Erratum: CSA Notice of Publication of Amendments Regarding Syndicated Mortgage Loans

Erratum
CSA Notice of Publication of Amendments Regarding Syndicated Mortgage Loans Regulation Amending National Instrument 45-106 Prospectus Exemptions Regulation Amending National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations Amendment to National Instrument 45-106 Prospectus and Registration Exemptions General Instruction Amendment to National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations General Instruction

Please note that an error occurred in the French and English versions of the CSA consultation notice published in section 6.2.2 of the Bulletin on August 6, 2020 (vol. 17, No. 31). This error appeared in Annex B of the notice under "Registration Exemption for Eligible Syndicated Mortgages" in French and "Registration exemption for QSMs" in English.

In the French version, the second paragraph read as follows:
We are not proposing a registration exemption for the distribution of eligible syndicated mortgages in Quebec. The Autorité des marchés financiers is currently developing local regulation to govern mortgage brokerage, and we believe it would be premature to propose a registration exemption for persons distributing such mortgages in Quebec until that framework is in place. In doing so, we will continue to assess whether we should propose a registration exemption for eligible syndicated mortgages in Quebec.

It should have read as follows:
We are not proposing a registration exemption for the distribution of eligible syndicated mortgages in Quebec. The Autorité des marchés financiers adopted on May 1, 2020, local regulation governing mortgage brokerage, and we believe it would be premature to propose a registration exemption for persons distributing such mortgages in Quebec at this time. We will continue to assess whether we should propose a registration exemption for eligible syndicated mortgages in Quebec.

In the English version, the second paragraph read as follows:
We are not proposing a registration exemption for the distribution of QSMs in Québec. The Autorité des marchés financiers is currently developing a local framework and rules to oversee mortgage brokers and dealers, and we think that it would be premature to propose a registration exemption for persons distributing QSMs in Québec until the framework is completed. In developing these new rules, we will continue to assess whether we should propose a registration exemption for the distribution of QSMs in Québec.

It should have read as follows:
We are not proposing a registration exemption for the distribution of QSMs in Québec. The Autorité des marchés financiers adopted on May 1, 2020, a local framework and rules to oversee mortgage brokers and dealers, and we think that it would be premature to propose a registration exemption for persons distributing QSMs in Québec at this time. We will continue to assess whether we should propose a registration exemption for the distribution of QSMs in Québec.

The corrected French and English versions of the CSA notice of publication are published below.

Dated October 1, 2020

CSA Notice of Publication
Amendments Regarding Syndicated Mortgage Loans Regulation Amending National Instrument 45-106 Prospectus Exemptions Regulation Amending National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations Amendment to National Instrument 45-106 Prospectus and Registration Exemptions General Instruction Amendment to National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations General Instruction August 6, 2020

Introduction
The Canadian Securities Administrators (the "CSA" or "we") are making amendments regarding syndicated mortgage loans (collectively, the "amendments") to the following regulatory texts:

• National Instrument 45-106 Prospectus Exemptions ("NI 45-106") and National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations ("NI 31-103");
• National Instrument 45-106 Prospectus and Registration Exemptions General Instruction ("NI 45-106 GI") and National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations General Instruction ("NI 31-103 GI").

The amendments were initially published for comment on March 8, 2018 (the "2018 Draft") and a revised version was published for a second round of comments on March 15, 2019 (the "2019 Draft").

Object
The amendments include changes to certain prospectus and registration exemptions available for the distribution of syndicated mortgage loans, including the following:

• elimination of the prospectus and registration exemptions provided in section 2.36 of NI 45-106 and section 8.12 of NI 31-103 (the "mortgage loan exemptions"), respectively, for the distribution of syndicated mortgage loans in Prince Edward Island, Nova Scotia, Nunavut, Ontario, Newfoundland and Labrador, the Northwest Territories, and Yukon[1];
• introduction of additional conditions to the exemption for distribution by way of offering notice provided in section 2.9 of NI 45-106 (the "offering notice exemption") that will apply when the exemption is used to distribute syndicated mortgage loans;
• amendment to the prospectus exemption for closed issuers provided in section 2.4 of NI 45-106 (the "closed issuer exemption") so that it cannot be relied upon for the distribution of syndicated mortgage loans.

