OSC to review recent IPOs amid complaints that banks use leverage as lenders to win capital markets business

OSC to review recent IPOs amid complaints that banks use leverage as lenders to win capital markets business
© Provided by Financial Post The Ontario Securities Commission is digging into the issue at the request of Ontario finance minister Peter Bethlenfalvy.

The Ontario Securities Commission is probing “potential anti-competitive practices” related to the “tied” selling of commercial lending and capital market services, and will be requesting additional disclosure related to a selection of recent IPOs.

The practice of tied selling, generally prohibited by banks, is defined by Canada’s largest capital markets regulator to include situations in which “a commercial lender requires a client to retain the services of an affiliated investment dealer for their capital raising and advisory needs, as a condition in a commercial lending transaction.”

A wide-ranging task force report on modernizing Canada’s capital markets, completed in January, revealed longstanding complaints from independent dealers that they had difficulty competing in mergers and acquisitions, and other capital markets activity, because companies feared losing access to commercial loans if they did not do business with the big banks.

The OSC is digging into the issue at the request of Ontario finance minister Peter Bethlenfalvy, who also directed the regulator to look into more recent complaints about the banks halting or restricting sales of third-party investment products.

Bethlenfalvy raised both issues in a letter to sent to OSC chair and chief executive Grant Vingoe last week.  

Kicking off its consultation on the issues Tuesday, the capital markets watchdog said it would be digging into past initial public offerings and seeking additional information through its powers governing continuous disclosure. The regulator said it would also take submissions related to tied selling — including supporting analysis — from issuers, dealers, market participants, investors and other stakeholders through Jan. 10.

Its examination into the supply of third-party investment products available on the shelves of the big banks will take the form of “focused” compliance reviews. The OSC also plans to contact some of the major firms during the week of Dec. 6 and conduct the reviews over the following month to determine how they have addressed conflicts of interest in the distribution of proprietary investment products, and examine “the composition of their product shelves.”

In his letter to the OSC’s Vingoe, Bethlenfalvy noted that some financial institutions have suggested the restriction of third-party investment products was in response to new client-focused reforms, which require advisors to have more knowledge about the products they sell.

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The finance minister said a narrowing of investment products offered to investors “would run counter to the underlying intent” of the new rules, which is “to mitigate conflicts of interest and ensure that investors have access to the products that best serve their needs.”

Bethlenfalvy wrote that he was aware the OSC had already contacted the financial institutions and requested information to better understand the changes, but called this “a necessary first step in understanding how to best protect the interests of investors and support consumer choice.”

The Canadian Bankers Association, an industry group, said in a statement that the banks comply with the law against tied selling.

“Banks in Canada are federally regulated and Section 459.1 of the Bank Act prohibits banks from practicing coercive tied selling,” the CBA said in the statement. “Indeed, banks have complied with the law for many years by not practicing coercive tied selling and, as part of their longstanding commitment to uphold the law, they provide their employees with training on acceptable sales practices.”

The OSC will report its findings, as well as potential recommendations, to the finance minister by Feb. 28, 2022.

• Email: bshecter@nationalpost.com | Twitter: BatPost

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