Deemed reliance versus proof of reliance

(Bennett Jones; Clark, Wilson)

Two commenters question whether it is appropriate todeem reliance on a misrepresentation in a continuousdisclosure document given that these documents are notused for the express purpose of effecting sales ofsecurities. This may encourage opportunistic lawsuits.One commenter suggests that the CSA consider requiringproof of reliance except in circumstances involving wilfulmisconduct or fraud by the issuer.

The deeming provision removes the necessity to provereliance which has been a significant hurdle inenforcing common law claims in Canada for negligentmisrepresentation. The deemed reliance provision alsoreflects the fact that investors may suffer damagesindirectly because of the effect a misrepresentation hason the market price of a security. As noted above, theCSA believe that the proposed secondary marketregime contains adequate safeguards againstunmeritorious litigation.


Liability for failure to file

(IDA)

One commenter expresses concern regarding the proposedprovision that would specify that potential defendants inan action for failure to file required documents mightinclude a dealer, without some appropriate defencessimilar to defences being proposed for rights of actionunder an offering memorandum, being available.

These provisions would only impose liability on adealer who is obligated under securities laws to file adocument (which would only occur if the dealer andthe issuer are the same person). Adding defences,however, would substantially change the nature of theliability which is a policy change beyond the mandateof the USL Project.

191. Civil liability

Liability for failure to make administrativefilings


One commenter disagrees with the proposal to provide aright of action for failure to make administrative filingssince they are not disclosure documents.

Under the USL, the liability for failure to file wouldonly apply to a person that failed to file a disclosuredocument, not an administrative document.


ENFORCEMENT

192. Enforcement

General comments

(AIMR; IDA; IFIC; PDAC; Romano andNicholls)

One commenter expresses concern that securitiesregulatory authorities act as lawmaker, law interpreter,investigator and prosecutor. The commenter submits thatit may be reasonable to conclude that securities regulatoryauthorities are not able to decide enforcement matters withimpartiality. The commenter suggests a greater judicialrole. The same commenter states that Canadianregulators’ enforcement practices need to be adjusted.The commenter suggests adopting U.S. practices whichallow an accused to settle a case while neither admittingnor denying liability. The commenter notes that thispractice protects an accused’s position when faced withsubsequent civil actions, including class actions.

One commenter expresses support for harmonizing theenforcement orders that a securities regulatory authoritycan issue after a hearing. Another commenter accepts thatsecurities regulatory authorities must be granted certainpowers to issue enforcement orders after hearings in thepublic interest, but expresses concern that the powers asiterated in the USL are very broad and should benarrowed.

Another commenter expresses the view that Canada needsa more coordinated and aggressive approach toenforcement. The commenter suggests a coordinatedapproach to investigation, prosecution and mutualrecognition of penalties imposed by other securitiesregulatory authorities.

Another commenter expressed concern as to whether eachsecurities regulatory authority would enforce the USL in aconsistent way.

The CSA note that these comments are beyond themandate of the USL.

The public interest powers proposed in the USL are acompilation of the powers that currently exist in thevarious jurisdictions. The CSA do not propose tonarrow these powers under the USL.

The CSA are aware of the need to reduce or eliminateduplication of enforcement activity. Much effort ismade at a staff level to do so when enforcementactions occur in multiple jurisdictions. The delegationprovisions proposed under the USL will furtherfacilitate these efforts.

The CSA are aware of the issue and are consideringways to ensure consistent application of the law. Thisis an objective of the USL.

72# Theme Comments Responses 193. Enforcement

Prohibitions

(IDA; PDAC; Romano and Nicholls)

One commenter submits that the prohibition on holdingout registration causes problems for registrants and servesan unclear purpose. The commenter notes that it conflictswith the requirement to disclose CIPF membership.

Two commenters support including prohibitions onengaging in unfair practices and fraud and marketmanipulation in the USL.

One commenter suggests that it is not clear that the marketmanipulation/misleading statement provisions shouldextend to non-reporting issuers, or at least non-publiclytraded issuers, as is the case under Ontario’s Bill 198.

The CSA have considered the comment. The CSAcontemplate that the USL will prohibit a person fromrepresenting that it is registered unless therepresentation is true and the person specifies thecategory of registration.


The CSA believe that these prohibitions should extendto all persons.


