Centralizing securities regulation not so simple
In 2011, the Supreme Court of Canada rejected the federal government’s most recent attempt to create a single, national regulator when it ruled legislation governing securities law was within the exclusive jurisdiction of the provinces.
The debate over securities regulation goes to the heart of regional tensions and industry cultures, creating administrative duplications for investors that no doubt seem impenetrable to foreign companies.
Investors heralded the proposed harmonization as a way to remove red tape in securities law and ultimately cut costs for investors.
“The differing rule books in the provinces just complicate the financing process,” says Ian Russell, president of the Investment Industry Association of Canada. “First of all you have to file for an exemption with each provincial jurisdiction and then you have to make sure that you’re following the rules in these different jurisdictions.”
despite the Supreme Court’s ruling, the federal government signalled in its most recent budget it would seek an arrangement to create a joint federalprovincial regulator. However, skeptics note this is unlikely to happen because of the politics inherent in the Canada’s federalist design.
The TSX and its venture cousin are the most well known stock exchanges in Canada, with Toronto-listed companies amounting to 98% of aggregate Canadian market capitalization. With such a high concentration of the market under Ontario’s securities regulatory regime, the case for a single national securities regulator in Canada may seem strong.
But the remaining 2% of markets have unique needs and some provinces aren’t willing to let go.
“Out West, things are a bit more venture-orientated,” says Shaun Fluker, an associate professor of law at the university of Calgary who worked as legal counsel for the Alberta Securities Commission in 2005-07. “The consensus historically has been that investors in Western Canada take on a little bit more risk when they invest and the regulatory structure has to allow for that,” Mr. Fluker says.
More relaxed securities law lends itself well to the resource and mining industries in Western Canada that rely on smaller investors to raise capital, Mr. Fluker says. Specifically, Alberta’s legislation lets companies raise money by issuing an “offering memorandum,” which has less-stringent disclosure requirements than traditional prospectuses as required in other provinces.
It’s precisely the more lenient exemption rules that provinces with smaller capital markets want to protect by having their own regulators.
Since the 1930s the two levels of government have fought over which could best regulate securities.
“It’s come up over and over again and it’s failed over and over again,” says Jeffrey MacIntosh, a university of Toronto law professor who holds the Toronto Stock exchange Chair in Capital Markets Law. “Part of the underlying political problem is just that we’re a country of regions, really, and there are all of these sorts of historical mistrusts, if not animosities.”
even where there is agreement between the provinces on substantive aspects of regulation, Mr. MacIntosh says ironing out the logistical and administrative kinks of a national regulator — such as who will staff it and where it will be located — have derailed co-operative plans in the past, since Toronto is home to the largest exchange in the country,
He says Ontario would want the head office on its turf, but the other provinces fear losing control.
“Ontario has said ‘Toronto or bust’, sort of saying ‘my way or the highway’ and the other provinces were saying ‘anywhere but Toronto,’ ” Mr. MacIntosh explains in reference to the previous negotiations for a single regulator.
unless there is a co-operative resolution, the provinces maintain autonomous control. At confederation, the drafters of Canada’s constitution divvied up lawmaking responsibilities between the federal government and the provinces, but regulation of securities was not contemplated and thus not explicitly delegated. The courts have interpreted the province’s constitutional power to regulate “property and civil rights” to include insurance and securities.
Meanwhile, Ottawa can legislate matters relating to general trade and commerce, the power under which it attempted to rely on to devise its securities regulation scheme.
Proponents of the one-size-fits-all solution say the provinces are no longer apt to regulate securities, which are now global in nature. “Capital markets have evolved from being local to being national to being international and our regulatory framework hasn’t kept pace. We still have local regulators and it’s ridiculous,” says Mr. Russell. He added Canada is the only country in the developed world lacking a single, national regime.
In addition to domestic considerations, he says a uniform solution is also needed to ensure Canada is well represented in securities-regulation discussions on the global stage where currently several provincial commissions speak for Canada.
“Canada is an important, respected country, particularly since the financial crash, and can punch above its weight in these discussions, and yet we don’t have Canada at the table in matters relating to securities regulation,” Mr. Russell says.
A single scheme could also spur international investment because potential investors wouldn’t have to jump through more regulatory hoops, says Terry Salman, who sat on the federal government’s expert panel on Securities Regulation leading up to the 2010 legislation. “Would that be of interest internationally? Absolutely. Because, you know, capital will go where you can raise money at the cheapest cost and in the most expedient manner,” Mr. Salman says.
He says the proposed national regulator would have preserved regional interests by having offices across Canada. He pointed to Australia as an example of a country that in the 1990s transitioned to a national regulator with regional offices — including one in Western Australia where the mining sector is based.
Mr. MacIntosh has a different solution: improvements to the current passport system.
“To the extent that people say ‘foreign investors don’t want to come here because they see this maze of regulatory miasma, this impenetrable layer upon layer of regulation,’ well that would not be the case with a passport system,” Mr. MacIntosh says.
In 2008, the Canadian Securities Administrators introduced a passport system to address some of the efficiency problems for investors and dealers across jurisdictions. It allows businesses and investors to obtain discretionary exemptions from their home regulators that other participating jurisdictions mutually recognize.
But there are gaps. even though exemptions are recognized, fees must be paid to each regulator. Further, Ontario does not participate and other jurisdictions can opt out.
“The Passport system does not cover all areas of securities regulation and to the extent that we have different regulators looking at the same thing, it slows everything down,” Mr. MacIntosh says. “And business doesn’t like to slow down. Business likes to seize windows of opportunity and rush forth. Those are very real problems.”
He has been an advocate for a passport system where a user joins one regulatory scheme, pays one set of fees, and the registration is considered valid in other jurisdictions. Canada’s incorporation laws reflect that approach, he says, and the framework could apply to securities.
Businesses in Canada have the choice of incorporating under the federal Canada Business Corporations Act, one of the provincial counterparts or even in a u.S. jurisdiction and essentially choosing the governing law.
Mr. MacIntosh says, “Why not give people the same kind of choice in securities regulation? everyone ends up with one regulator and pays one set of fees.”