Part II – Canadian Securities Regulators Propose New ‘Asset Backed Commercial Paper’ Exemption

By: Brian Koscak, Jonathan Fleisher, Alison Manzer and Michael Brown

The Canadian Securities Administrators (the CSA) have published for comment proposed amendments (the 2014 Proposals) to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). The 2014 Proposals seek to:

  • amend the existing prospectus exemption relating to short-term debt securities by imposing different credit rating requirements and restricting its use to non-securitized products (the Short-Term Debt Exemption) and
  • create a new prospectus exemption for the sale of short-term securitized products backed by traditional or conventional assets (the Short-Term Securitized Product Exemption).

Part I of this series discussed the proposed Short Term Debt Exemption which includes a discussion on the background leading to the publication of the 2014 Proposals. This Part II discusses the proposed Short-Term Securitized Product Exemption.

Proposed Short-Term Securitized Product Exemption

The CSA proposes to exclude short-term securitized products from being distributed under the Short-Term Debt Exemption as well as under the private issuer, friends and family, founders and offering memorandum exemptions. Instead, traditional or conventional short term securitized products would be issued under the new proposed Short-Term Securitized Product Exemption.

For more complex short-term securitized products (such as asset-backed commercial paper that is backed by synthetic assets), neither the Short-Term Debt Exemption nor the private issuer, friends and family, founders and offering memorandum exemptions will be available. As a result, conduits would be required to distribute such securities under other prospectus exemptions, such as the accredited investor exemption, which will cause those securities to be subject to resale restrictions and required the filing of an exempt distribution report with securities regulators.

For the purposes of the 2014 Proposals, a securitized product means a security that is governed by a trust indenture that provides a holder with an interest in an asset pool of cash-flow generating assets in which an issuer has a property interest and which entitles a holder to principal and interest payments. A short-term securitized product means a securitized product that is commercial paper that matures not more than one year from the date of issue.

The proposed Short-Term Securitized Product Exemption would be subject to a number of conditions:

1.      Two credit ratings

To distribute securities under the Short-Term Securitized Product Exemption, a conduit must have credit ratings from at least two designated rating organizations (each being a DRO) that meet or exceed a prescribed minimum rating. The prescribed minimum ratings would be higher than the minimum credit ratings proposed for the Short-Term Debt Exemption (as discussed in Part I of this series). The exemption would not available if any of the conduit’s credit ratings are under review by the relevant DRO and it would be reasonable for the conduit to expect that the review would result in the credit rating being withdrawn or downgraded below the prescribed minimum level.

The permitted credit ratings must be at or above the following categories:

  • R-1 (high) (sf) if issued by DBRS Limited;
  • F1+  (sf) if issued by Fitch Inc.
  • P-1  (sf) if issued by Moody’s Canada Inc.; and
  • A-1 (high) (sf) if issued by Standard & Poor’s Rating Services (Canada).

2.     Enhanced liquidity support

A conduit distributing securities in reliance on the Short-Term Securitized Product Exemption would be required enter into one or more agreements that obligate one or more liquidity providers to provide funds to the conduit to enable the conduit to satisfy all of its obligations to pay principal and interest as that class of short-term securitized product matures.

For the purposes of the Short-Term Securitized Product Exemption, a liquidity provider must generally be a deposit-taking institution that is regulated by either the Office of the Superintendent of Financial Instructions or a similar provincial body, and must also have a specified level of credit rating from at least two DROs.  The limitation of acceptable liquidity providers will significantly affect access to and competitiveness in the non-bank securitization sector.  Consideration should be given to expanding the allowed liquidity providers while  maintaining prudence such as requiring Basle III or equivalent (US) compliant financial institutions.

3.      Permitted assets only

As noted above, only traditional or conventional securitized products may be distributed under the Short-Term Securitized Product Exemption. As a result, the conduit would be required to undertake or agree that the conduit’s asset pool will only consist of traditional asset classes – specifically, mortgages, leases, loans, receivables, or royalties. Securities of other conduits subject to the same asset class restrictions would also be permitted. As a result, securities backed by asset pools that includes credit derivatives or highly structured or leveraged credit products would not be permitted to utilize the proposed Short-Term Securitized Product Exemption.

4.      Priority ranking

If the conduit has issued more than one class of short-term securitized product, the short-term securitized product to be distributed, under the exemption, when issued, will in the event of bankruptcy, insolvency or winding-up of the conduct, rank higher in priority of claim than any other outstanding class of short-term securitized product issued by the conduit.  However, further guidance from the CSA will be required to determine whether or not this assessment is made on an asset pool basis.

5.      Mandatory Disclosure

The Short-Term Securitized Product Exemption is also conditional upon disclosure, both at the time the product is initially distributed, and thereafter on an on-going basis.

a)      Disclosure at time of distribution

Subject to certain exceptions, a conduit will have to prepare an information memorandum (IM) that it must make reasonably available to each investor. In particular, proposed Form 45-106F7 would require an IM to include disclosure under the following headings:

  1. Significant parties to the securitization transaction
  2. Structure
  3. Eligible assets
  4. Liquidity support on credit enhancements
  5. Property interests in asset pool and priority payments
  6. Compliance or termination events
  7. Description of short-term securitized product and offering
  8. Additional information about the conduit
  9. Material agreements
  10. Summary of asset pool
  11. Date of information memorandum
  12. Representations re no misrepresentation

b)      Ongoing periodic and timely disclosure

In addition to the IM, a conduit would be required to undertake or agree with each investor that it will provide a monthly disclosure report, current as at the last business day of each month. The conduit will have to make the monthly disclosure report reasonably available to investors within 30 days of month end. Proposed Form 45-106F8 would require a monthly disclosure report to include disclosure under the following headings:

  1. Significant parties to the securitization transaction
  2. Program information
  3. Flow of funds
  4. Asset pool
  5. Second-level assets
  6. Asset pool changes
  7. Program compliance and termination events
  8. Securitization transaction summary
  9. Material agreements
  10. Fees and expenses
  11. Alignment of interest and conflicts of interest
  12. Alignment of interest and conflicts of interest

A conduit will also be required to undertake or agree to make a timely disclosure report in the event of a change to the information in the most recent monthly disclosure report or the occurrence of an event that would reasonably be expected to materially affect either payments on that class of short-term securitized product or performance of the assets in the asset pool. The timely disclosure report must be made available to Purchasers within 2 days of the conduit becoming aware of the change or event.

c)       Filing of Disclosure and Potential Liability Issues

Conduits will not be required to file the above disclosure with any Canadian securities regulators, but will be required to undertake to deliver the monthly and timely disclosure reports to the regulators upon request.

Unlike previous proposals, the 2014 Proposals do not provide additional statutory rights of actions for misrepresentations in an IM, monthly disclosure report or timely disclosure report beyond those that already exist in a jurisdiction. However, as the application of such rights vary across jurisdictions, we recommend that each conduit carefully consider the applicable law within each jurisdiction in which it operate to determine the scope of exposure (if any) it may have with respect to a potential misrepresentation.


The decision to require disclosure at the asset pool level relieved many of the concerns expressed in the initial proposal avoiding privacy and sensitive competitive information concerns.  The level and extent of disclosure, for the contemplated asset classes, will add administrative cost but should not hamper participation or competiveness in the sector.

Comment period

The comment period for the 2014 Proposals ends on April 23, 2014. A copy of the 2014 Proposals can be found here.

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This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

Brian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Exempt Market Dealers Association of Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee. Brian can be reached by phone at 416-860-2955, by e-mail at or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at

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