The Investment Industry Regulatory Organization of Canada (IIROC) recently released the final version of Guidance Note 14-0299 (the Guidance), which sets out general principles and suggested practices for underwriters’ due diligence with respect to public securities offerings. IIROC issued proposed guidance on this subject on March 6, 2014 (the Proposed Guidance). The Guidance is substantially similar to the Proposed Guidance, although some clarifications have been made. For example, unlike the Proposed Guidance, the Guidance clearly states that (i) it does not apply to private placements and (ii) an underwriter may choose to establish a materiality threshold in its due diligence plan from both a quantitative perspective (i.e. a dollar threshold considering the issuer’s financial position) as well as a qualitative perspective (e.g. the areas of business, operations and risk most relevant to the issuer).
The Guidance is based on the following nine principles:
- Each underwriter is expected to have written policies and procedures in place relating to all aspects of the underwriting process and to have effective oversight of these activities.
- An underwriter should have a due diligence plan that reflects the context of the offering and the level of due diligence that will be reasonable in the circumstances.
- Due diligence “Q&A” sessions should be held at appropriate points during the offering process.
- An underwriter should perform business due diligence sufficient to ensure that the underwriter understands the business of the issuer and the key internal and external factors affecting the issuer’s business.
- Underwriters should clearly understand the boundary between business due diligence and legal due diligence, to ensure that matters that should be reviewed by the underwriters are not delegated to underwriters’ counsel.
- The extent to which an underwriter should rely on an expert opinion is a contextual determination, having regard to the qualifications, expertise, experience, independence and reputation of the expert.
- Each syndicate member is subject to the same liability for misrepresentation under securities legislation. A syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence investigation that the syndicate member would have performed on its own behalf as lead underwriter.
- An underwriter should document the due diligence process to demonstrate compliance with its policies and procedures, IIROC requirements and applicable securities laws.
- An underwriter must have a comprehensive and effective supervisory and compliance framework in place to ensure compliance with policies and procedures, IIROC requirements and applicable securities laws.
As a result of the Guidance, an underwriter should:
- Review its existing policies and procedures and refine and expand those policies and procedures as appropriate (including the creation of separate due diligence plans for different types of offerings).
- Pay particular attention to due diligence conducted with respect to underwritings for new and emerging market issuers.
- For bought deals with very short offering timetables, be cognisant that the need for comprehensive business and legal due diligence will make it more important for the underwriter to “invest” in the issuer and plan ahead.
- Review circumstances where experts are relied upon and apply appropriate scrutiny, especially in the case of foreign experts.
- As a syndicate member, consider how to satisfy itself as to the adequacy of the lead underwriter’s diligence.
- If it has in the past tended to rely on legal counsel to conduct due diligence, consider the need to enhance its internal due diligence capabilities.
- Ensure that it has a robust compliance program in place
