Changes to the regulation of syndicated mortgages under securities laws

Christopher Marr, TEP and David Slipp

Effective March 1, 2021 in all provinces of Canada, other than Ontario and Quebec (to be effective there on July 1, 2021), securities laws related to the distribution of syndicated mortgages were amended to provide for enhanced reporting requirements and oversight by provincial regulators. The changes are in the form of amendments to National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”) and National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”, and collectively with NI 45-106, as amended, the “Amended Rules”), the full texts of which can be found here and here, respectively.

What is a syndicated mortgage?

Under the Amended Rules, a “syndicated mortgage” is a mortgage in which two or more persons participate, directly or indirectly, as a lender in the debt obligation that is secured by the mortgage.

Securities regulators consider a mortgage (including syndicated mortgages) to fit the definition of a “security” under securities legislation, so that the borrower, in accepting money for the mortgage interest in land, is viewed as the issuer selling a security, and the lender giving money for the mortgage interest in land is viewed as an investor buying the security. Along with this, anyone involved in facilitating this transaction, such as a mortgage broker, could be viewed as dealing in securities. With this being the case, an interest in a mortgage cannot be granted by a borrower without either filing a prospectus approved by securities regulators, or relying on an exemption from prospectus requirements, and a person cannot broker a mortgage transaction without being registered in the appropriate dealer category, or being able to rely on a registration exemption.

It should be noted that the borrower of a syndicated mortgage loan may not always be the issuer of the security and that not every action taken in connection with a syndicated mortgage will be a distribution under securities laws. Whether or not a distribution is taking place, and the identity of the issuer, will need to be considered on a case by case basis when dealing with syndicated mortgages.

What is the change in the law?

Prior to March 1, 2021, borrowers could avoid prospectus requirements when distributing syndicated mortgages by relying on an exemption for mortgages under NI 45-106 in certain provinces (including Nova Scotia, Newfoundland and Labrador and Prince Edward Island), and the private issuer exemption in NI 45-106 in other provinces (including New Brunswick). Some provinces allowed brokers to avoid the registration requirements if they were licensed under provincial mortgage broker legislation, while in others, brokers had to register in the proper category in order to broker syndicated mortgages. These exemptions are now no longer available for syndicated mortgages under the Amended Rules.

The Amended Rules will leave borrowers under syndicated mortgages with the options of relying on one of the accredited investor exemption, the offering memorandum exemption or the minimum amount investment exemption as the most likely prospectus exemptions applicable under NI 45-106 when distributing a syndicated mortgage. For those choosing to rely on the offering memorandum exemption, the Amended Rules require newly prescribed disclosures specific to syndicated mortgages and the value of the real property, including certification by a qualified appraiser independent of the borrower.

The practical result of the Amended Rules for borrowers under syndicated mortgages is that the remaining prospectus exemptions all have the accompanying requirement of filing a report of exempt distribution with securities regulators, whereas the former exemptions did not. It’s worth noting, however, that the Amended Rules have not removed the exemption from filing a report where the distribution is of a debt security of a single issuer sold to Canadian Financial Institutions  or Schedule III banks (as those terms are defined in NI 45-106). Whether or not this exemption is available will be something else to consider when dealing with syndicated mortgages.

A final consideration under the Amended Rules is whether or not a local rule or order requires any offering memorandum delivered to investors to be filed with securities regulators, even when relying on a prospectus exemption other than the offering memorandum exemption. Though likely not previously thought of as an offering memorandum, due to the expansive definition of that concept in securities legislation, parties should consider whether or not any information, term sheets, or presentations delivered to lenders would constitute an offering memorandum, and need to be filed with securities regulators.

