Ontario capital markets set for modernization effort

Ontario capital markets set for rule revamp

Listed real estate would welcome easing of quarterly reporting obligations
Tuesday, September 15, 2020
By Barbara Carss

Proposals to ease some of the rigidly prescriptive oversight of Ontario capital markets, while strengthening punitive mechanisms, have garnered positive response from connected players who issue, underwrite, deal in and advise investors on publicly traded securities. Members of the provincially appointed Capital Markets Modernization Taskforce are now assessing feedback on 47 policy proposals they released for public consideration earlier this summer. That will inform a final report and recommendations to be submitted to Ontario’s Minister of Finance later this year.

Panellists participating in a recent webinar sponsored by the NEO exchange mostly weighed in with praise for the measures outlined in the interim document. Although the hour-long discussion was necessarily scoped to a few key themes, there was general consensus the five-member taskforce has delivered a proposed strategy consistent with its instructions to identify regulatory improvements that can foster innovation, provide more balanced access for large and small players and serve investors’ best interests.

Taskforce member Cindy Tripp — founding partner and co-head, institutional trading, with GMP Securities LP — was also on hand to outline the premise of various proposed measures intended to support issuers, streamline administrative processes, scrutinize the banks’ substantive and expanding position, and give regulators sufficient clout to effectively police miscreants.

“How do we get vibrant capital markets? There are three things that, for me, are critical: competition, innovation and transparency,” asserted Jos Schmitt, NEO chief executive officer and president. “I really like the term ‘investor confidence’ versus ‘investor protection’— that’s less rules, more principle-based organizational transparency.”

The taskforce suggests the Ontario Securities Commission (OSC) should adopt a formal mandate to foster capital formation and competition — an agenda that’s already enshrined for securities regulators in the United Kingdom, Australia and Singapore — in order to pursue those objectives. That would provide an explicit premise to tackle the obstructions market players encounter, whether that be fees or anti-competitive behaviour.

“The aim of this change is to, institutionally and culturally, supplement the policing function of the primary regulator with a public policy imperative of growing the capital markets in Ontario,” the first of the 47 proposals states.

From there, they address a range of issues that are likely to be of interest to listed real estate entities and their investors, as well as start-up ventures and other publicly traded service providers to the commercial real estate industry. That includes: steps to reduce administrative burden and costs; efforts to help start-ups and small companies gain improved access to capital; safeguards for the quality and independence of investment advice: and proactive support for diversity, environmental, social and governance (ESG) information and open data. A new disclosure requirement for some institutional investors is also contemplated.

“We have certainly been watching and reviewing the taskforce proposals,” affirms Michael Brooks, chief executive officer of REALPAC, which counts both public real estate companies and institutional investors among its membership. “We have been discussing many of the same issues with our public company chief financial officers for, in some cases, many years.”

Modifying issuers’ interactions with investors

Looking at issuers’ outreach to potential investors, the taskforce proposes an alternative model that would allow qualifying issuers to offer tradeable securities based on a short offering document and their continuous disclosure record rather than filing a prospectus. That would be subject to an annual limit and other compliance conditions. The taskforce also proposes giving issuers increased flexibility to gauge institutional investors’ interest prior to filing a preliminary prospectus,

Other suggested streamlining measures include: recognition that “access equals delivery” so that materials such a prospectuses could be made available through digital channels; eliminating redundant reporting requirements; and introducing a “well-known seasoned issuer” category, mirroring the designation in the United States, which reduces required compliance steps for issuers that meet certain conditions.

Brooks predicts financial officers with real estate investment trusts (REITs) will be particularly pleased with the proposal to reduce quarterly reporting of financial results and accompanying management discussion and analysis (MD&A) to a semi-annual exercise. He estimates each review accounts for 1 to 1.5 per cent of externally managed REITs’ annual general and administrative costs or 2 to 3 per cent of those costs for internally managed REITs, equating to $160,000 to $460,000 per quarter depending on the complexity of the business.

“We feel that quarterly reporting is inconsistent with the long-term nature of commercial real estate,” Brooks submits. “Given the obligation to report to the market about material changes, we feel that the market is well notified on a real-time basis on what’s happening in each issuer’s business.”

