Ontario Securities Fee delivers steering on ‘trading relationship’ and defence of reliance on authorized tips

On March 28, 2022, the Ontario Securities Commission (OSC) released a deserves conclusion in the circumstance of Photo voltaic Cash flow Fund (Re). The decision offers advice on the interpretation of “trading relationship” underneath segment 44(2) of the Ontario Securities Act (the Act), which prohibits generating misstatements about matters which investors would look at related in choosing whether to enter into trading or advising associations.

The determination also offers direction to respondents named in OSC administrative proceedings on the conditions in which the defence of reliance on authorized suggestions is accessible to fees of securities regulation wrongdoing, especially in scenarios that allege misstatements in securities filings.

The circumstance

The company respondent, Photo voltaic Cash flow Fund Inc. (SIF Inc.), designed and managed photo voltaic farms. SIF made a variety of funds which elevated revenue from the public by means of exempt industry dealers who invested in photo voltaic projects and then paid SIF Inc. to present consulting, growth and management solutions.

OSC Staff’s Statement of Allegations focused on two revenue cash established by SIF. The initial earnings fund, referred to as SIF #1, lifted nearly $60 million from investors who bought the units from SIF Inc. but through an exempt market place supplier. SIF #1 loaned dollars to the 2nd revenue fund, SIF #2, which was used for a variety of functions, together with distributions to SIF #2 unitholders and to pay the costs of exempt market sellers. OSC Staff alleged that this use of cash was not permitted by the SIF #1 supplying memorandum and therefore breached sections 44(2) — the prohibition on building misstatements relevant to buying and selling or advising relationships — and 126.1(1)(b) — the prohibition on fraud — of the Act, and constituted conduct opposite to the community curiosity.

In addition to SIF Inc., OSC Workers pursued allegations versus the company’s different former officers.


Portion 44(2) of the Act does not apply in these situations

Section 44(2) of the Act gives

Representation prohibited

(2) No man or woman or firm shall make a statement about any subject that a affordable trader would take into account suitable in determining whether or not to enter into or maintain a buying and selling or advising connection [emphasis added] with the human being or enterprise if the statement is untrue or omits details required to prevent the assertion from getting phony or misleading in the conditions in which it is produced.

OSC Team alleged that SIF Inc. was in a buying and selling connection with SIF #1 unitholders since, between other items: buyers purchased their models immediately from SIF Inc. SIF Inc. decided investors’ eligibility to purchases units SIF Inc. wrote to investors to verify information of their device purchase and to invite concerns SIF Inc. determined the redemption selling price for SIF #1 models and SIF Inc. could cancel models at its discretion.

The Fee panel disagreed with OSC Team and discovered that a “trading or advising relationship” was vital to part 44(2) of the Act and that a “trading relationship” had never been observed to exist except with respect to activities that ended up (or ought to have been) done by registrants. The panel expressed worry that if OSC Staff’s contention was adopted, “every issuer could confront a related obtaining.” The Commission panel expressly turned down the notion that the administrative and investor romance activities generally carried out by exempt market issuers could give increase to a “trading connection.”

The use of resources was opposite to segment 126.1(1)

Area 126.1(1)(b) of the Act gives

Fraud and market manipulation

126.1 (1) A human being or corporation shall not, specifically or indirectly, have interaction or participate in any act, apply or training course of conduct relating to securities, derivatives or the underlying curiosity of a derivative that the individual or corporation is aware of or fairly ought to know,


(b) perpetrates a fraud on any person or company.

The Commission panel determined that the time period “fraud” in portion 126.1(1)(b) expected OSC Employees to establish that the “respondent knew or ought fairly to have recognized that [SIF Inc.] perpetrated a fraud”.

“Fraud” consists of unauthorized makes use of of money

The Commission panel uncovered that the fraud prohibition in part 126.1(1)(b) contains a “use of money that is inconsistent with what was promised to buyers.” In this scenario, the Commission panel observed that despite the fact that the SIF #1 providing memorandum was to some degree ambiguous, it did not authorize the use of investor cash to shell out distributions to SIF #2 investors. The panel further more identified that SIF #1 traders ended up exposed to a chance of deprivation for the reason that the loans to SIF #2 developed a hazard that those people monies would not be repaid.

The “reasonable reliance on legal advice” defence was not made out

The Commission panel discovered that a “reasonable reliance on legal advice” defence is accessible the place Staff alleges fraud contrary to section 126.1(1)(b) of the Act. To avail them selves of the defence, respondents should build that

  1. the law firm had enough information of the points on which to foundation the suggestions
  2. the lawyer was skilled to give the guidance
  3. the suggestions was credible supplied the situation under which it was specified
  4. the respondent manufactured sufficient enquiries and relied on the assistance

The Commission panel located that although the respondents experienced received lawful guidance from a skilled securities law firm that SIF #1 was permitted to lend money to linked entities, this information could not be relied on due to the fact the law firm experienced not been asked precisely if people funds could be utilized to spend SIF #2 distributions or exempt market supplier fees. As this sort of, none of the respondents could avail them selves of the defence.

No carry out contrary to public fascination

Notwithstanding owning identified fraud, the Fee panel did not uncover that the respondents experienced engaged in conduct contrary to the public fascination. This was for the specialized explanation that OSC Staff’s Statement of Allegations contained a bare allegation of conduct “contrary to the public interest” without particulars.


Even although unique provisions of the Act — these types of as segment 44(2) — may not specifically apply to specified sector members, other provisions of the Act, as well as the Commission’s general public-desire jurisdiction, capture impugned carry out normally prohibited by the Act.

Issuers must meticulously scrutinize supplying paperwork for limitations on the use of money as unauthorized takes advantage of may perhaps be found to be fraudulent or misleading. Issuers searching for to rely on lawful assistance really should also guarantee that they provide comprehensive particulars to their counsel and acquire actuality-specific assistance.

In the context of a regulatory continuing, respondents need to take into consideration very carefully the implications of waiver of privilege when trying to depend on legal assistance. Though constitutional and other lawful protections make apparent that Staff members and other investigative bodies can not drive respondents to waive privilege, Fee instances propose challenges in relying on lawful information as a most important defence with no waiving privilege about that information. Respondents, with the assistance of counsel, need to thoroughly navigate how the reality of lawful assistance is framed in the context of a defence. They need to also thoughtfully harmony the relativities and probable risks affiliated with a waiver of privilege, which includes the extent of the waiver, versus the advantages of relying on legal assistance.

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