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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 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
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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 diligence: core function of the underwriters 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 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 issuers, auditors, underwriters and exchanges
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Overview of new regulatory initiatives (cont)
OSC Staff Notice 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. 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 offering- specific 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)
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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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