Canadian Structured Finance Law : Canadian Structured Finance Law: Securitization/OTC Derivatives Blog by Stikeman Elliot Lawyers & Attorneys

Jason Kroft	Doug Bryce

 As briefly discussed in prior blog posts, the securitized product rules published by the Canadian Securities Administrators (CSA) propose to significantly expand the continuous and periodic disclosure regime applicable to issuers of securitized markets in both the public and private markets. This is a significant departure from the current regulatory regime in the exempt market.

While National Instrument 51-102 Continuous Disclosure Requirements will continue to apply, the newly proposed National Instrument 51-106 Continuous Disclosure Requirements for Securitized Products (NI 41-106) would impose a number of new, additional disclosure requirements specific to issuers of any securitized product that is not a “covered bond” or a non-debt security of a “mortgage investment entity”. These disclosure requirements are largely based on the requirements of Reg AB and certain of the proposed rules from the SEC of April, 2010 relating to ABS and other structured finance products and, therefore, for our readers already familiar with the existing disclosure obligations in force under Reg AB the following summary will be strikingly similar to the disclosure regime that has been in effect for a number of years in the U.S.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

 Michael Rumball

Under the proposed securitized product rules disclosure is also required in respect of certain significant counterparties in a transaction. For the most part the rules follow the pattern set out in Reg AB. The most significant feature of the proposed rule is it requires a certain degree of financial disclosure about the counterparties, depending upon whether the counterparty is considered to be, what will be called for present purposes, a “significant counterparty” or a “very significant counterparty”. For significant counterparties, such disclosure is limited to the selected financial information contained in the MD&A disclosure required of reporting issuers plus the same information for any subsequent interim period ended more than 60 days before the date of the prospectus. For a very significant counterparty, however, the financial statements that would have been prescribed under securities legislation had it been the issuer of securities under a prospectus will need to be provided. The calculation of the threshold levels varies according to the counterparty in question.

Significant Obligors

A “significant obligor” is, generally speaking, an obligor (or group of affiliated obligors) in respect of pool assets representing 10% or more of the asset pool. A very significant obligor is one whose assets represent 20% or more of the pool. In addition, if a significant obligor is an issuer of securitized products and the applicable pool assets are securitized products, then disclosure will need to be made about the underlying securitized products as if the significant obligor were the issuer.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Mark McElheran

The proposed exempt distribution rules published for comment by the CSA on April 1, 2011, if enacted as proposed, will have a very significant impact on the exempt market for securitization transactions and would effectively transform the exempt market for securitized products into a quasi-public market. In addition to narrowing the scope of eligible exempt investors (creating a special category of “eligible securitized product investors”, which has been discussed in a previous post), the proposed amendments to NI 45-106 would also impose significant disclosure obligations at the time of issuance and on a continuous basis and create certification requirements as part of a broader statutory civil liability regime. The proposed changes to the exempt market are a significant departure from traditional securities regulatory policy and its emphasis on the protection of unsophisticated investors.

Information Memorandum Requirements

In order to qualify for the securitized product exemption, the issuer will be required to deliver an information memorandum (IM) to the purchaser, which must (i) disclose sufficient information about the securitized product and securitized product transaction to enable a prospective purchaser to make an informed investment decision; (ii) describe the rights of action that the issuer will have against, among others, the issuer, the sponsor and the underwriter for any misrepresentations in the IM; (iii) describe the relevant resale restrictions; and (iv) not contain a misrepresentation. For a short term securitized product, the IM also has to be in the prescribed form.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Canadian Securities Administrators have recently published for comment proposed rules and rule amendments relating to securitized products. Through this blog we have circulated some of our thoughts on these proposals and will continue to do so over the next several weeks. By so doing we hope to stimulate and encourage a broader and more nuanced consideration and discussion of this significant development in the securitization market

Our ultimate goal is the preparation and submission of a comment letter on the proposals. While we appreciate that a portion of our readership will develop their own responses to the proposals or participate in a response made on their behalf by some sort of formal or informal association, there may be industry participants who, for one reason or another, will not be submitting a formal comment letter. Industry participants interested in consulting with us in the preparation of our comment letter are encouraged to contact us. We would be pleased to discuss our views and hear yours in the process, so that our comment letter represents the views of as broad a cross-section of our readership as is feasible and, should, at the conclusion of such process, you wish to be cited in the letter as supporting the views expressed in it, we would be pleased to do so.

