Notice and Request for Comments: OSC Notice 51-902 - Proposal for a Statutory Civil Remedy for Investors in the Secondary Market

Proposal for a Statutory Civil Remedy for Investors in the Secondary Market

The Ontario Securities Commission (the "Commission") and other members of the Canadian Securities Administrators (the "CSA") have developed proposedlegislative amendments which are published for comment in Chapter 6 in this Bulletin (the "Proposal") to implement the main recommendation of the FinalReport of the Toronto Stock Exchange Committee (the "TSE Committee") on Corporate disclosure (the "TSE Final Report"). (See CSA Notice 53-301).

Background to the Proposal

The main recommendation in the TSE Final Report is the creation of a limited statutory civil liability regime enabling secondary market investors who are harmedby misrepresentations in disclosure documents and other statements or by failure to make timely disclosure to bring action against issuers and other responsibleparties.

The Securities Act (Ontario) provides investors who purchase securities under a prospectus certain statutory rights, including a right of action for damagesagainst the issuer and others for misrepresentations contained in the prospectus. In contrast, investors who purchase securities in the secondary market have nosimilar statutory right of action. This anomalous result is of concern to the CSA given that the volume of trading in the secondary market vastly outweighs thatin the primary market.

Common law remedies for misrepresentation are difficult to pursue, because investors must prove that they relied on the misrepresentation to their detriment.The Securities Act (Ontario) deems investors to have relied on the prospectus and therefore relieves investors of the need to prove reliance. The proposedlegislative amendments would provide similar deemed reliance by secondary market investors on an issuer's continuous disclosure and public statements.

The objective of the Proposal is to create a meaningful civil remedy for investors who trade in the secondary market when there is a failure to make timelydisclosure, or when there are misrepresentations in continuous disclosure documents and oral statements issued by or on behalf of issuers and other responsiblepersons. At the same time, the Proposal imposes reasonable limitations on potential liability for continuous disclosure misrepresentations to address concernsabout opening the door to the type and extent of securities class actions experienced in the United States.

The CSA believe that implementation of the Proposal, which largely follows the main recommendation of the TSE Final Report, will enhance public confidencein the integrity of the Canadian capital markets.

Late last year, several members of the CSA, including the Commission, submitted to our respective governments a recommendation that the Proposal beadopted. At this time the Government of Ontario has made no decision to proceed with the Proposal.

Prior Publication of Request for Comment Regarding Definitions of "Material Fact" and "Material Change"

On November 7, 1997, the Commission published Request for Comment # 51-901 seeking comment on proposed changes to the definitions of "material fact"and "material change". Other members of the CSA published similar requests for comment. The proposed changes to these definitions were published forcomment as they did not form part of the recommendations contained in the TSE Final Report (with the exception of one aspect of the proposed change to thedefinition of "material fact" to remove the "retroactive" aspect of the current definition which was recommended by the TSE Committee).

The CSA received several submissions in response to this Request for Comment. The CSA thanks the commentators for their thoughtful submissions. TheCSA are considering the comments received and have not made a final decision to recommend to our respective governments that the definitions be revised asproposed. In the meantime, the proposed revised definitions are reflected in the Proposal.

Publication of the Proposal

The Proposal as a whole was not previously published for comment. Several members of the CSA were hopeful that the Proposal could be considered as part ofthe Spring 1998 legislative agenda in their jurisdictions. As this target is not feasible, the CSA have decided to publish the Proposal for comment in its entiretygiven the significance of the Proposal and the extent of the public interest generated by the TSE Final Report and the CSA Proposal.

While the text of the Proposal may differ between jurisdictions in certain respects, reflecting differences in existing securities legislation across Canada, theintention is to create the same right of action in all CSA jurisdictions. As the CVMQ is in the process of reviewing the Proposal in light of Québec's civil lawregime, no draft legislation is presently available for comment in that jurisdiction. The text of the Ontario Proposal together with Explanatory Notes is publishedfor comment with this Notice.

Other Matters Under Consideration

The Proposal would extend limited statutory civil liability to secondary market transactions effected in reliance upon certain statutory prospectus exemptionswhen the investor in such transactions is not already afforded a comparable remedy under Ontario securities law or is not in a position to obtain by contractcomparable rights. As a separate but related initiative, the CSA will consider recommending legislative amendments to introduce a statutory civil right of actionfor misrepresentations in connection with certain private placements and other prospectus exempt transactions which would replace the existing contractual rightof action provisions.

The CSA will also consider a further recommendation contained in the TSE Final Report, namely the adoption of an integrated disclosure system for reportingissuers. The CSA's objectives in considering this recommendation would be to improve the quality of continuous disclosure and streamline and simplify theprocess of capital formation through distributions of securities in both the public offering and private placement context. Implementation of the Proposal wouldprovide a foundation for increased reliance on continuous disclosure documents in the context of an integrated disclosure system.

Request for Comment

Interested parties are invited to comment on the Proposal. Comment letters should be submitted by August 28, 1998.

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 3S8

Comment letters submitted in response to the Request for Comment are placed on the public file and form part of the public record, unless confidentiality isrequested. Although comment letters requesting confidentiality will not be placed on the public file, they will be circulated amongst the securities regulatoryauthorities, and freedom of information legislation may not permit confidentiality to be maintained. Persons submitting comment letters should therefore beaware that the press and members of the public may be able to obtain access to any comment letter.

Questions may be referred to:
Susan Wolburgh Jenah
Manager, Market Operations
Ontario Securities Commission
(416) 593-8245

Dated: May 29, 1998