Sanctions available to be imposed bysecurities regulatory authorities/finesimposed by courts

(AIMR; Davies; IDA; IFIC; Institute ofCharted Accountants of Manitoba; FaskenMartineau; Ogilvy Renault; PDAC; Romanoand Nicholls)

One commenter suggests that administrative penalties,financial and otherwise, over a specified duration orquantum should be subject to a judicial review or reviewby an independent tribunal.

One commenter asks whether the USL would provide fora maximum duration of enforcement orders.

One commenter submits that a substantial financialadministrative penalty (e.g. $1,000,000), while de minimusfor major companies, is not trivial for smaller corporationsor individuals. The commenter states that broaderpunitive powers require more independent review.Furthermore, the commenter submits that administrativepenalties should be limited to an aggregate cap that wouldapply to similar offences. Otherwise, the penalty imposedcould easily be well beyond the stated limit given thenumber of technical provisions involved in any breach.

Several commenters address the issue of harmonization ofthe amount of penalties. Two commenters recommendthat the range of penalties should be uniform acrossjurisdictions and that the CSA should also be required toreview penalties that securities regulatory authorities in alljurisdictions impose to assure that there is uniformity inenforcement. One such commenter’s remarks apply tocourt imposed penalties as well as administrativepenalties. Another commenter believes that uniformpenalties are desirable but acknowledges that each caseneeds to be considered in the context in which it arises.Another commenter disagrees with the proposal to havevarying maximum penalties and suggests that ceilingsshould be established.

Currently, all sanctions can be appealed to a court ofcompetent jurisdiction on the application of therespondent. The imposition of automatic review isbeyond the scope of the USL and would also impose asignificant burden on the judicial system.

No maximum duration is contemplated.

The administrative penalty proposed under the USL isnot punitive in nature. The administrative penalty isintended to provide additional flexibility to securitiesregulatory authorities and enable them to tailorsanctions to suit the particular circumstances of a case.Securities regulatory authorities would continue to beable to impose administrative penalties only if theimposition of the fine would be in the public interest.In addition, administrative penalties under USL wouldbe capped. The overarching requirement that anyadministrative penalty be in the public interest requiresa securities regulatory authority panel to consider theoverall effect of any penalty.

The suggestion that the CSA review a penalty imposedby a securities regulatory authority would give theCSA powers that properly belong to courts. In relationto comments concerning court-imposed penalties, suchpenalties may be imposed following a provincialoffence prosecution and conviction of an offence andwill vary in each jurisdiction.

195. Cease trade orders for non compliancewith filings

(PDAC)

One commenter submits that cease trade orders for failureto comply with filing requirements should not bepermitted without a hearing unless notice and anopportunity to cure is first provided.

Each jurisdiction will address hearing requirements inits Administration Act.


General versus specific offences

(Davies; IDA; IFIC)

Two commenters support the proposal that anycontravention of securities laws be considered an offence.They agree that securities regulatory authorities shouldhave the flexibility to decide how to treat a contraventionwithout the need to amend legislation each time they wishto add to the list of provisions that may be treated as anoffence. One commenter is opposed to the proposal andsubmits that it is not appropriate to grant securitiesregulatory authorities this amount of flexibility.

The CSA believe that the proposal that anycontravention of securities laws be treated as anoffence is necessary in rapidly evolving capitalmarkets to ensure that enforcement powers aresufficiently meaningful to inspire investor confidence.

JOINT HEARINGS

197. Joint Hearings

Joint hearing procedures

(AIMR; IDA; IFIC; PDAC; Royal Bank ofCanada)

Several commenters support the concept of joint hearings.Two of these commenters submit that enforcement on thewhole should be more coordinated. One commentersuggests that joint hearings should result in coordinationof investigations among securities regulatory authoritiesand SROs across jurisdictions. Another commentersuggests that there be reciprocal imposition of sanctions.

One commenter urges the CSA to include joint hearingprocedures in the USL. The commenter suggests thatthese procedures be implemented in an identical manneracross the country and emphasizes that the proceduresmust not be subject to variation or change by anyprovince.

There is already substantial coordination amongsecurities regulatory authorities and SROs ofinvestigations and enforcement. The changesproposed in the USL would further the degree ofcoordination significantly. However, some of thedifferences in investigations and enforcement powerstie back to the fact that each securities regulatoryauthority derives its authority from its respectiveprovince or territory.

