Proposed Change: OSC Notice 51-901 - Report of the Toronto Stock Exchange Committee on Corporate Disclosure and Proposed Changes to the Definitions of "Material Fact" and Material "Change

REQUEST FOR COMMENT

51-901

Re: Report of The Toronto Stock Exchange Committee on Corporate Disclosure andProposed Changes to the Definitions of "Material Fact" and "Material Change"

The Commission and other members of the Canadian Securities Administrators ("CSA") intend tosubmit to their respective governments a proposal recommending legislative amendments toimplement the main recommendation of the Final Report of The Toronto Stock ExchangeCommittee on Corporate Disclosure (the "Final Report"). (See CSA Notice 53-301). The mainrecommendation in the Final Report is the creation of a limited statutory civil liability regime thatwould enable investors that trade in the secondary markets to bring a civil action against an issuerand other responsible parties where there has been a misrepresentation in disclosure documentsand other statements, or where there has been a failure by the issuer to meet its timely disclosureobligations. The CSA is finalizing the recommended proposed legislation which substantiallyfollows the recommendations in the Final Report.

The CSA is proposing to include in its recommendations draft legislation that would amend thedefinitions of "material fact" and "material change" for all purposes under securities legislation.

The Commission is now publishing for comment these proposed new definitions which are set outin the attached Schedule. The Commission is proposing for comment, in the definitions of materialfact and material change, a new formulation of the materiality standard with a view to moreclosely harmonizing the approach to materiality throughout the Securities Act (Ontario) and withthe approach in other jurisdictions. In Quebec, where the Securities Act (Quebec) does not define"material fact", the courts have followed U.S. case law to develop a different formulation of themateriality standard from that found in the legislation in other provinces of Canada. The standardarticulated in the seminal U.S. case of TSC Industries v. Northway, Inc. 426 U.S.438 (1976) hasbeen used in Quebec with approval. According to that standard, facts are material when theywould be substantially likely to be considered important to a reasonable investor in making aninvestment decision.Outside the definitions of material fact and material change, Ontario securitieslaw already recognizes a different standard of materiality. This is implicit in the line itemdisclosure requirements in the various forms under the Regulation. As well, there are variousinstances in the rules and in policy statements where a materiality standard comparable to thatproposed has been articulated. For example, for the purpose of determining the level of requiredfinancial disclosure in a prospectus or information circular under Ontario Securities CommissionPolicy Statement No. 5.1, the acquisition of a business "is considered material to an issuer if it isprobable that its omission from the financial statement information would influence or change aninvestment decision with respect to the securities of that issuer." See also National PolicyStatement No. 47 - Prompt Offering Qualification System. The amendment in 1994 to clause122(1)(b) of the Securities Act (Ontario), replacing the reference to the term "misrepresentation"(which requires a finding of "material fact") with references to the terms "misleading or untrue""in a material respect" is further evidence of a movement away from the narrow materialitystandard contained in the definitions of "material fact" and "material change". It was also recentlyrecognized that the current definitions of "material fact' and "material change" do not apply verywell in the context of mutual funds, and this resulted in proposed NI 81-102 including a definitionof "significant change" that adopts a similar materiality standard to that followed in Quebec andthe United States. It should also be pointed out that the proposed definition of "material fact" isconsistent with the general approach recommended in the 1979 Federal Proposals for a SecuritiesMarket Law in Canada.Accordingly, the CSA determined that it would be appropriate torecommend amending the definitions to adopt the materiality standard followed in Quebec and theUnited States. This would result in uniformity in the standard of disclosure applicable in Canadaas well as within North America. The change would also address the concern identified in theFinal Report with respect to the current definition of "material fact" which includes both a factthat "significantly affects the market price or value" of a security and a fact that "wouldreasonably be expected to have a significant effect on the market price or value" of a security.Consistent with the recommendation of the Final Report, the proposed change would removefrom the determination of materiality the current ex post examination of the effect of thedisclosure on the market price or value of the security. It was also noted that while the proposedamendment would remove the requirement for an examination of the likely effect on market priceor value in the determination of materiality, under the proposed civil liability regime a plaintiff willnot have a remedy in an action unless there has been an impact on market price.The Commissionis seeking comment on the proposed new definitions of "material fact" and "material change". Inparticular, while the Commission supports the CSA proposal to adopt a uniform materialitystandard on the terms proposed, the Commission is seeking comment on whether the uniformmateriality standard should apply in all contexts under the Securities Act (Ontario). For example,should the proposed materiality standard be applied in judging the disclosure in a documentprepared in connection with the exercise of a vote by a securityholder rather than an investmentdecision? Should the proposed materiality standard be applied to all disclosure documentsprepared under the Securities Act (Ontario)? Should the same materiality standard be applied inthe context of insider trading?Interested parties are invited to make written submissions withrespect to the Request for Comment. Submissions received by December 19, 1997 will beconsidered.Submissions should be sent in duplicate to:

Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55

Toronto, Ontario M5H 3S8Comment letters submitted in response to the Request forComment are placed on the public file and form part of the public record, unlessconfidentiality is requested. Even where confidentiality is requested, comment letters willbe circulated amongst the securities regulatory authorities and freedom of informationlegislation may not permit confidentiality to be maintained. Persons submitting commentletters should be aware that members of the public may be able to obtain access to anycomment letters.Questions may be referred to:

Susan Wolburgh Jenah
Manager, Market Operations
Ontario Securities Commission
(416)593-8245

Dated: November 7, 1997 SCHEDULE TO REQUEST FOR COMMENT

51-901 Proposed Definitions of "Material Change" and "Material Fact"

and the Related Definition of "Investment Decision""investment decision" means adecision to purchase, hold or sell securities;"material change" means,