Summary of Changes to the 2018 Draft
We received 26 comments in response to the 2018 Draft.
In light of the comments received:

• Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador proposed prospectus and registration exemptions as dealers, and Alberta and Quebec proposed a prospectus exemption, for eligible syndicated mortgage loans, which are similar to the exemptions already available in British Columbia under Rule 45-501 Mortgages of the British Columbia Securities Commission (the "Rule 45-501");
• Alberta proposed a prospectus exemption for syndicated mortgage loans distributed to authorized clients, which is similar to that for syndicated mortgage loan distributions to institutional investors provided by Rule 45-501;
• we proposed changes to the amendments relating to the offering notice exemption, including the following:
  o an amendment to the date of the property appraisal report so that it falls within 6 months, rather than 12 months, prior to its delivery to the purchaser; o the elimination of the draft mortgage broker attestation; o the addition of guidance regarding the identity of the issuer of the syndicated mortgage loans;

[1] Syndicated mortgage loans are already excluded from the mortgage loan exemptions in Alberta, British Columbia, Manitoba, New Brunswick, Quebec, and Saskatchewan.

• we changed the proposed effective dates so that all amendments come into force simultaneously, rather than the prospectus-related amendments coming into force before the registration-related amendments.

These draft amendments were published for comment as part of the 2019 Draft and are substantially included in the amendments.

Summary of Changes to the 2019 Draft
We received 11 comments in response to the 2019 Draft. The comments are summarized in Annex A to this notice.

The amendments are substantially identical to those in the 2019 Draft. In light of the comments received, the following changes have been made:

• we clarified the definition of the term "professional association";
• we added examples of potential risk factors in the instructions to section 3 of Annex 45-106A18, Additional Information to be Provided in the Offering Notice for Syndicated Mortgage Loans ("Annex 45-106A18");
• we revised section 7 of Annex 45-106A18 to include information on the potential subordination of the syndicated mortgage loan and clarified the method for calculating the loan-to-value ratio;
• we deferred the effective date to March 1, 2021;
• the authorities of certain jurisdictions are proposing additional changes to their local applicable exemptions for syndicated mortgage loans, as stated in the local annex for those jurisdictions.

Impact on Investors
Investors in syndicated mortgage loans relying on the offering notice exemption will be entitled to additional information about their investment. We expect this will help them make informed decisions, while allowing participating registered persons to better meet their obligations in this regard.

Investors will also benefit, in all jurisdictions, from the protections associated with the participation of a registered person in the distribution.

Expected Costs and Benefits of the Amendments
The expected costs and benefits of the amendments are expected to be substantially identical to those of the March 2018 Draft. In jurisdictions where local amendments are implemented, including an exemption for eligible mortgage loans, an annex to this notice may contain additional information.

Other Alternatives Considered
We considered implementing the 2019 Draft in its initial form as well as other alternatives suggested by stakeholders in Annex A.

Local Interest Points
An annex to this notice is published in every interested jurisdiction where amendments to local securities legislation are proposed, including to local notices or other local policy documents. It may also contain any other information that relates only to the interested jurisdiction.

In some jurisdictions, implementation of the amendments requires ministerial approval. Subject to the approval of the competent ministers, the amendments will come into force on March 1, 2021.

Content of Annexes
Annex A – Summary of Comments and Responses
Annex B – Local Interest Points (Quebec)

Questions
For any questions, please contact one of the following persons:
Autorité des marchés financiers
Alexandra Lee
Regulatory Analyst
514 395-0337, ext. 4465 alexandra.lee@lautorite.qc.ca

Ontario Securities Commission
David Surat
Senior Legal Counsel, Corporate Finance
416 593-8052 dsurat@osc.gov.on.ca

Matthew Au
Senior Accountant, Corporate Finance
416.593-8132 mau@osc.gov.on.ca

Melissa Taylor
Legal Counsel, Corporate Finance
416 596-4295 mtaylor@osc.gov.on.ca

Paul Hayward
Senior Legal Counsel, Compliance and Registrant Regulation 416 593-8288 phayward@osc.gov.on.ca

