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Prudent Investor Update, April 18, 2018

No Free Pass on Securities Regulations

As some municipalities review their options under the new prudent investor regulation, it helps to know more about how securities laws and the Ontario Securities Commission (OSC) fit into the picture.

As per applicable Municipal Act regulations, a municipality wishing to invest under the prudent investor regime will need to pass a by-law and adopt an investment policy. From there, it can either establish its own investment board, join an existing investment board (originally established by another municipality or municipalities), or, together with another municipality, create a joint investment board. And that’s where the securities laws become relevant.

The OSC is Ontario’s securities and capital markets regulator, responsible for the administration of the Securities Act and the regulations made under that Act. One of the pillars of securities regulation is that any individual or entity whose business is to provide advice on investing in securities must be registered with the OSC. There are certain exemptions from this registration requirement, and the OSC can grant a discretionary exemption under certain conditions.

The “business of advising”
According to Susan Han at WeirFoulds, staff of the OSC have consistently taken the view that while a municipality can invest and manage its own money (e.g. through its Finance and Treasury staff), if another person is engaged to manage that municipality’s money, that other person may be carrying on “the business of advising” and would have to be registered or be exempt from registration. A straightforward example is if a municipality hires an outside money manager to look after its bond portfolio. That outside money manager has to be licensed with the OSC.

But it goes beyond that. If an upper-tier municipality wishes to manage money belonging to a lower-tier municipality, the upper-tier municipality could also be considered to be carrying on the “business of advising.” So, for example, York Region obtained an exemption allowing its staff to invest on behalf of its lower-tier municipalities. The lesson here is that there is no automatic exemption from securities laws just because the activity is considered in another piece of legislation such as the Municipal Act.

Right now, it is not clear whether the OSC will consider an investment board, or joint investment board for a number of municipalities, to be “engaged in the business of advising.” ONE Investment is currently seeking OSC direction on this.

ONE Investment
ONE Investment has already done a lot of analysis and homework on the securities law aspects of the prudent investor regime. It is planning to offer turnkey solutions to municipal governments under the prudent investor standard, subject to regulatory approval. In addition to providing existing products, plans include providing municipalities with transition advice, by-law support, and new investment products.

The program being developed is designed to offer municipal governments a compliant, cost-effective way to take part in the broader options available with the prudent investor standard – regardless of how much they may be investing. The goal is to help municipal governments reduce some of the substantial start-up costs of creating their own investment board. Investment options in which municipalities pool their resources and leverage their collective purchasing power can help to lower management costs, including the cost of and deliver better returns through economies of scale.

Watch this space for more developments in the days ahead.