Canadian securities regulators are adopting a new rule to combat the abuse of over-the-counter markets in the United States by companies based in Canada.

The Canadian Securities Administrators (except Ontario) Thursday published advance notice of the rule, which aims to address the damage that is caused to the reputation of Canada’s capital markets when Canadian firms engage in abusive activities in the U.S. OTC markets — such as creating shell companies to carry out stock promotion schemes.

The rule, which follows a similar rule that was adopted by British Columbia in 2008, would impose disclosure requirements on issuers with a significant connection to a Canadian jurisdiction and whose securities are quoted in the U.S. OTC markets; it would also restrict the use of certain prospectus, takeover and disclosure exemptions by these sorts of companies; and, impose restrictions on the resale of private placement securities.

“The reputation of Canada’s capital markets have been negatively impacted by market participants who engage in questionable activities through the OTC markets in the United States,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission. “We have enacted the OTC rule to address this reputational harm, and to help protect legitimate issuers, investment dealers, and other market participants in participating jurisdictions.”

The rule defines a significant connection to Canada as businesses that are directed or administered from a Canadian jurisdiction, including where executive functions take place, and where its directors and officers are located, but not if the only connection is an asset of the issuer, such as a mineral property, or non-executive personnel. If an OTC issuer employs a firm in Canada to conduct promotional activities, regulators will likely conclude that the issuer is carrying out promotional activities from that jurisdiction, it notes.

The rule, which is expected to come into force on July 31, provides a transition period for OTC reporting issuers that are not filers with U.S. regulators, although the transition period does not apply in B.C. In adopting the new rule, B.C. will revoke its existing rule in this area, which the B.C. Securities Commission says will streamline compliance, and improve investor protection.