(September 30, 2005) The Ontario Securities Act is being amended and compliance teams will likely need to make adjustments going forward in order to accommodate the rules under Ontario’s new civil liability regime, compliance experts say.

Bill 149 comes into effect on December 31, 2005. The new legislation, proclaimed in August, gives stock market or secondary market investors the right to sue public companies that issue misleading financial reports, press releases and other disclosure documentation.

Companies who issue misleading or incorrect statements open themselves up to lawsuits if investors can reasonably claim that they relied on the information to make a decision about their holdings in the company. Analysts’ jobs might also become more difficult in the future — the rules also apply to any oral statements made by company executives and investment managers or anyone else with the actual, implied or apparent authority to speak on behalf of the fund.

Primary market investors, those who buy shares being sold to the public as part of an initial public offering, already have a statutory right to sue if the information presented in a prospectus is false or misleading or if the company omits important information. More than 90% of all equity trading in Canada however occurs in the secondary market where investors generally buy shares from other investors.

The rules will apply to investment funds as well, even though the language used in drafting the legislation is not well-tailored to the products. Mutual funds are already sold by prospectus and by their very nature and structure, they also have relatively few “material facts” that would significantly affect their market price.

Lawyers presenting at IFIC’s annual conference in Toronto on Thursday said a strict interpretation of the legislation would seem to suggest that the rules would not apply to most investment funds.

In discussing the matter with Minister of Finance and the Ontario Securities Commission however, an IFIC working group found that that legislation was indeed intended to apply to mutual funds. In overseeing cases, judges are more likely to accept a broader view of the legislation rather than a strict interpretation of the law. “They don’t like technical defences,” warns IFIC legal counsel Stacey Shein.

To guard against the threat of litigation mutual fund companies will need to beef up their already elaborate compliance policies. Don MacDonald, vice president and legal department counsel at Investors Group Financial Services, advised company executives gathered at the conference to review existing policies, create a disclosure policy and establish a disclosure committee that includes legal representation and employees senior enough to know what material changes are taking place at the company.

Perhaps most importantly, companies need to implement an awareness and training program to help employees recognize that potential liability arises whenever a document is released, this includes sales and marketing materials, or when a public statement is made. Disclosure policies, MacDonald points out, are not worth very much if people don’t know about them.

Fortunately, the legislation includes a number of provisions to safeguard against abusive or frivolous lawsuits. Among them, the court must decide if a case has merit or not before allowing it to go ahead, proceedings can not be discontinued or abandoned without court approval, and the winning party is entitled to the costs of the litigation.

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  • Ontario introduces long-awaited investor protection measures

    • It remains to be seen if these new rules will help or hurt the quality of information available to investors. Although, in theory, materials will be more reliable, having all public information picked over by lawyers before it is released raises concerns that information in the future will be too watered down to be useful or meaningful in the decision making process.

    MacDonald points out that mutual fund companies are in the business of selling products and informing clients about their investment decisions. “There is still the business motivation to get information out there, irrespective of legal motivations,” he says. “Procedures need to be tightened, but this won’t reduce the amount of disclosure clients receive.”

    Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

    (09/30/05)