Please feel free to contact any of the following:

• Douglas J. Klaassen (Doug) - dklaassen@stikeman.com
• Jason Kroft - jkroft@stikeman.com
• Mark E. McElheran - mmcelheran@stikeman.com
• Michael D. Rumball - mrumball@stikeman.com

• Comments
• Trackbacks
• Email This
• Print
• Share Link

 Michael Rumball -

As indicated in a previous piece, Item 1 of the proposed CSA rules deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role. In the following, we continue to discuss issues raised by certain of the required disclosure elements relating to the parties to a securitized products transaction.

Issuer
In Reg AB, disclosure is required in respect of “any provisions or arrangements included to address any one or more of the following issues:

(a) Whether any security interests granted in connection with the transaction are perfected, maintained and enforced.

(b) Whether declaration of bankruptcy, receivership or similar proceeding with respect to the issuing entity can occur.

(c) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the sponsor, originator, depositor or other seller of the pool assets, the issuing entity’s assets will become part of the bankruptcy estate or subject to the bankruptcy control of a third party.

(d) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the issuing entity, the issuing entity’s assets will become subject to the bankruptcy control of a third party.”

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Jason Kroft and Doug Bryce -

The securitized product rules proposed by the Canadian Securities Administrators (CSA) seek to, among other things, narrow the class of investors who can buy securitized products on an exempt basis. In subsequent blog pieces, we will investigate the disclosure that is required for exempt offering under the new regulatory regime at the time of issuance as well as on a continuous basis post-issuance.

Item 3 of the proposed CSA rules deals with the various amendments to the current prospectus and registration exemption regime in now found in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106), as well as the proposed new exemption which is specific to securitized products. In the following, we highlight the changes likely to have the largest impact on the Canadian securitized products market.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

 Michael Rumball -

Proposed Form 41-103F specifies the supplementary prospectus disclosure requirements for distributions of securitized products. Item 1 deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role.

The roles specified as being material and, where applicable, the related definitions are as follows:

• Sponsor: the person who organizes and initiates a securitized products transaction by selling or transferring assets, either directly or indirectly, to the issuer.
• Depositor: a person or company in a securitized product transaction who receives or produces pool assets from the sponsor and transfers or sells the pool assets to an issuer of securitized products.
• Arranger: a person or company that arranges and structures a securitized product transaction, but does not sell or transfer assets, direct or indirectly, to the issuer of the securitized products, and in the absence of evidence to the contrary, includes the underwriters for a distribution of securitized products.
• Originator: a person or company that originates receivables, loans or other financial assets that are pool assets.
• Issuer
• Servicer: a person or company responsible for the management or collection of pool assets or making allocations or payment distributions to a holder of a securitized product, that does not include a trust of an issuer of securitized products or for the securitized product that makes allocations or payment distributions.
• Trustee
• Any other party with a material role including, without limitation, a custodian, intermediate transferor or liquidity provider in the secondary market.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Michael Rumball -


As indicated in our previous posting, the Canadian Securities Administrators have proposed a new framework for the regulation of securitized products which includes:

•enhanced disclosure requirements for securities issued under a prospectus

•enhanced continuous disclosure requirements

•certification requirements

•rules narrowing the class of eligible investors in the exempt market

•rules prescribing disclosure, both initial and ongoing, in respect of exempt distributions.

We will be providing regular commentary in this forum on the proposed framework and its potential implications for securitization market participants. This is our first such submission and touches upon the initial, threshold, issue of applicability. What all of these proposed rules have in common is that they apply to “securitized products”, which is the subject of a new definition.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 25, the Canadian Securities Administrators (the CSA) published for comment the proposed National Instrument 41-103 – Supplementary Prospectus Disclosure Requirements for Securitized Products and National Instrument 51-106 – Continuous Disclosure Requirements for Securitized Products (together, the Proposed Rules), along with proposed amendments to National Instrument 52-109 – Certification of Disclosure in Issuers Annual and Interim Filings, National Instrument 45-106 –Prospectus and Registration Exemptions (NI 45-106) and National Instrument 45-102 – Resale of Securities (collectively, the Proposed Amendments, and together with the Proposed Rules, the Proposal).

• Comments
• Trackbacks
• Email This
• Print
• Share Link