Stronger over-the-counter disclosure rules take effect

New rule imposes disclosure requirements on issuers that are quoted on the U.S. OTC markets and have a “significant connection” to a Canadian jurisdiction

By: James Langton
July 31, 2012 July 31, 2012
13:30

A new rule is to take effect today that aims to combat the abuse of U.S. over-the-counter markets by companies based in Canada.

Earlier this year, the Canadian Securities Administrators (CSA) published advance notice of a rule designed to combat the damage caused by Canadian firms engaging in abusive activities in the U.S. OTC markets — such as creating shell companies to carry out stock promotion schemes.

Canadian regulators strengthen over-the-counter rules

The rule, which comes into force July 31 (except in Ontario), imposes disclosure requirements on issuers that are quoted on the U.S. OTC markets and have a “significant connection” to a Canadian jurisdiction, such as businesses that are directed from Canada. It also restricts the use of certain prospectus, takeover and disclosure exemptions by these sorts of companies; and, imposes restrictions on the resale of private placement securities.

When the CSA announced the rule back in May, it said that the rule aims to address the reputational damage suffered by Canada’s capital markets when Canadian firms use U.S. markets to abuse investors; and to help protect legitimate issuers and dealers.

The rule provides a transition period for OTC reporting issuers that are not filers with U.S. regulators, although the transition period does not apply in BC, which already has a rule in this area.