Similarly, he suggests a proposal for enhanced scrutiny of proxy advisory firms could achieve more nuanced readings of how real estate differs from other asset classes. Although the taskforce notes that proxy advisory firms (PAF) serve an important role in analyzing proxy materials and making voting recommendations to investors, it proposes that: issuers be given an opportunity to rebut PAF guidance to voters; and PAFs be prohibited from serving as consultants to both issuers and voters on the same matter.

“We are generally in favour of better oversight of proxy advisory firms. Some of our members have found them inaccessible and, in some cases, uninformed relevant to a specific company or REIT,” Brooks reports. “For example, we have engaged with one proxy advisory firm about their foray into ESG evaluation of firms, where they seem to have little understanding of real estate and are applying a generic business template to real estate operations rather than a industry lens like GRESB.”

The proposal to compel TSX-listed companies to disclose ESG information that is compliant with either the Taskforce on Climate-related Financial Disclosures (TCFD) or the Sustainability Accounting Board Standards (SABS) potentially gives even more weight to those concerns.

The taskforce proposes shareholders be required to disclose their ownership stake once it reaches 5 per cent of the issuer’s voting securities — a lowering of the threshold from the current 10 per cent, which would harmonize with rules in the United States and the United Kingdom. Also in keeping with U.S. practices, it is proposed that institutional investors with holdings surpassing a specified dollar-value threshold in Canadian securities with a specified market cap would have to disclose that information quarterly.

“Because institutional investors are generally not required to disclose their holdings unless they cross the 10 per cent reporting threshold, issuers and other market participants may not have adequate transparency into institutional investors’ ownership positions. The lack of transparency hinders shareholder engagement and the ability for issuers to respond to shareholder concerns,” the taskforce reasons.

Proposals to better support diversity and deter misconduct

Among the dozens of taskforce proposals, Brooks also sees a push for diversity as in accord with REALPAC’s priorities. “This is something that our industry as a whole needs to embrace at every level,” he maintains.

The taskforce notes that little discernible change has occurred since the “comply or explain” model was adopted in 2014 and suggests other levers are needed to increase the presence of women, Black, Indigenous and people of colour in executive ranks and boards of directors. Along with targets and timelines for achieving them, the taskforce proposes TSX-listed companies be required to develop and adopt a written policy outlining how such candidates will be identified and put forward. It also proposes 10-year maximum tenure for directors, albeit with the allowance for up to 10 per cent of the board to serve an additional two years.

“This is aimed to encourage an appropriate level of board renewal,” the taskforce states. “The issue of board entrenchment and board renewal is a concern from a governance perspective as continued refreshment of the board helps to ensure that fresh and diverse perspectives and skills are brought into the boardroom.”

REALPAC’s endorsement contrasts with tenor of the recent panel discussion that the NEO exchange sponsored. Drawing on backgrounds in investment banking, products and advisory, panellists generally expressed support for diversity, but argued against attempts to promote it via regulation.

“I am all for diversity. I don’t think there’s a boardroom in this country that doesn’t think about it, doesn’t talk about it,” said Sheila Murray, a corporate director and former president of CI Financial. “Board renewal takes time. I don’t think we will achieve that objective through a sledgehammer approach.”

“What does this have to do with securities regulation?” queried Rob Wildeboer, executive chairman and co-founder of Martinrea International and counsel to Wildeboer Dellelce LLP, a firm specializing in corporate, securities and tax law. “I don’t think it should be a regulation from the securities commission.”

“I think we are simply asking the question: Is it time to move past ‘comply or explain’?” taskforce member Cindy Tripp observed. “What’s the next step from ‘comply or explain’ if you don’t want hard targets?”

Panellists were highly supportive of the package of proposals related to enforcement — even suggesting that a contemplated fivefold increase in the maximum administrative penalty, taking it to $5 million, is still somewhat modest. The taskforce also proposes the OSC be given authority to freeze or seize offenders’ properties and that they be prohibited from renewing their driver’s licenses or automotive license plates while penalties are still owing.

“I am a big believer in principle-based regulation and it comes with the ability of the regulator to step in, and step in, in a big way,” Schmitt reiterated. “I see a lot of recommendations that align with that. There are quite a few good ideas that will make the regulator stronger.”

Barbara Carss is editor-in-chief of Canadian Property Management.

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