Janet McFarland reports in the Globe and Mail :
Canadian regulators are proposing major new restrictions on the sale of securitized financial products like asset-backed commercial paper, arguing unsophisticated investors should not be buying products that are potentially too complex and risky.
The Canadian Securities Administrators, an umbrella group for Canada’s provincial securities commissions, has unveiled a host of reforms to govern the sale of securitized products, responding to calls for tighter regulation following the melt-down of Canada’s $32-billion market for non-bank asset backed commercial paper (ABCP) in the summer of 2007.
In the CSA’s own words:
A key element of the proposed rules is the narrowing of the class of investors who can buy securitized products in the exempt market to a smaller, more sophisticated group. This feature is intended to help investors avoid products whose risk profiles and underlying components may be unsuitable for their investment objectives.
The CSA is seeking input from investors and marketplace participants on the proposals. The comment period is open until July 1, 2011.
The Requiest for Comment states:
The following is a summary of several significant features of the Proposed Exempt Distribution Rules.
(i) Removal of existing prospectus exemptions
We propose that the following prospectus exemptions in NI 45-106 be unavailable for distributions of securitized products that are not covered bonds or non-debt securities of MIEs:
- • section 2.3 (the accredited investor exemption);
- • section 2.4 (the private issuer exemption);
- • section 2.9 (the offering memorandum exemption);
- • section 2.10 (the minimum amount investment exemption);
- • subsection 2.34(2)(d) and (d.1) (financial institution or Schedule III bank specified debt exemption);
- • section 2.35 (the short-term debt exemption).
Instead, we propose to add a new prospectus exemption for the distribution of securitized products.
(ii) New Securitized Product Exemption (section 2.44)
Proposed section 2.44 contains the new prospectus exemption for distributions of securitized products to an “eligible securitized product investor” purchasing as principal (the Securitized Product Exemption). The definition of “eligible securitized product investor” essentially is the same as the definition of “permitted client” in National Instrument 31-103 Registration Requirements and Exemptions.
The definition comes later:
“eligible securitized product investor” means
(a) a Canadian financial institution or a Schedule III bank;
(b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada
Act (Canada);
(c) a subsidiary of any person referred to in paragraph (a) or (b), if the person owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of the subsidiary;
(d) a person registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer, other than as a scholarship plan dealer or a restricted dealer;
(e) a pension fund that is regulated by either the federal Office of the Superintendent of Financial Institutions (Canada) or a pension commission or similar regulatory authority of a jurisdiction of Canada or a wholly owned subsidiary of such a pension fund;
(f) an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) to (e);
(g) the Government of Canada or a jurisdiction of Canada, or any Crown corporation, agency or wholly-owned entity of the Government of Canada or a jurisdiction of Canada;
(h) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government;
(i) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de gestion de la taxe scolaire de l’île de Montréal or an intermunicipal management board in Québec; (j) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a managed account managed by the trust company or trust corporation, as the case may be;
(k) a person acting on behalf of a fully managed account managed by the person, if the person is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction;
(l) an investment fund if it is one or both of the following:
(i) managed by a person registered as an investment fund manager under the securities legislation of a
jurisdiction of Canada;
(ii) advised by a person authorized to act as an adviser under the securities legislation of a jurisdiction of
Canada;
(m) a registered charity under the Income Tax Act (Canada) that obtains advice from an eligibility adviser or an adviser registered under the securities legislation of the jurisdiction of the registered charity;
(n) an individual who beneficially owns financial assets, as defined in section 1.1 having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million;
(o) a person that is entirely owned by an individual, or individuals referred to in paragraph (n), who holds the beneficial ownership interest in the person directly or through a trust, the trustee of which is a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction;
(p) a person, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements;
(q) a person that distributes securities of its own issue in Canada only to persons referred to in paragraphs (a) to (p);”
I told you that things like this were going to happen! The regulators will not be happy until the only investment options available to retail are homogenized vanilla funds sold by banks, who must be good, since they employ a lot of ex-regulators.