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Now's the time

Passports only perpetuate our patchwork of rules. A Canadian Securities Commission is needed today

Jeffrey S. Leon
Wednesday, April 02, 2008


Recently, Finance Minister Flaherty appointed an expert panel to advise on securities regulation in Canada. Meanwhile, the chair of the Council of Ministers for Securities Regulation (Where's Ontario?, Greg Selinger, FP, March 26) has extolled the newly implemented and improved passport system and suggested that an expert panel is not needed: The federal government should just focus on improving criminal enforcement against securities fraud. With respect, such an approach ignores the complexity of securities regulation, particularly in the area of enforcement. Passports will only perpetuate our current patchwork system and will not address the need for a unified "made in Canada policy" for securities enforcement consistent with Canadian culture and values.

The need for a national securities regulator has been hotly debated. A key reason for proposed reform is the perception that Canada lacks vigour in enforcing its securities law because of its fragmented provincial/ territorial regulatory system. The time has come for creative constitutional consideration and action to establish a national securities regulator to immediately assume overall responsibility for the enforcement of Canadian securities laws. Operating with a national approach, there will be the resources, stature and credibility to attract talented people with expertise to undertake and lead investigations of alleged capital market misconduct, and to respond effectively through criminal prosecution in the courts or regulatory proceedings before a specialized administrative tribunal.

Currently, the enforcement of securities laws in Canada is governed by 13 provincial and territorial statutes and regulations. Each regulator has broad investigative powers to examine potential misconduct in its capital markets and, where warranted, to sanction such misconduct. There is potential for overlap, duplication and inconsistency. Even the concepts of a "lead regulator" and "reciprocal orders" have not resolved these jurisdictional issues. In contrast, a national securities regulator, with a mandate to protect Canadian investors, can deal with enforcement in an effective and co-ordinated manner.

By way of general overview, using the Ontario example, when potential misconduct in the capital market is suspected or detected, staff of the Ontario Securities Commission can initiate an investigation. Under the Ontario Securities Act, where an investigation reveals conduct that allegedly contravenes the law or is contrary to "the public interest," two primary enforcement measures are available: (1) administrative proceedings before an OSC panel under section 127 for an order to respond to conduct alleged to be contrary to "the public interest"; and (2) a quasi-criminal proceeding before the Ontario Court of Justice, under section 122(1), which can, if successful, lead to conviction and fine or imprisonment.

Administrative proceedings are most frequently used to deal with enforcement issues. Under section 127, the OSC has broad discretion to regulate through the imposition of administrative sanctions. While the distinction can become blurred, such proceedings are to be used only to regulate and protect capital markets in the public interest by restraining future misconduct and not to punish past misconduct. Punishment of past misconduct is for the courts following successful quasi-criminal prosecution under section 122.

It is in relation to quasi-criminal prosecutions in the Ontario Court of Justice where the OSC and its staff have been most frequently criticized, sometimes justifiably and sometimes not, for the failure to obtain convictions and severe penalties in high-profile cases. Comparisons are made, often inappropriately and unfairly, to the high-profile convictions (and significant prison terms) obtained by the U.S. Department of Justice in securities matters.

The regulatory function and the quasi-criminal function are and should be very different. Part of the perceived problem may be the failure to separate these functions both in terms of the investigative process and in terms of subsequent proceedings. There needs to be a clearer demarcation of alleged misconduct that, by its nature and consequences, requires a criminal response as opposed to a regulatory response.

Under the current regimes, the necessary independence and the requisite distinction between criminal versus regulatory response is lacking. Through an integrated legislative scheme of a national securities regulator, co-operation and co-ordination can be promoted, the investigative function can be segregated and the determination of the appropriate response (criminal or regulatory) can be made and pursued in a forceful and effective manner. Greater use might also be made of statutory civil remedies.

Most recently, in January of 2008, the International Monetary Fund released an assessment of securities regulation in Canada. Criminal enforcement appears to be particularly weak and needs improvement. There is a common perception that few cases have faced criminal prosecution and even fewer have resulted in criminal sanctions. Although the establishment of the Integrated Market Enforcement Teams is a commendable federal initiative to respond to potential criminal conduct, concerns remain about the lack of visible accomplishments, clear national priorities, accountability, expertise and talent retention. This recent assessment is aligned with the several Canadian reports that have favoured the creation of a national securities regulator.

