Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House





January 2009
Salterio balks at passport approval

Steve Salterio

By Grant Cameron

A decision by the Canadian Securities Administrators (CSA) to implement the next phase of the passport system is generating praise in some industry circles and pessimism in others.

Supporters say it will streamline the securities regulation process. Critics say it will lead to watered down rules and substantial differences in regulatory scrutiny across the country.

The passport system, a regulatory framework which allows each jurisdiction to maintain its own securities commission and recognize others, much to the dislike of the federal and Ontario governments, has been a contentious issue for those in the nation’s securities industry.

The CSA moved the system further along on March 17 by adopting a new rule and policies that outline how it will work and how participants will deal with Ontario, which has rejected the system.

Jean St-Gelais, chair of the CSA and president and CEO of the Autorité des marchés financiers (Québec), said the new rule and policies are a step forward for securities regulators.

“The passport rule together with the national policies will simplify the regulatory approval process and benefit businesses and investors in all provinces and territories,” he said. “This phase of passport will give issuers access to Canada’s capital markets by allowing them to deal with only one regulator and one set of harmonized requirements.”

The new rule allows someone to clear a prospectus or obtain a discretionary exemption from their home securities regulator, and have it automatically apply in all other passport provinces and territories. The new policies, meanwhile, set out the processes for filing and reviewing prospectuses and exemptive relief applications. The policies also outline how market participants from passport jurisdictions will gain access to the Ontario market.

Manitoba Finance Minister Greg Selinger, who is chair of the Council of Ministers for Securities Regulation, said the CSA’s announcement is good news because it will streamline the process and provide a single window of access to capital markets for companies.

“It’s a major step forward because it provides a single door of entry and a single set of harmonized rules. It’s a big improvement over the old days when things were different in most jurisdictions.”

One benefit is that a company won’t have to go to three or four provinces when a security is being issued, Selinger said.

“They can go to their own securities regulator and if it’s accepted there it’s accepted everywhere. The prospectus, or the issuer, is treated equally everywhere they go. It also helps the consumer in terms of what protections they have and what rules they’re following.”

However, Steve Salterio, a chartered accountant and business professor at Queen’s University in Kingston, Ont. isn’t buying into the passport system. He believes it’s unworkable.

“I think the passport system, as it’s currently conceived, is a fundamental step backwards. I’m very glad that Ontario isn’t on board.”

Last year, Salterio studied Canada’s decentralized system of securities regulation and found that it wasn’t making the grade. His research also showed there is a substantial difference in the level of regulatory scrutiny by various securities regulators across the country.

“I have fundamental concerns about the passport system because it assumes all regulators are created equal. But there’s a different level of enforcement across the country. Hence, one would also infer there’s a different level of scrutiny when one is making application for registration.”

For example, said Salterio, New Brunswick has only a half dozen publicly-traded companies and several years might pass before regulators there are required to do a registration, whereas Alberta might register three or four publicly-traded companies a week.

“The expertise differences might be quite large.”

According to Salterio, the solution is to replace the current fragmented system with a single national regulator and enforcement agency that has the power to take care of business across the country. That’s also the preference of the Ontario and federal governments.

“My position is that Ontario shouldn’t be on board and neither should Alberta or Quebec,” Salterio said. “They’re the three best regulators we have in the country and, if anything, the three of them should form a united front and say: ‘Hey, we’re the folks who are really in the business of doing regulations and we have the resources and we’ll be the passport.’

“The reality is the markets are in these provinces and these provinces have jurisdiction over these markets and they need to exercise their rights to regulate the markets that are in their provinces. We have to stop this watering down of things in order to get everybody on side.”

Salterio believes the passport system will merely weaken control standards across the country.

“Ontario has made the right decision, in my mind, as the location of Canada’s largest capital market, to say: ‘No, we’ve got the largest capital market in the country and we’ve got to make sure that companies that are going to be traded on the largest capital market meet the highest standard.’”

With Ontario and the passport jurisdictions seemingly at loggerheads, the question looming, then, is what happens next?

The other provinces and territories are forging ahead with the passport system, and in good faith are allowing decisions made by the Ontario Securities Commission to be recognized by regulators in their jurisdictions, but Ontario is still sitting on the sidelines and has shown no signs of reciprocating.

However, Selinger is still holding out hope that Ontario will come on board.

“There’s been a lot of rhetoric about a common securities regulator. Our approach has been to put our heads down and just work on making things better rather than debating the perfect model. We decided as a group of provinces, rather than fight with the federal government about the perfect model, let’s just make things better and see where it takes us.”

Passport jurisdictions have held out the olive branch by recognizing regulatory decisions made by Ontario, Selinger said.

“We’ve given them the right to issue into our jurisdiction. We did that as a positive gesture to show we want to be co-operative.”

With Quebec on board, Selinger doesn’t see why Ontario can’t follow suit.

“If Quebec can take a civil code system and make it harmonized, why couldn’t Ontario? Quebec has taken its system and blended it with the rest of Canada, so it shows if there’s a will there’s a way.”