Exemptions to the new regulations

Along with implementing the Amended Rules, many provinces are implementing local rules or orders setting out further specific exemptions from the registration and prospectus requirements in connection with the distribution of syndicated mortgages. Though these exemptions are all different, they are generally based on either the mortgage in question being a low-risk close to conventional style syndicated mortgage, or there being a mortgage broker licensed under the provincial licensing scheme involved in the transaction. To exemplify how these general exemptions may vary from province to province, the following is a summary of the local exemptions in place in Nova Scotia and New Brunswick:

Nova Scotia

Effective as of March 1, 2021, the Nova Scotia Securities Commission has issued Blanket Order 45-528 (“Blanket Order”) to soften the impact of the Amended Rules on small, low-risk syndicated mortgages and brokered syndicated mortgages offered to sophisticated investors. The Blanket Order can be accessed here.

Under the Blanket Order, the prospectus and registration requirements in the Securities Act (Nova Scotia) do not apply if the syndicated mortgage is a “qualified syndicated mortgage”. In Nova Scotia, a syndicated mortgage is qualified if (i) a majority of the property is used for residential purposes, (ii) the debt obligation is less than $2 million, (iii) the syndicated mortgage was not incurred for a development project or construction, (iv) the value of the syndicated mortgage does not exceed 90% of the value of the real property, and (v) the syndicated mortgage cannot be subject to future financing without consent from each lender.

In order to be eligible for the qualified syndicated mortgage exemption, at least one party involved in the distribution or trade of the qualified syndicated mortgage must be a mortgage broker licenced in Nova Scotia.

The Blanket Order also relaxes prospectus and registration requirements in respect of syndicated mortgages distributed to mortgage brokers licenced in Nova Scotia investing in their own right (and not as agent for a third-party). However, the first trade of the syndicated mortgage in this instance will be subject to all regular securities laws in Nova Scotia.

Categorically sophisticated investors, “permitted clients”, as defined in NI 31-103, also do not need the same level of protection as retail investors.

While permitted clients are not automatically exempted from the right to receive a prospectus, brokers distributing syndicated mortgages to permitted clients do not need to register in the province of Nova Scotia as securities dealers, provided, that at least one person involved in the distribution is a licenced mortgage broker in Nova Scotia.

New Brunswick

The local exemption is found in Local Rule 45-501 – Prospectus and Registration Exemptions, available here. The local rule exempts (i) any person licensed under the Mortgage Brokers Act (New Brunswick) (“NB Act”) from having to register under NI 31-103 when trading in qualified syndicated mortgages or when trading in any syndicated mortgages with permitted clients, so long as, in each case, the mortgage secures real property in Canada, and (ii) any distribution by a person licensed under the NB Act of a qualified syndicated mortgage, or of any distribution of a syndicated mortgage to permitted clients, so long as, in each case, the mortgage secures real property in Canada, from prospectus requirements.

A permitted client is understood to be a permitted client as defined in NI 31-103. A qualified syndicated mortgage is defined in the local rule, with the highlights being that it is a mortgage on real property used primarily for residential purposes, with no more than four units, the principal amount of which does not exceed 80% of the fair market value of the real property secured, and which is not used for construction on or other development of real property.

Key take-aways

• The mortgage exemption and private issuer exemption in NI 45-106 can no longer be relied upon to relieve an issuer of a syndicated mortgage from prospectus requirements.
• Offering memorandums related to syndicated mortgages now require additional disclosure certified by a qualified independent appraiser.
• The securities regulators of many, but not all, of the provinces have exempted investments in qualified syndicated mortgages made by licenced mortgage brokers and distributing syndicated mortgages to permitted clients through licensed mortgage brokers, from prospectus and dealer registration requirements.
• Because the changes to the National Instruments will be the same in each jurisdiction, but exemptive relief will be granted by provincial securities regulators, exemptions from the new rules will vary from province to province.
• There are still traditional prospectus exemptions available under NI 45-106 for the distribution of syndicated mortgage, which will provide exempt status to the vast majority of syndicated mortgage transactions.
• There are new issues to consider when dealing with syndicated mortgages, related to whether or not there is a distribution, who is the issuer, what exemption is available, and whether or not a report of exempt distribution or a document that could be viewed as an offering memorandum must be filed with securities regulators.

This update is intended for general information only. If you have questions about the above, please contact a member of our Securities group.