Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House


January 2004

Another year, another kick at securities regulation

For every task force report on how to reform the market, there seems to be a jurisdiction waiting to block any chance for change


By James Langton

Investors and industry players agree on one thing: there is widespread dissatisfaction with the current system of securities regulation. Both sides have proposed changes, but the sheer volume of initiatives, conflicting agendas and lack of convincing leadership is threatening to thwart effective reform.

In no particular order, there is a federal push, a co-ordinated provincial effort, individual provincial initiatives, joint reform projects by regulators and individual provincial regulators’ reforms. Unfortunately, they are duplicative, unco-ordinated and leave market players wholly uncertain.

Take Ontario, for example, arguably the most important capital market in the country. It faces reform proposals on several fronts: the federal Finance Ministry’s wise persons’ committee; provincial finance ministers’ efforts to produce a passport system; the Canadian Securities Administrators’ uniform securities law project; and three separate efforts to bring about fundamental structural changes.

Both the WPC report and the CSA’s final version of the USL were expected to be released before Christmas. Regardless of what they produce, their efforts remain subject to the whim of various legislatures. But with the current level of political turmoil at both the federal and provincial levels, it seems unlikely any bold reform will move forward.

Any federal reform effort will stir up controversy with the provinces, which have always claimed jurisdiction over securities regulation. That means a federally driven initiative is almost certainly off the agenda until after a federal election, when the new minister would win a long-term mandate.

Similarly, the CSA’s own efforts to produce uniform rules will require the assent of the various provincial legislatures. Even then, the legislatures will have to resist the temptation to tinker at the local level. All the regulators can do is draft the reforms and leave it up to the politicians.

Similarly, the provinces have pledged to pursue a passport system, although elections in several provinces may have dissipated some of the momentum behind the proposal. Provincial initiatives seem far more realistic than anything federally driven, but still the ultimate implementation remains uncertain.

Ontario itself has initiated a trio of reform efforts. The five-year review committee delivered its report this past summer, offering a broad range of recommendations. The report has yet to be acted upon. Meanwhile, the Ontario Securities Commission’s Osborne committee, which is exploring the need for structural reform, was expected to deliver its findings by Jan. 1. It is considering a broad range of possibilities, including spinning off either enforcement or the adjudicative function in an effort to shore up the commission’s image of objectivity.

The OSC has also finally released the recommendations of the regulatory burden task force, struck in 2001 to advise the commission on how it could do a better job of serving investors and the industry. Among its list of 107 recommendations: legal delegation in the absence of the ideal of a national regulator; dividing the Investment Dealers Association of Canada’s regulatory and lobby group functions; overhauling the registration system; reforming the IDA’s governance and disciplinary panels; and considering whether it makes sense to merge the self-regulatory organizations into a single body. The report also recommends ways to improve the commission’s communications, service and organizational culture.

Some of the task force’s recommendations are so old, however, they had already been enacted. As for the others, the OSC has promised to review the proposals and respond by the end of March.

IDA executives were quick to criticize the report for going beyond its mandate in making recommendations about the SRO system, among other things. However, this doesn’t diminish the fact that the task force — made up of former OSC vice chairman Morley Carscallen; Keith Gray, retired vice chairman of TD Securities Inc.; and Gar Pink, a corporate consultant and a former senior partner of Tory Tory DesLauriers & Binnington — were so moved by the volume of criticism they heard, they put the recommendations in their report. This may well reflect the feelings of the industry and investors, but the recommendations don’t appear to have a champion among the regulators.

Commenting on the WPC project, OSC general counsel Susan Wolburgh Jenah sums up the basic problem facing all reforms: “There are so many different possibilities, the real issue is always the follow-through. If nothing happens, it becomes just another report. The issue is the will to follow through. That will determine whether we get anywhere, and that’s impossible to predict.”

This is to say nothing of mere policy projects that promise radical industry reform, such as the OSC’s long-awaited fair-dealing model. That is another project that has been promised and delayed several times. The FDM concept paper was due out by the end of 2003, and it was reportedly on the press as recently as this fall and pulled off again. While it doesn’t quite deal with the fundamental regulatory structure as do the other big projects, it is an initiative that could radically alter the operating environment for financial industry firms.

Ontario doesn’t have the market in speculative reform initiatives entirely cornered. The B.C. Securities Commission is still moving forward with its proposal to bring in sweeping reform. It wants to wean the system away from rules and toward principles-based regulation, overhaul the market access disclosure and registration systems, and bring in more private market enforcement.

The BCSC recently released a study that found, based on interviews with market players and simulations, its proposed new model would improve investor protection without adding regulatory costs. It also expects to have its new legislation ready in time for the spring legislative session.

The BCSC and OSC have been at odds over British Columbia’s plan to go its own way, but it’s notable that the OSC regulatory burden task force recommends many of the ideas that are being pursued by B.C.

Says BCSC chairman Doug Hyndman: “I was particularly pleased to see that the OSC’s task force endorsed themes that we at the BCSC have been pushing: streamlining and simplifying rules and relying less on detailed, prescriptive regulation; moving to a system of firm-only registration; and eliminating the prospectus for companies after their IPOs and relying on continuous disclosure as the basis for public offerings.”

Elsewhere, Quebec is following through on plans to build a provincial super-regulator that handles all of its financial industry regulation. Saskatchewan has already integrated its securities, pension and insurance regulation. Ontario was supposed to do the same, but the idea currently stands as one of those important, fundamental reforms that legislators forgot. IE