Adam Braun
Legal Counsel, Compliance and Registrant Regulation 416 593-2348 abraun@osc.gov.on.ca

Alberta Securities Commission
Lanion Beck
Senior Legal Counsel
403 355-3884 lanion.beck@asc.ca
Jan Bagh
Senior Legal Counsel
403 355-2804 jan.bagh@asc.ca

British Columbia Securities Commission
Leslie Rose
Senior Legal Counsel, Corporate Finance
604 899-6654 lrose@bcsc.bc.ca

Financial and Consumer Affairs Authority of Saskatchewan Mikale White Legal Counsel, Securities Division 306 798-3381 mikale.white@gov.sk.ca

Commission des services financiers et des services aux consommateurs, Nouveau-Brunswick Ella-Jane Loomis Senior Legal Counsel, Securities 506 453-6595 ella-jane.loomis@fcnb.ca

Manitoba Securities Commission
Sarah Hill
Legal Counsel
204 945-0605 sarah.hill@gov.mb.ca

Nova Scotia Securities Commission
H. Jane Anderson
Executive Director and Secretary to the Commission 902 424-0179 jane.anderson@novascotia.ca

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ANNEX A
SUMMARY OF COMMENTS AND RESPONSES

Stakeholder
Canadian Institute of Appraisers (Keith Lancastle) The Canadian Advocacy Council for Canadian CFA Institute Societies Canadian Foundation for Advancement of Investor Rights (Ermanno Pascutto and Vanisha Sukdeo) Firm Capital Corporation (Eli Dadouch) Foremost Financial Corporation (Evan Cooperman and Ricky Dogon) MarshallZehr Group (Murray Snedden) Ontario Mortgage Investment Companies Association (Adam Rose, Ricky Dogon and Robert Trager) Ordre des évaluateurs agréés du Québec[1] The Private Capital Markets Association (Craig Skauge, Diane Soloway, Frank Laferrière and Georgina Blanas) PMC Funding (Stephen Lidsky) Vector Financial Services Limited (Mitchell Oelbaum)

Number Comment Response
Support for the objectives of the draft amendments

1. Six stakeholders support the general objectives of improving investor protection and harmonizing the regulation of syndicated mortgage loans. One welcomes the efforts made by the CSA and their provincial partners to fill gaps in investments in such loans to protect the public and mitigate the risk of mortgage fraud. One stakeholder fully agrees with the objectives underlying the draft, namely to introduce additional investor protection mechanisms for the distribution of syndicated mortgage loans.
   We thank stakeholders for their support and comments.

[1] Submitted as part of the consultation on the initial publication of March 8, 2018.

Number Comment Response
2. One stakeholder recognizes the need to monitor more closely companies offering investors loans that do not suit them, but believes that new obligations should be limited to "equity financing" and not target private syndication agents for mortgages.
This project aims in particular to address concerns regarding the inappropriate distribution of high-risk investment products in the context of real estate projects under the current prospectus and registration exemptions for mortgage loans. However, the amendments primarily aim to substantially harmonize the obligations applicable to syndicated mortgage loans across the CSA. In Prince Edward Island, Nova Scotia, Nunavut, Ontario, Newfoundland and Labrador, the Northwest Territories, and Yukon, the exclusion of syndicated mortgage loans from the prospectus and registration exemptions for mortgage loans will conform the treatment of these investments to that currently reserved for them in Alberta, British Columbia, Manitoba, New Brunswick, Quebec, and Saskatchewan.

3. One stakeholder finds laudable the public order objective of the project to protect investors/lenders while avoiding systemic risk that would result from the syndication of investments in securities disguised as mortgage loans. According to him, this is a good practice and it is clearly in the long-term strategic interest to have a viable market for the sector that meets the criteria for adequate credit granting based on the risk tolerance of investors.
   We thank the stakeholder for his support and comment. Regarding the exemptions applicable to eligible syndicated mortgage loans in certain jurisdictions, we are convinced that they are restricted to mortgage loans that do not raise the same investor protection concerns as the investments on which the project is intended to focus.