(a) if used in relation to the affairs of an issuer other than an investment fund,

(i) a change in the business, operations, assets or ownership of the issuer thedisclosure of which would be substantially likely to be considered important to areasonable investor in making an investment decision, or

(ii) a decision to implement a change referred to in subparagraph (a)(i) made by (A)senior management of the issuer who believe that confirmation of the decision bythe directors is probable, or

(B) the directors of the issuer, and

(b) if used in relation to the affairs of an investment fund,

(i) a change in the business, operations or assets of the issuer the disclosure of whichwould be substantially likely to be considered important to a reasonable investor inmaking an investment decision, or

(ii) a decision to implement a change referred to in subparagraph (b)(i) made by(A)senior management of the issuer or by senior management of the investment fundmanager who believe that confirmation of the decision by the directors of theissuer or the directors of the investment fund manager is probable, or

(B) directors of the issuer or the directors of the investment fundmanager;"material fact" means, if used in relation to the affairs of an issueror its securities, a fact or a series of facts the disclosure of which would besubstantially likely to be considered important to a reasonable investor inmaking an investment decision.

Proposed Amendment to Rule 32-502 Under The Securities Act - Registration Exempt ForCertain Trades By Financial Intermediaries

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NOTICE OF PROPOSED AMENDMENT TO RULE 32-502

UNDER THE SECURITIES ACT

REGISTRATION EXEMPTION FOR CERTAIN TRADES

BY FINANCIAL INTERMEDIARIESSubstance and Purpose of Proposed AmendmentRule32-502 Registration Exemption for Certain Trades by Financial Intermediaries (the "Rule") waspublished in the Ontario Securities Commission Bulletin on December 20, 1996 ((1996), 19OSCB 6926). The Rule provides relief from the registration requirements of the Act for certaintrades up to and including March 31, 1998. The purpose of the proposed amendment is toremove the "sunset" date of March 31, 1998 so that the registration relief provided by the Rulewill not be time limited.Summary of Proposed AmendmentThe Rule came into effect on January1, 1997 and carried forward the relief contained in a deemed rule of the Commission In the Matterof Certain Amendments to Regulation 1015 of the Revised Regulations of Ontario 1990 MadeUnder the Securities Act (1994), 17 OSCB 5516. Subsection 1.1(1) of the Rule provides that upto and including March 31, 1998, section 25 of the Act does not apply to a trade by a financialintermediary of the type described in subsection 35(1) of the Act or section 151 of the Regulationor in securities described in subsection 35(2) of the Act.Subsection 1.1(2) of the Rule providesthat up to and including March 31, 1998 clause 25(1)(b) of the Act does not apply to a trade by afinancial intermediary of the type described in subsection 209(1) of the Regulation.TheCommission proposes to amend the Rule by deleting the "sunset" date of March 31, 1998 anddeleting Part 2 of the Rule which contains the effective date of January 1, 1997. If theamendments are made, there will be no time limitation on the relief provided in the Rule.Authorityfor the Proposed RuleParagraph 143(1)8 of the Act authorizes the Commission to make rulesthat, among other things, provide for exemptions from the registration requirements of theAct.Alternatives ConsideredThe Commission considered whether after March 31, 1998, financialintermediaries should be required to be registered to engage in trades described in the Rule. TheCommission determined that, at the present time, it would not be appropriate to impose aregistration requirement on financial intermediaries for the trades contemplated by the Rule. TheCommission notes that ongoing initiatives in the registration and derivatives areas may result inthe Commission revisiting this position in the future.Unpublished MaterialsIn proposing thisamendment, the Commission has not relied on any significant unpublished study, report or othermaterial.Anticipated Costs and BenefitsThe Rule benefits financial intermediaries trading incertain securities in that those financial intermediaries are not required to be registered to trade inthose securities. The Rule imposes no costs on those financial intermediaries. In consideringwhether to allow the relief provided by the Rule to lapse, the Commission was of the view that ifit did not amend the Rule, federally regulated financial intermediaries would be exempt fromregistration under subsection 209(10) of the Regulation, while financial intermediaries notregulated federally would be required to register. This would impose significant costs on thoseinstitutions and would have a disproportionate effect on them that the Commission does notbelieve is justified in the circumstances.Regulations to be AmendedThe Commission proposes toamend subsection 206(1) of the Regulation by deleting the reference to the deemed rule andanother deemed rule replaced by Rule 32-503 Registration and Prospectus Exemption for Tradesby Financial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans so that thefollowing words of subsection 206(1) will be deleted: "Except as otherwise provided in the Rulesentitled "In the Matter of Certain Amendments to Regulation 1015 of the Revised Regulations ofOntario, 1990 made under the Securities Act" (1994), 17 OSCB 5516 and "In the Matter ofCertain Amendments to Regulation 1015 of the Revised Regulations of Ontario, 1990 made underthe Securities Act" (1994), 17 OSCB 5517,".CommentsInterested parties are invited to makewritten submissions with respect to the proposed amendment. Submissions received by February6, 1998 will be considered.Submissions should be made in duplicate to: Daniel P. Iggers,Secretary

Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably Word Perfect)should also be submitted. As the Securities Act requires that a summary of written commentsreceived during the comment period be published, confidentiality of submissions received cannotbe maintained.Questions may be referred to:

Tanis MacLaren
Associate General Counsel
Ontario Securities Commission
(416) 593-8259

Proposed AmendmentThe text of the proposed amendment follows.

DATED:November 7, 1997.