1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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)

15. 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