National Securities Regulator Long Overdue (February 2009)

There are huge advantages to the establishment of a Canadian securities regulator. The cost of raising capital by businesses will be lowered by eliminating the current multiple filing requirements. Investors will have greater protection through a more effective enforcement process and a single independent adjudicative tribunal.

The global financial crisis and turbulent capital markets have strengthened the urgency of having a single national securities regulator in Canada.

As the G7 developed countries, and the broader G20, engage in ongoing discussions on ending the synchronized global recession and credit crunch, there has been a great deal of positive commentary on the strength of Canada’s banking system, most recently by the chair of Barack Obama’s new Economic Recovery Advisory Board. This strength is largely due to coherent national regulation through the Office of the Superintendent of Financial Institutions, together with the Bank of Canada and the Department of Finance.

But the same coherence does not exist in respect of Canada’s capital markets which have been severely affected by the failures in the U.S. and international markets. With 13 different securities regulators, Canada lacks a critical player in international forums and discussions, and is unnecessarily exposed to market risks and instability. For example, as early as August 2007, inadequate securities oversight resulted in a debilitating freeze on $32 billion in toxic asset-backed commercial paper (ABCP), something which continues to seriously impact the legitimate commercial paper market even as a tortuously negotiated agreement to unfreeze the ABCP now takes effect. The Bank of Canada was vigorously involved in the final agreement to unfreeze the ABCP market, and has improved its capital market expertise and surveillance role in monitoring systemic risks across the financial system. But this is no substitute for effective national regulation and oversight.

Ontario is a strong supporter of a national securities regulator. As home to the largest securities market in the country, Ontario Is all too aware of how the fragmented structure of securities regulation across 13 provincial and territorial bodies, weakens Canada’s financial sector regulatory framework and undermines financial market stability. A single national regulator in the capital markets makes even more sense at a time when all provinces and the federal government are trying to move rapidly towards strengthening the Canadian economic union by eliminating all barriers to the mobility of goods, services, capital and people across Canada.

In Budget 2009, the federal Minister of Finance announced that federal legislation establishing a Canadian securities regulator will be introduced later this year, and that a transition office would be established immediately to follow through on the recommendations in the Report of the Expert Panel on Securities Regulation of January 12, 2009 – Creating an Advantage in Global Capital Markets. To facilitate working collaboratively with all provinces and territories, proposals have been made to accommodate certain distinct needs of regional centres and to ensure responsive and efficient local service, together with a firm federal government commitment to fully reimburse provinces and territories for any loss in revenue resulting from winding up their securities regulatory structure.

A Council of Ministers consisting of the federal Minister of Finance and a Minister designated by each participating jurisdiction, will act as a forum to discuss the development of securities policy and the ongoing administration of the system. The provision that gives the provincial ministers the power to veto amendments to the federal legislation provided those opposed represent at least a majority of participating provinces having in total of not less than a majority of the population of all participating provinces, is potentially problematic and needs more discussion.

To promote regional balance, vice-chairs may represent the major regional centres: British Columbia in the mining sector, Alberta in the oil and gas sector, Ontario in the financial services sector, and Quebec in derivatives (Expert Panel Report p. 43). And a federal-provincial nominating committee will, among other things, recommend the adjudicators to be appointed to the separate adjudicative tribunal.

A small reporting issuer panel will examine opportunities on an ongoing basis to streamline reporting requirements and reduce compliance costs for small companies. And the regulator will adopt a proportionate and more principle-based approach to regulation to reduce unnecessary compliance costs and strengthen enforcement action.

Finally the needs of investors will be better served through the establishment of an investor panel to address investor issues and improve investor services and the creation of an investor compensation fund. Indeed investors were particularly vocal before the Expert Panel about the complex complaint process across a balkanized web of 13 regulators, and the serious inadequacy of current securities oversight, enforcement and redress procedures. The Expert Panel noted that one manager of a larger Canadian pension fund had a policy of purchasing Canadian stocks on the U.S. stock exchanges, because U.S. enforcement bodies appear to have a greater success in prosecuting Canadians that commit capital market crime than Canadian authorities (Expert Panel Report p. 51).

The stability of the financial system in Canada has never been more important. A single Canadian security regulator is long overdue. Not only will it reduce the cost of raising capital for businesses in Canada, enhance investor protection and increase Canada’s competitive advantage. It will also permit Canada to play an important leadership role in coordinating international action to end the global credit crunch and financial instability in the capital markets.