A uniform joint hearing procedure, although useful, isnot a high priority at this time. Under the USL, jointhearing procedures could be added at a later timeeither as a rule or a policy.

198. Joint Hearings

Delegation

(Ogilvy Renault)

One commenter suggests that joint hearings are contrary tothe principle of delegation. The commenter submits thatthe USL should enable a securities regulatory authority tofully delegate its power to conduct a hearing to anothersecurities regulatory authority without independent reviewor concurrent participation by the delegating securitiesregulatory authority. The commenter suggests that thiswould further emphasize the need for consistency inpenalties to be applied.

The delegation provisions contemplated under theUSL would allow full delegation of the power toconduct a hearing from one securities regulatoryauthority to another. However, it may not be desirablein all circumstances to delegate this power. Often,enforcement activities have ties to more than onejurisdiction and a joint hearing approach will bepreferable.


GENERAL PROVISIONS

199. General provisions

Rule making authority

(Ogilvy Renault; Royal Bank of Canada)

One commenter supports providing rule making authorityto all securities regulatory authorities. Anothercommenter supports the harmonization of the heads of rulemaking authority and the continued oversight of rulemaking by the Lieutenant Governor-in-Council. However,the commenter notes that, in Ontario and certain otherprovinces, there has been a degree of politicization of therule making process. The commenter suggests thataffected capital market participants have used the periodbetween the time a rule is published by the relevantsecurities regulatory authority in final form and the time itis finally approved by the Minister of Finance to lobby or“appeal” to the Minister. While this period was notoriginally contemplated for these purposes, the commentersuggests that consideration be given to formalizing thisprocess with respect to the basis on which affectedparticipants can appeal and time limits within which to doso.

Rule making procedures will be dealt with by eachjurisdiction in its Administration Act.


Rule making authority

(Barclays Global Investors; IDA; IFIC)

Several commenters note that rules created by securitiesregulatory authorities must be subject to governmentoversight.

One commenter also states that rules should be developedthrough a transparent process. Securities regulatoryauthorities must ensure that they do not overstep theirregulatory mandate. While the rule making process iseffective, there have been occasions when the timelinessof the process has been less than desirable. There is aneed for clear and reasonable time periods associated withthe processes for obtaining public comment andMinisterial approval. The commenter submits thatsecurities regulatory authorities should be granted somedegree of flexibility and discretion in determining whenrepublication of proposed rules is required.

Rule making procedures will be dealt with by eachjurisdiction in its Administration Act. However, theCSA agree that any rule making process should betransparent at all stages of the process.

76# Theme Comments Responses 201. Blanket order authority

(IDA; PDAC; Royal Bank of Canada)

Several commenters agree that securities regulatoryauthorities should have the authority to make blanketorders.

One commenter specifically supports empowering allsecurities regulatory authorities to make blanket orderssince the power will increase the ability of all securitiesregulatory authorities to respond to market developmentsin a timely and efficient manner.

One commenter submits that the authority to make blanketorders should be delegated to a small numbers ofsecurities regulatory authorities so that identical cross-country relief will be provided simultaneously.

The CSA agree with the comments.

The CSA agree that the ability of securities regulatoryauthorities to make blanket orders is integral to theirability to respond to market changes effectively.

The proposed delegation provision will be draftedbroadly to permit, if appropriate, what the commentercontemplates.


General authority to exempt by order

(IDA)

One commenter supports the consolidation of variouslyworded exempting provisions into one generally wordedauthority in order to exempt persons and companies fromsecurities law requirements.



Filing of documents from a foreignjurisdiction


One commenter submits that the USL should allow thefiling of documents that are “similar” to documents filedunder the USL instead of requiring that the foreigndocuments are “substantially the same”.

The USL will contain a provision allowing for thefiling of documents that comply with the laws of aforeign jurisdiction whose laws are substantially thesame as those under the USL.

77# Theme Comments Responses 204. General provisions

Non-disclosure provisions


One commenter submits that the non-disclosure provisionseither should be repealed or should permit disclosure forcompliance, establishing a defence or other bona fidereason. These provisions purport to prevent a person fromadvising the senior officers or directors of his employer ofan investigation. The scope, constitutionality andappropriateness of these provisions need to bereconsidered as they appear to be overly broad and are notavailable in the context of much more serious matters suchas criminal investigations.

