Bernard Pinsky Click here to see full sized version.

The British Columbia Securities Commission (the “Commission”) worked on its version of new securities regulation for over a year, and expected to adopt the new British Columbia Securities Act (the “Act”) and Rules effective November 29, 2004.

At the last minute, after the Act had passed third reading in the legislature, the B.C. government decided not to proclaim the legislation. There is speculation that pressure from issuers and market participants who were concerned about the new civil liability provisions in the Act, particularly those new provisions affecting secondary trading liability, resulted in the government’s decision. There could also have been pressure from opponents of the Act who maintain that moving away from uniformity in securities legislation in Canada only harms Canadian markets. Whatever the reason, it is now unclear when, if at all, the new legislation will be enacted.

The Commission’s project as mandated by the B.C. government was to deregulate the securities industry. The Commission’s stated goal was to make securities regulation more effective and less burdensome by reducing the number of securities requirements. This approach stands in sharp contrast to the approach taken in the United States under Sarbanes-Oxley and in contrast to the initiatives of the Ontario Securities Commission and other Canadian regulators, who have moved towards harmony with U.S. rules.

Rather than a “rules based” approach to securities regulation, the proposed Act and Rules are “principles based” legislation. In short, the Act and Rules would not prescribe exactly what a market participant had to do: if a reasonable person on balance would consider that the act of the market participant was wrong, it would be prohibited. Exactly what to do and what not to do would be left to issuers, brokers and other market participants to a greater extent than is now the case in Canada.

In its original form, changes from existing legislation were even more dramatic than the Act and Rules turned out to be. For example, the first version of the Rules required only brokerage firm registration and no individual could register as a broker or agent. It was up to brokerage firms to monitor the acts of all their employees and face the consequences of any wrongdoing by the employees. In the end, the Commission decided it was not practical to proceed with the firm-only registration system.

The Rules include interfaces, called the “passport system” that allow market participants that operate in other provinces generally to comply only with their home jurisdiction requirements.
When and if the new Act and Rules become effective, all current national and multi-lateral instruments are intended to remain in force in B.C. for a limited time.

That means, for example, that all issuers would be able to follow the rules that the issuer had previously been dealing with regarding most matters. The Commission intended to publish for discussion a specific proposal relating to rescission of various national and multi-lateral instruments that would no longer be necessary under the new B.C. system in early 2005, and encouraged issuers to try to utilize the benefits of the new Act and Rules in their dealings even though they may have the alternative of policies or rules set out in multi-lateral instruments.

The more significant changes to the Act and Rules compared to other Canadian securities legislation included:

1) If an issuer is up to date in its continuous disclosure obligations, it could offer and issue securities at any time, and no prospectus or prospectus exemption would be required. This is at the heart of the Act and is called “Continuous Market Access”.

2) Notwithstanding that a request for information about a brokerage employee may tip off the current employer about an employee’s intention to leave, firms were required to perform a reference check with the current or most recent employer, immediately before finalizing an offer of employment.

3) Brokerage firms would be required to meet higher standards for managing conflicts of interest, disclosure provided to clients in plain language and hiring practices under a new Code of Conduct.

4) The Commission distributed plain language guides for how brokerage firms, broker representatives, issuers and their officers and directors should conduct themselves.

5) Issuers will need to maintain a list rather than to file a list annually. Issuers will be required to provide the list during a compliance review or in response to a production or investigation order.
Should the Act and Rules be proclaimed, B.C. would be a testing ground for a different type of securities regulatory regime: one that has considerable uncertainty, but could prove just as effective as other approaches at preventing securities fraud.

Bernard Pinsky is head of the Corporate Finance/Securities Law Group at Clark, Wilson in Vancouver.