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EMDs and Conflicts of Interest Related and Connected Issuer Disclosure
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By: Brian Koscak, EMDA Chairman and Partner, Cassels Brock & Blackwell LLP

An exempt market dealer (EMD) must not make a recommendation in any medium of communication to buy/sell/hold a security issued by the EMD or a "related issuer” or "connected issuer” of the EMD unless the EMD discloses, in the same medium of communication, the nature and extent of the relationship or connection between the fi rm and issuer (e.g., related and/or connected issuer disclosure). The terms related issuer and connected issuer are defi ned in National Instrument 33-105 Underwriting Conflicts (NI 33-105)

Section 13.6 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations sets out the disclosure requirements for EMDs who have relationships with related and connected issuers. However, many EMDs may not know that related and connected issuer disclosure requirements are also set out in NI 33-105.

Some EMDs may be of the view that NI 33-105 only applies to investment dealers that act as underwriters in prospectus off erings. This is incorrect. As is made clear by the wording of section 2.3 of the Companion Policy to

NI 33-105, the disclosure obligations in NI 33-105 generally apply to EMDs that act as principal or agent in connection with most but not all types of prospectus-exempt distributions, including distributions made in reliance on the accredited investor exemption in section 2.3 of NI 45-106 Prospectus and Registration Exemptions. In Ontario, NI 33-105 does not apply to EMDs selling mutual fund securities or the following "exempt securities”:

Sections 2.20 [Private investment club], 2.21 [Private investment fund - loan and trust pools], 2.35 [Short-term debt], 2.38 [Not for profit issuer] and 2.39 [Variable insurance contract] of National Instrument 45-106 Prospectus and Registration Exemptions.

Paragraphs 73(1)(a) and (b)of the Securities Act (Ontario) [This references the exemptions in s. 35(1) to (4), namely debt securities issued or guaranteed by the federal or provincial government, certain municipal
debt, certain secured indebtedness as defined in the PPSA, certain indebtedness secured by a mortgage]
Sections 2.4 to 2.6 of OSC Rule 45-501 [certain securities issued by a co-op or credit union].

Paragraphs 2.34(2)(b),(d.1),(e) and (f) of National Instrument 45-106 Prospectus and Registration Exemptions [certain types of "Specified debt” issued by the Asian Development Bank, the European Bank for Reconstruction and Development, Inter- American Development Bank, International Bank for Reconstruction and Development].

If the security is not an exempt security and the EMD is acting as an underwriter (as defined in subsection 1(1) of the Securities Act (Ontario)) in the private placement, NI 33-105 generally requires that any document used by an EMD to sell securities of the issuer contain the disclosure required by Appendix C to NI 33-105.

Appendix C would require the following types of disclosure:

• Certain statements on the face page of the offering document describing the related or connected issuer relationship, the basis for the relationship, and a cross reference to further information in the offering document about this relationship (sections 1 to 3);
• Certain statements in the body of the offering document describing the related or connected issuer relationship and the basis for the relationship (sections 4 and 5);
• If the issuer is a connected issuer because of indebtedness, certain prescribed information about the indebtedness (e.g., amount of indebtedness, whether the issuer is in compliance with terms of indebtedness, any waivers of breaches, the nature of any security for the indebtedness, the extent to which the financial position of the issuer has changed since the indebtedness was incurred) (section 6);
• Certain prescribed information about the involvement of the EMD and each related issuer of the EMD in the decision to make the offering and the determination of the terms of the offering (section 7);
• Certain prescribed information about the effect of the offering on the EMD and each related issuer of the EMD, including information about the extent to which the proceeds of the offering will be applied for the benefit of the EMD and each related issuer of the EMD (section 8);

• If a portion of the proceeds will be applied to indebtedness (principal or interest) owed by the issuer (or certain related persons of the issuer) to the EMD or arelated issuer of the EMD or the redemption of certain securities of the issuer held by the EMD or a related issuer of the EMD, certain prescribed information about the indebtedness or shares (section 9); and
• Any other materials facts with respect to the relationship or connection between the issuer and the EMD and each related issuer of the EMD (section 10).

This is a summary only. Readers are referred to Appendix C of NI 33-105 for the full requirements. If EMDs are looking for samples of this type of related and connected issuer disclosure, they can find examples in certain prospectuses filed on SEDAR.The same rules generally apply whether in a prospectus or offering memorandum.

The contents of this article do not constitute legal advice and is provided for information purposes only. This article does not necessarily reflect the opinions of Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this article are not intended to be used as a substitute for specific legal advice or opinions.

For more information contact: Brian Koscak

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