Transcript Current Regulatory Initiatives and Expectations Regarding

Current Regulatory Initiatives and Expectations
Regarding Investment Banking Practices
OSC PERSPECTIVE
Shannon O’Hearn Manager, Corporate Finance
Michael Bennett Corporate Finance
DEALER PERSPECTIVE
Paul Le Vay Stockwoods LLP
Jane Ratchford Head of Canadian Compliance, Global
Banking & Markets, BNS
Moderator: John Fabello,Torys LLP
IIROC CLS Conference, December 4, 2012
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Agenda
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Overview: purpose of current regulatory due diligence
standard + business context + existing standards
Overview of new regulatory initiatives
Key Message: importance of thorough due diligence
Key Message: importance/use of internal written policies
Key Message: proof of due diligence through
documentation
Overview of Purpose of Regulatory
Standards
Purposes
1. investor protection
2. foster fair and efficient capital markets
OSA s. 1.1
Principles
1. Balancing the importance of the purposes
2. Timely, accurate and efficient disclosure
3. Regulatory costs and restrictions proportionate to
regulatory objectives OSA s. 2.1
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The Business Context
Different types of equity offerings
Initial Public Offerings
Follow-on Offerings (marketed vs. bought deals)
Role of the investment bank in the transaction
lead – left hand/right hand
book runner
syndicate member
Other participants
Issuer/management
lawyers/auditors/experts/analysts
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Existing Standards
 Underwriters must certify that prospectus contains full, true and plain
disclosure of all material facts OSA s. 59(1)
 Objective: discover and disclose material facts in clear and non-misleading
way
 Other disclosure documents can be incorporated by reference into
prospectus
 Regulatory liability
 s. 122 OSA materially misleading statement in prospectus/ contravention of Ont.
securities law
 conduct contrary to the public interest
 due diligence defence
 Civil liability: s. 130 OSA /common law misrepresentation
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Existing Standards (cont)
 No explicit standards set out in the legislation or case law
 Due diligence defined by industry practices which provide a
measure for due diligence/standard of care
 IIAC Corporate Finance Guidelines – based on jurisprudence and
experience of authors
 Practically
 onus will be on underwriters
 standard will be tailored to facts of each offering, and will be rigorous
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Existing Standards (cont)
 “reasonable investigation” will be fact-specific
 IPO vs. senior issuer
 length and history of relationship with underwriter
 stability/reputation of management
 creditworthiness
 internal and external changes to the business
 reputation of issuer’s auditors/lawyers and length and stability
of relationship with issuer
 if delegate task, responsibility is not delegated
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Existing Standards (cont)
Types of due diligence and who typically performs it
Business due
underwriters
diligence: core
function
of
the
 review of internal and external sources to understand the business
(business plans, budgets, MD&A, industry reports)
 meetings with management/site visits
 use of research analysts
Legal due diligence: underwriters counsel
 opinions re securities, title to assets, legal restrictions etc.
underwriters will be responsible for counsel’s omissions
Auditors/experts:
 may reasonably rely on opinions
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Overview of New Regulatory
Initiatives
OSC Staff Notice 51-719 Emerging Markets Issuer
Review (EMIR)
 Issued by OSC staff on March 20, 2012
 Review conducted in face of notable concerns that surfaced involving some
emerging market issuers (EM issuers) that were listed for trading and raising capital
in our markets
 Assessed quality and adequacy of selected EM issuer’s disclosure of corporate
governance practices
 Assessed adequacy of gatekeeper roles played by auditors, underwriters and
exchanges
 Examined legal vehicles through which EM issuers have accessed our markets
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Overview of New Regulatory
Initiatives (cont)
Four principal concerns arising from EMIR
 Level of EM issuer governance and disclosure
 Adequacy of audit function for EM issuer’s annual financial
statements
 Adequacy of due diligence process conducted by underwriters in
offerings of securities by EM issuers
 Nature of exchange listing approval process
Recommendations for EM
underwriters and exchanges
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issuers,
auditors,
Overview of new regulatory
initiatives (cont)
OSC Staff Notice 51-720 Issuer Guide for Companies
Operating in Emerging Markets
 Issued by OSC staff on November 9, 2012
 Provides assistance to EM issuers and their directors and management on governance and
disclosure practices in light of the unique challenges they face
 Highlights to EM issuers and management potential areas of risk or red flags that may warrant
further scrutiny
 Sets out questions that directors and management of EM issuers should consider when
deciding how to address risks of doing business in emerging markets
 Outlines Staff’s expectations regarding compliance with existing disclosure requirements
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Overview of new regulatory
initiatives (cont)
AREAS OF FOLLOW-UP
Underwriters
 OSC will work with IIROC as it reviews underwriting due diligence standards with a
view of promoting industry best practices and standards in this area
Auditors
 OSC working with CPAB on issues of common interest, including opportunity to share
information permitted by legislation
 Discussions to address concerns about use, access and reliance on foreign component
auditors’ work product
 Examine need for changes in order to respond to other audit related concerns
Exchanges
 Toronto Stock Exchange and TSX Venture Exchange are currently finalizing additional
guidance to address risks associated with listed EM issuers
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KEY MESSAGE: Importance of
thorough due diligence
 Need for professional skepticism and rigour
 Red flags: identify, probe, resolve
 Need to understand issuer and its emerging market business
environment
 Reliance on experts (auditors etc.) – need for professional
skepticism
 Delegation to counsel – ask the right questions to counsel in
emerging market jurisdiction
 Need for critical thinking
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KEY MESSAGE: Importance/use of
internal written processes
 Consider distinctions between primary vs. follow-up offerings; lead vs.
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syndicate participation, etc.
Process of preparing internal written due diligence processes helps identify
potential risk areas
Provides a set of standards to follow (ensure flexibility to address offeringspecific factors)
Must ensure that written processes are “consistently followed”
Need to ensure that application is not rote / proper planning based on specific
risks / attributes of issuer and offering
Need for robust oversight from senior i-banking personnel
Sharing with peer firms enhances overall quality
Processes should (depending on circumstances) address: issuer’s operational
structure, internal controls/risk management, foreign language issues, local
business and cultural issues, asset ownership, related party issues, site visits,
customer/supplier issues, key documents, senior management (conflicts and
competency)
KEY MESSAGE: Proof of due diligence
through documentation
 Documentation of due diligence results
 Provides ongoing record during transaction
 Serves as proof procedures done – ideally reduces liability BUT
creates record for subsequent scrutiny
 Enables (apparent) gaps in procedures to be identified and
remedied through internal and external reviews
 Serves as teaching tool
 Important for “red flag” identification, follow-up and
(especially) resolution
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