CSA has announced a slew of rule amendments that will mean more paperwork for advisors. The changes are to National Instrument 45-106 Prospectus and Registration Exemptions.


Raising eyebrows is the revamped Form 45-106F9 that individual accredited investors must sign to show they understand the risks of purchasing exempt market securities. “At the top […] in big bold letters is the word WARNING with an exclamation point,” notes Ron Kosonic, a partner at BLG in Toronto. “Then it goes on to say this investment is risky: ‘Don’t invest unless you can afford to lose all the money you pay for this investment.’ Well, that’s true of virtually every investment, short of government bonds.”

Not only that, says Kosonic, but the warning’s sweeping statement ignores the fact that risk, strategy and restrictions vary widely among investments. “The problem with it is that one size does not fit all. There’s no wiggle room here.”

He’s worried the form implies raising money in the private placement world is riskier than through a prospectus, which may deter some investors. “My clients use offering memoranda that, in a lot of cases, have more information and are even less risky than some mutual funds.”

Risk acknowledgement forms have been “creeping in for a while,” says Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver, as securities commissions in most provinces are already using them for certain kinds of offering memoranda. “It’s basically a cigarette package warning: This could be hazardous to your financial health.”

Like Kosonic, Pinsky finds the new form heavy-handed, but he sees value for the inexperienced investor “who might be lured by promises of high returns.” Most advisors, he stresses, already warn their clients of investment risks; but now the rare scammer must contend with this form, which may force investors to “understand they can’t afford to lose that money and give them pause. It’s worth it.” He predicts the form’s prominent warning will also deter some clients from complaining to the regulator if their investments flop. “It’s another safety valve for the securities commission.”

Kosonic warns of the additional paperwork fund managers and investors will have to process. “Subscription agreements have gone from eight to 10 pages 10 years ago to 40 or 50 pages.”

Adds Pinsky: “It’s going to be a little more of a hassle for companies to get clients to sign these forms, but I think people are getting used to filing and signing a lot of paperwork. It will become a matter of course pretty quickly.”

Ontario amends AI definition

Pinsky welcomes Ontario’s amended Accredited Investor (AI) definition, which now allows fully managed accounts to purchase investment fund securities using the managed account category of the AI exemption.

He also likes how trusts established by accredited investors for family members will now be included in the AI definition for the purposes of the exemption.

Previously, if an AI established a trust containing AI-only investments, the beneficiaries had to be AIs. “That was hardly ever the case as most of the beneficiaries were children,” notes Pinsky. Under the new rule, it isn’t necessary for beneficiaries to be accredited investors.

Ontario now also has the Family, Friends and Business Associates (FFBA) exemption, which allows early-stage issuers to benefit more from cost-effective capital from family, friends and business associates. It provides investment opportunities for those who may not otherwise qualify as accredited investors. “This is good for most issuers because it […] expands who they could raise seed money from,” says Kosonic. But Ontario is the only province that does not allow investment funds to use this exemption, so “it’s bad because it’s taking away a source of seed capital for a lot of start-up fund managers: specifically, their families.”

CSA releases report

CSA’s 2014 enforcement report has few surprises, says Laura Paglia, a partner at BLG in Toronto. She notes the report is consistent with previous years in terms of number of cases, but fines leapt from $35 million in 2013 to more than $58 million last year. Also, in 2014, 56% of enforcement proceedings wound up in contested hearings before a tribunal, whereas only 31% led to a settlement agreement. “The majority of respondents are not settling,” she says. “Why? Is it because they believe they can do better at a hearing? They believe they have nothing to lose?” She considers the ratio noteworthy, although CSA doesn’t offer more information on the underlying causes of the statistics.

OBSI’s annual report

OBSI’s annual report was also largely unsurprising, says Paglia, except for the level of investor compensation. Last year, the number of cases fell by half compared to 2010 (570 in 2014, down from 1,024 in 2010), but average compensation rose modestly from $14,976 in 2010 to $16,921 last year. “You’ve got bigger numbers on half the cases. This report wouldn’t tell us why. I don’t see anything here to suggest why or what the difference is.”

The numbers surprise her, given OBSI expanded its mandate in 2014 to include registrants beyond SROs. “Without further knowledge of what gives rise to any individual recommendation,” she says, “this may be an indication of what could be a continued concern as to OBSI’s process and their calculations as to damages.”

Another concern is one OBSI itself admits: a weak dispute-resolution system. Some firms are refusing to pay recommended settlement amounts. To combat this, OBSI has been publicizing these firms and their cases—so-called “naming and shaming.”

Simon Romano, a partner at Stikeman Elliott LLP in Toronto, says it’s “having more of an effect on some firms than others, likely due to public relations sensitivities.” Though not foolproof, this tactic “puts more pressure on firms to settle according to the ombudsman’s recommendation.”

Romano notes that OBSI has highlighted low-ball settlements as a key priority in 2015. Considering both the CSA and OBSI reports, Pinksy says Canadian enforcement is enhancing confidence among investors in Canada and abroad. For example, he’s encouraged to see that more than 1,000 registrants joined OBSI last year, nearly tripling the number of participating firms.

“Ten years ago, the reputation of the United States market and the SEC was much stronger in enforcement than it was in Canada. There were lots of examples of cases of people getting away with things they wouldn’t have in the U.S. I think Canada’s reputation is moving toward being strong on enforcement.”

by Allan Tong, a Toronto-based financial journalist.