Syndicated mortgage rule proposals offer protection


Marlin Horst head shot

A Canadian Securities Administrators’ (CSA) plan to increase oversight of syndicated mortgages is an effort to protect ‘unsophisticated’ investors from risk, Toronto corporate lawyer Marlin Horst tells The Lawyer's Daily.

The CSA has issued a call for comments on proposed amendments that were first suggested in March 2018, The Lawyer's Daily reports.

The council for the provincial and territorial securities regulators indicates the changes will harmonize a regulatory framework for syndicated mortgage investments (SMI) and increase safeguards for investors, the publication reports.

An SMI is a way of funding commercial or residential developments with multiple investors putting their money together to target large-scale real estate projects, The Lawyer's Daily reports, adding the investment is a mortgage registered against title to the property being developed.

Horst, partner with Shibley Righton LLP, tells the publication that the mortgages are not uncommon in development, but there have been some high-profile “blow-ups.”

“They involved non-institutional, Mom and Pop-type investors who lost a lot of money when a big development went sideways,” he says. “The people who invested didn’t understand how risky their investment really was — so these regulations, if you cut right through them, are trying to protect those ‘unsophisticated’ investors from putting money in something they don’t understand.”

Horst tells The Lawyer's Daily that what is being introduced is not radical by securities regulation standards, but a big departure for the SMI market.

The publication reports that updates include proposals from a number of provinces calling for dealer registration and prospectus exemptions for larger, sophisticated institutional issuers. Among the suggested changes is a requirement that property appraisals take place within a six-month period as well as more guidance on establishing the identity of SMI issuers, says The Lawyer's Daily.

“I think what you are going to find is the more sophisticated and above-board syndicated mortgage operators are going have a bit of cost added to their business model, but not too much because they were probably already doing most of these things in terms of regulation and the like,” Horst says.

“What it should do is get rid of a lot of these developers going off on their own and putting together syndicated mortgages with people who don’t really understand what they are getting into. There will be more regulation, so it’s going to be the professionals who understand how the system works that are going to be best able to do them.”

The comment period on the proposals ends May 14, with the updates set to take effect Dec. 31, The Lawyer's Daily reports.

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