The CSA believe that the non-disclosure provisionsare an important element of the investigative processand serve the objective of ensuring its integrity andprotecting persons who provide information to asecurities regulatory authority in the course of anexamination. A securities regulatory authority maymake an order for disclosure of information where itconsiders that it would be in the public interest to doso. This permits a securities regulatory authority to bein a position to properly weigh the relevant interestsinvolved (e.g. the public interest in disclosure versusthe interest in preserving the confidentiality of theinvestigative process). The CSA do not believe itwould be appropriate to take away the importantprotections provided by the non-disclosure provisions.


Recovery of costs


One commenter submits that the USL should not allowcost sanctions in the absence of a breach of law and thatcosts should be awarded to a successful defendant.

The comment goes beyond the scope of the USLProject.

FEES

206. Fees

(Barclays Global Investors; BD&P;Canadian Council of Chief Executives; IFIC;Ogilvy Renault; Royal Bank of Canada)

A number of commenters suggest that the efficienciesrealized through the legal delegation model should resultin reduced fees.

One commenter recommends the adoption of a single feemodel for all security regulatory authorities based on thenew Ontario model.

One commenter submits that securities regulatoryauthorities should have the ability to demand participationfees attributable to a participant’s size or presence in aparticular market provided that such fees properly reflectthe cost of regulating such market.

The CSA are committed to reviewing fee scheduleswith a view to passing on cost savings to industryparticipants with the approval of relevantgovernments.


COMMENTS ON EXISTING NATIONAL INSTRUMENTS AND OTHER CSA INITIATIVES

207. Existing National Instruments

(PDAC; Romano and Nicholls)

Two commenters provide comments on existing nationalinstruments.

The primary objective of the USL Project is toharmonize securities laws across Canada. Therefore,the CSA do not propose to amend existing nationalinstruments (other than consequential amendments toensure consistency with the Uniform Act) at this time.However, the Uniform Act will be a platform actwhich will allow for significant policy change to takeplace in the future.

208. Proposed National and MultilateralInstruments and Other CSAInitiatives

(Certified General Accountants Associationof Canada; Davies; KPMG; Ontario BarAssociation; Phillips, Hager & North;Romano and Nicholls; SHARE; Torys; TotalTelcom)

A number of commenters provide comments on proposednational and multilateral instruments, such as NI 51-102and NI 81-106, and on-going CSA initiatives, especiallythose relating to investor confidence, which will beincluded in the USL.

Comments relating specifically to proposed nationaland multilateral instruments and on-going CSAinitiatives will be considered during the commentprocesses for those proposed rules.

COMMENTS ON THE INTERACTION OF SECURITIES LAWS AND CORPORATE LAWS

209. Differences Between Securities andCorporate Law Requirements

(Bennett Jones)

One commenter notes that even if inconsistencies betweenprovincial securities acts are eliminated, inconsistenciesbetween securities laws and corporate laws will remain.The commenter appreciates that the CSA are workingunder an aggressive timetable to implement the USL butsuggests that it would be beneficial for the CSA to moreclearly define the boundary between corporate law andsecurities law and to make recommendations for thereduction of differences in areas of overlap.

The CSA thank the commenter for its observation.

79# Theme Comments Responses 210. Interaction between Exemptions

under Securities Laws and CorporateStatutes

(Bennett Jones)

One commenter is concerned with the interaction betweenthe prospectus exemptions proposed for the USL(including the elimination of the minimum investmentexemption) and the concept of “distributing corporation”under the Business Corporations Act (Alberta) (ABCA).If the minimum investment exemption is eliminated,companies that have relied on it to distribute securities (toinvestors who do not meet the definition of accreditedinvestor) may find that they have become “distributingcorporations” for the purposes of the ABCA. Also, acompany could become a distributing corporation if aninvestor who once satisfied the “net asset” or “net income”test under the accredited investor exemption ceases tomeet those tests after investing. This is potentially aproblem given that many companies structure their capitalraising efforts so as to ensure that they do not becomedistributing corporations.


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CANADIAN SECURITIES ADMINISTRATORS NOTICE 11-304 … · 7/31/2003 · Inc., StrongBow Resources Inc., Tagish Lake Gold Corp., Tenajon Resources Corp., The SunBlush Technologies Corporation,