Proposed CSA amendments to protect small investors

Proposed CSA amendments to protect small investors

Posted by: Marlin J. Horst , March 22, 2018

Proposed rules around syndicated mortgage investments (SMI) will help “weed out” those who are taking advantage of unsophisticated investors, Toronto corporate and commercial lawyer Marlin Horst tells The Lawyer’s Daily.

An SMI “is a method of funding commercial or residential developments where two or more people pool their money to invest in large-scale real estate projects,” the article states. “The investment is a mortgage registered against title to the property that is being developed.”

The legal publication notes the Financial Services Commission of Ontario has issued more than $1 million in fines against companies involved in the SMI market and the Canadian Securities Administrators (CSA) has put forward proposed amendments in an attempt to harmonize the regulatory framework across Canada.

Horst, a partner with Shibley Righton LLP, says the syndicated mortgage market is “ripe for taking advantage of less sophisticated investors,” who think a mortgage is a good, safe investment.

“You aren’t required to have a third-party appraisal of the property — you can right away see how you could manipulate this if you had an appraisal from a related company or entity that says the property is worth $10 million when really a third party would say it’s worth $5 million. There’s a huge difference on how protected that private mortgage would be,” he tells The Lawyer’s Daily.

Under the proposed amendments, the article states, “exemptions for filing a prospectus on SMIs with the securities regulators in some provinces would be removed. In addition, issuers of syndicated mortgages would be required to deliver property appraisals prepared by an independent, qualified appraiser.”

Horst says the proposed rules will make it more difficult for everyone in the SMI market — even the legitimate players — but “at the end of the day, it will weed out the people who are really taking advantage of unsophisticated investors.”

“The big change is taking away the prospectus exemptions, which means now [SMIs] will be like any other investment,” he says. “It takes away the ability of the less above-board syndication companies to take advantage of a small investor, which is really what the CSA is trying to protect here.”