Securities
Unconventional Wisdom and the Canadian Securities Market
Published: 06/28/2010
By Heather Zordel May 27, 2010, Toronto – The federal government has released legislation that will form the basis of a Supreme Court reference on the constitutionality of a single Canadian securities regulator. With that, a 70-year old debate on the constitution and Canadian business will again play out, now against the backdrop of the recent global financial crisis. The current effort must be the final act in implementing this important reform to our capital markets. Canada’s ability to respond to significant regulatory issues and integration of global markets depends upon its success.
A recent report by Pierre Lortie, a business advisor whose firm is working with the Alberta Government and the Québec securities authority (AMF) in opposition to a federal role in securities regulation, challenges what he calls the “conventional wisdom” of national securities regulation. Though I take issue with Mr. Lortie’s conclusions, I am pleased he considers it conventional wisdom that securities should be federally regulated.
Mr. Lortie notes the historical Canadian securities legislation objectives are (i) providing investor protection and (ii) fostering fair and efficient capital markets. He then analyses market efficiency in the context of the initial public offering market, survival rates of junior issuers and costs of public issuances, concluding that the highly harmonized “Passport System” achieves securities regulation goals. Many will agree that provincial regulation under the Passport System is quite good, but that does not mean federal regulation is unnecessary.
It is fundamentally incorrect to equate all of securities regulation with the Passport System, which addresses limited areas the current regulatory bodies have harmonized and manage effectively. Such an approach ignores areas of regulation currently managed less well, including mechanisms for the regulation of trading and clearing; regulation of derivatives; and the pressing need for an international response to regulation. As well, the Passport System does nothing to improve the pursuit of enforcement actions, or uphold consistent investor protection across the country. Another important area not currently addressed by the provinces is the evolving financial stability principle described by the Expert Panel on Securities Regulation as reduction of systemic risk – a principle which IOSCO (the International Organization of Securities Commissions) also promotes.
Comparing securities regulation in Canada and in the U.S., Mr. Lortie uses the Canadian Securities Administrators’ refusal to fully adopt U.S. Sarbanes-Oxley rules as evidence of a more considered, better approach. I submit we should instead be asking the question, “Why couldn’t Canada influence the U.S. to adopt more balanced regulation?” U.S. regulators have become frustrated with our convoluted system, and are paying more attention to regulators in the UK and elsewhere as they consider the future of global securities regulation. This is an area where we should be able to “punch above our weight”, as the Minister of Finance, Jim Flaherty, and the Bank of Canada’s Governor, Mark Carney, are doing on global banking issues.
Mr. Lortie compares provincial securities regulation favourably to U.S. regulation by the SEC and concludes we should not move to federal regulation, because that would be equivalent to U.S. regulation. He is trying to fight a battle that doesn’t exist over a system no one is advocating for. The U.S. structure is the worst of both worlds, having both federal SEC regulation and individual state regulation. The proposal in Canada is to have a single national securities regulator as soon as possible. The size of our capital markets does not justify either two-tier regulation or thirteen sets of provincial regulation, no matter how hard the provinces work to harmonize a structure that, by its nature, cannot be kept aligned.
We now have the opportunity to implement a system that is structurally harmonized and more efficient, while not causing major market disruption. The provincial “opt-in” mechanism allows those provinces that may be sceptical to continue with the current system of inter-relationships, while they wait for the federal government to develop and implement its legislation and transition plan. However, it is disappointing that rather than working together to create a truly national regime, some seek to prevent efforts to improve our overall securities regulatory structure for an increasingly global economy.
Canada has a history of sound financial regulation, and our economic performance in the depths of the recent global crisis demonstrates this fact. However, on this important issue, we must re-organize and re-establish ourselves with one voice in order to be worthy of an international leadership role.
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