However, in the absence of amendments expanding the definition of "eligible syndicated mortgage loan", the drafts would, in his opinion, lead to a decrease in available credit and adverse impacts.

Participation of Individual Investors
4. One stakeholder suggests, in the context of Ontario's mortgage lending legislation, to completely prohibit individual investors from investing in non-eligible syndicated mortgage loans.
We are aware of concerns surrounding the offering of non-eligible syndicated mortgage loans to individual investors who are not qualified investors. However, we do not consider it appropriate to completely exclude these offerings. The addition of conditions to the offering notice exemption aims to address investor protection concerns that may arise from the marketing of these products to individual investors.

The other prospectus exemption we expect to be invoked for the sale of non-eligible syndicated mortgage loans to individual investors is the prospectus exemption for distribution to parents, friends, and partners. Under this exemption regime, the requirement that the issuer and purchaser be closely related aims to ensure that individual investors are better equipped to assess the risk of the investment. In addition, the required exempt distribution declaration will allow securities regulators to monitor the use of this exemption for the distribution of syndicated mortgage loans.

5. One stakeholder argues that the annual ceiling currently applicable under Ontario's mortgage lending legislation to investments in "non-eligible consortium mortgages" (the term used there for non-syndicated mortgage loans), namely $60,000 for investors not belonging to a designated category, effectively prevents investors from investing in first mortgage loans because the amounts are greater than $60,000 and the syndication requirements are too heavy. According to him, this ceiling exposes investors to greater risk by restricting them to private mortgage loans of less than $60,000.
   In Ontario, we expect that many of the obligations regarding "non-eligible consortium mortgages" under mortgage lending legislation, including the $60,000 ceiling, will cease to apply after the effective date of the amendments.

Investment ceilings may apply under the prospectus exemption expressly invoked, such as the offering notice exemption in certain jurisdictions. In addition, registered persons participating in a syndicated mortgage loan distribution will be subject to suitability and concentration of investments standards under their obligations to clients.

Risks Associated with Syndicated Mortgage Loans and Comparison with Other Securities
6. Four stakeholders believe that syndicated mortgage loans are wrongly considered high-risk investments and should not be treated differently from other securities.
One of the main objectives of these amendments in Prince Edward Island, Nova Scotia, Nunavut, Ontario, Newfoundland and Labrador, the Northwest Territories, and Yukon is to harmonize the obligations relating to syndicated mortgage loans with those of the rest of the CSA members.

We believe that explicit obligations for these loans under the offering notice exemption are appropriate, as this exemption is generally associated with distributions to individual investors. Furthermore, we do not believe that these products should be offered under the prospectus exemption for closed issuers. Syndicated mortgage loans offered under other exemptions, such as the prospectus exemption for distribution to qualified investors, will be subject to the same conditions as other securities offered under these exemptions.

Transition Period
7. One stakeholder indicates that the proposed effective date, namely December 31, 2019, for the amendments to the prospectus and registration exemptions does not leave enough time for market participants, and that the effective date of the registration-related amendments should be deferred by one year, to December 31, 2020.
The effective date of the amendments has been deferred to March 1, 2021 to allow more time for market participants.

8. One stakeholder points out that existing providers of this type of financing and current participants in it need sufficient time to adjust to the new licensing and regulatory regime. Financing commitments in place with continuous financing requirements are difficult to modify mid-term of the mortgage loan, and a borrower default due to their inability to meet the new standards only exposes participating lenders to increased risks.
   We recognize that market participants will need time to adjust to the elimination of exemptions currently available for the distribution of syndicated mortgage loans in Prince Edward Island, Nova Scotia, Nunavut, Ontario, Newfoundland and Labrador, the Northwest Territories, and Yukon. The obligations will apply to loans distributed after the effective date of the amendments and not to existing loans. However, future advances of funds by existing lenders will be conditional on the availability of other prospectus exemptions for individual investors who are not qualified investors.

Compliance
9. According to one stakeholder, regulatory compliance mechanisms should be enhanced so that participants in the offering process
As is already the case in Alberta, British Columbia, Manitoba, New Brunswick, Quebec, and Saskatchewan,

Number Comment Response process of offering