Studies of Canada's securities laws have consistently recommended a national securities regulator. The 2003 Wise Persons' Committee concluded that there are three major structural limitations of the existing system. One limitation is inefficient allocation of resources caused by duplication of manpower and resources under the existing fragmented system. Another limitation is co-ordination difficulties in multi-jurisdictional proceedings. This has the potential to impede cross-border investigation and enforcement if there is a refusal to cooperate or provide assistance, resulting in the potential for unnecessary costs and delays, and multiple investigations and enforcement proceedings. Finally, we have inconsistent priorities and investor protection across Canada. A national securities regulator would promote optimal utilization of enforcement resources to achieve uniform investor protection.

The 2006 Crawford panel report commentedonfragmented regulatory enforcement as having caused delays and impeded enforcement investigations and proceedings, resulting in investor loss of confidence. A Canadian Securities Commission would reduce duplication in roles and resources and centralize expertise. Enforcement will be consistent and orders will be effective across jurisdictions.

In their analysis for the 2006 Investment Dealers' Association task force on securities regulation, the Hon. Peter de C. Cory and Prof. Marilyn Pilkington conclude that it is "fundamentally important that enforcement be managed on a national basis to ensure the effective use of resources, the development and deployment of expert skill and knowledge across the country, and the independence and accountability of enforcement processes." Even if provinces retain jurisdiction over securities regulation, a national enforcement body should be established, reflecting the interests of both the federal and provincial governments to enforce securities laws.

While other commentators have expressed concerns about one body having a monopoly on regulation, increased bureaucracy, loss of regional autonomy and over-regulation, these concerns can be dealt with through creative co-operation of federal and provincial authorities to establish a national enforcement framework.

Also, Canada does not operate in isolation from international capital markets. A national securities regulator would promote recognition of and respect for Canada's enforcement activities in the context of international cross-border enforcement initiatives. Canada should lead the investigation of allegations of misconduct that are principally connected to Canadian capital markets and, if appropriate, commence prosecutions or regulatory proceedings in response. This will promote the protection of our capital markets and afford participants the procedural protections offered by Canadian law in the face of conflicting process and procedure of other jurisdictions (i.e. the United States).

A national securities regulator will have the status, resources and profile to promote a Canadian enforcement response to misconduct in Canadian capital markets. It has been suggested that the principles of comity and "the convenient forum" be applied by the courts and regulators so that individuals are not subject to multiple securities proceedings in Canada and the United States based on the same set of facts. Courts have traditionally stayed proceedings in favour of the forum with the most appropriate connection to a matter in order to avoid multiple legal proceedings and to promote the fair and efficient working of the legal system as a whole. This approach can avoid unfairness and prejudice in the context of cross-border investigations, prosecutions and regulatory proceedings. With a strong national securities regulator, the ability to make the case for application of principles of comity and "the convenient forum" is significantly strengthened.

Multiplicity is problematic in the international arena. Foreign countries may have to interact with different provincial jurisdictions in dealing with securities law matters. As noted by Rodrigo de Rato, managing director of the International Monetary Fund, "Canada is currently the only G7 country without a common securities regulator." To be able to deal with other countries' national securities regulators on an equal footing, Canada needs a unified stance to promote mutual recognition of securities regulation.

If credible and effective enforcement of securities law, from both a regulatory and criminal perspective, is a national priority in order to promote the efficiency and competitiveness of Canada's capital markets, the federal and provincial governments need to collaborate. Canada needs a national securities regulator in order that resources can be used efficiently and effectively to attract the most talented people. Canada then will be able to credibly assert control over conduct in the Canadian capital markets. Investigations will be comprehensive and effective. Where warranted, serious misconduct can be responded to with the full force of the criminal law. Under a national regulator, resources and expertise will exist to marshal evidence and arguments to present a strong case to a criminal court or to a regulatory tribunal. There will be co-ordination and consistency. Increased and better use can be made of civil remedies.

This is how Canada can make a decisive statement to the international capital markets that it is safe to invest in Canada and that Canada will properly enforce its securities laws with a "made in Canada" policy consistent with Canadian culture and values.

--- - Jeffrey S. Leon is a partner in the Toronto office of Bennett Jones LLP.

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