On August 6, the Canadian Securities Administrators (CSA) published final amendments to national rules affecting the prospectus and registration exemptions for distributions of securities involving syndicated mortgages (National Amendments). In addition, some provinces including Ontario have proposed additional changes to their local prospectus and registration exemptions, and the Financial Services Regulatory Authority of Ontario (FSRA) is consulting on draft guidance (FSRA Guidance) for its supervision of mortgage brokers and administrators dealing in certain syndicated mortgages. The National Amendments, proposed FSRA Guidance, and proposed Ontario-specific amendments prospectus and registration exemptions (Ontario Rules) are expected to come into effect on March 1, 2021. Below, we highlight key features of the reforms.
The National Amendments will amend National Instrument 45-106 Prospectus Exemptions (NI 45-106), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), and the related companion policies. Among other things:
The existing prospectus and registration exemptions in Ontario, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and the Yukon for securities that are syndicated mortgages (Mortgage Exemptions) will be removed. This will align the regulatory frameworks in these jurisdictions with the rest of Canada.
The private issuer prospectus exemption (Private Issuer Exemption) will be removed for distributions of syndicated mortgages.
Because of these changes, exempt distributions of syndicated mortgages in Canada will have to be effected under another prospectus exemption, such as the accredited investor exemption (AI Exemption), offering memorandum exemption (OM Exemption), or family, friends and business associates exemption (FFBA Exemption).
Consistent with the current approach in British Columbia for syndicated mortgages distributed under the OM Exemption, the National Amendments will require supplemental disclosure tailored to syndicated mortgages.
In Ontario and other jurisdictions where the Mortgage Exemptions currently apply to syndicated mortgages, market participants that are in the business of trading syndicated mortgages will need to determine whether the registration requirement applies to them.
Changes since 2019: The National Amendments are substantially similar to the proposed amendments published by the CSA for comment in March 2019 (2019 Proposal). But there have been a few changes. For example, Form 45-106F18 Supplemental Disclosure for Syndicated Mortgages will require disclosure of the potential subordination of the syndicated mortgage, clarify the calculation of the loan-to-value ratio, and include additional examples of risk factors.
Some jurisdictions have proposed further changes to their exemptions:
Qualified syndicated mortgages: Ontario and New Brunswick have published for comment prospectus and registration exemptions for “qualified syndicated mortgages” (QSMs), and we expect Nova Scotia to introduce a similar pair of exemptions. Alberta and Québec have proposed a prospectus-only exemption for trades in QSMs.
Distributions of non-qualified syndicated mortgage investments (NQSMIs) to permitted investors: Ontario and New Brunswick also have proposed prospectus and registration exemptions for distributions of NQSMIs to permitted clients (i.e. institutional and high net worth investors). Alberta has proposed a prospectus-only exemption for trades in NQSMIs to permitted clients, while Québec is asking for feedback on whether such an exemption should be introduced.
Reports of exempt distribution: Ontario and New Brunswick will not require a Form 45-106F1 Report of Exemption Distribution to be filed for distributions of QSMs under their new prospectus exemptions or for distributions of NQSMIs sold to permitted clients.
Who will regulate what in Ontario beginning in March 2021? FSRA currently regulates all syndicated mortgage investments in Ontario. When the new regime comes into effect, FSRA will continue to supervise transactions involving qualified, syndicated mortgage investments and the mortgage brokers and administrators involved in such transactions. Oversight of NQSMIs will be split between FSRA and the OSC, depending on the status of the investor/lender and the type of transaction. In particular, FSRA will supervise:
NQSMI transactions with permitted clients;
NQSMI transactions with permitted and non-permitted clients before March 1, 2021 (Legacy NQSMIs); and
Administrators of NQSMIs.
Mortgage brokerages that deal in mortgages and syndicated mortgages only with permitted clients will not have to register with the OSC and the distributions of these products to permitted clients will be exempt from the prospectus requirement. There will be dual oversight however, in some circumstances. For example, FSRA will have oversight over mortgage brokers dealing in NQSMIs when they act on behalf of the borrower who is not a permitted client, with the OSC having oversight over the trades with respect to that investor/lender.
The proposed FSRA Guidance describes FSRA’s forward-looking, risk-based approach to supervision of the firms and transactions over which it will have authority and outlines the data it plans to collect from firms to inform its risk assessments.