Expert Panel on Securities Regulation

Creating an Advantage in Global Capital Markets


Table of Contents

If there is one message that came through clearly during our deliberations, it is that global financial systems matter. They matter to Canadians and they matter to international investors. When organized properly and operating efficiently, financial systems deliver capital that spurs job creation, facilitates investment, and creates opportunities.

What is also clear is that in today’s increasingly interconnected economy, how Canada organizes its own capital markets matters not only to Canadians—but to the world. As billions of dollars move around the globe at the click of a mouse, investors will not tolerate outdated, cumbersome, or duplicative systems. And investors will not tolerate poor enforcement of securities law. If Canada is to realize its potential in the global economy, the regulation of its financial markets must be among the world’s best. At the moment, it is not.

Our mandate focuses on securities regulation, the subject of over 70 years of study and several large bodies of work in recent years alone. This work informed our discussions; however, over the course of 10 months, we also met with well over 100 stakeholders, consulted with experts, and reviewed the results of our commissioned research studies.

The result is our report, which begins with an examination of different approaches to sound regulation. We recommend Canadian securities regulators should focus less on process and more on outcomes; relying more on articulating principles than on multiplying rules. We believe that regulation should be grounded in guidance and rules on a bedrock of well-formulated principles. This will help reduce unnecessary compliance costs, improve regulatory outcomes, and give Canada a competitive advantage. And, by harnessing the flexibility of proportionate-based regulation, we believe that regulation could be better tailored to reflect the risk, size, and sector of public companies in Canada. Canada’s preponderance of smaller public companies should be a particular focus of this effort.

We also recommend adopting a comprehensive performance-based system of measurement for securities regulation—as a few provincial securities regulators are today doing—which will both sharpen the focus on outcomes and improve accountability to Canadians. To promote fairness in the adjudication of regulatory matters, we propose the establishment of an independent adjudicative tribunal. In coming to this conclusion, we were heavily influenced by the success of Quebec’s independent tribunal.

During our consultations with Canadians, we heard particular concerns about investor protection. My fellow panellists and I were troubled by the accounts of individuals who had not been well-served by the current regulatory system. Investors who have lost money because of fraud or inappropriate advice quite naturally want their money back. But the likelihood of successfully obtaining this basic form of redress varies across the country.

Investors also told us of the difficulty of commencing the complaint process and the challenge of navigating the complicated web of securities regulators and national self-regulatory organizations.

We also heard that the enforcement of securities law in Canada does not compare favourably relative to other jurisdictions. This is true whether it is administrative enforcement by securities regulators and self-regulatory organizations, criminal investigations by police, or prosecution in our courts. If a basic purpose of securities regulation is to protect investors, Canada’s system is falling short.

Over the past number of years, significant progress has been made through the development of the current passport system. This has enhanced the levels of harmonization across jurisdictions and facilitated operations for companies carrying on business in different parts of the country.

Although the passport system is a major step forward, most stakeholders told us that its application is limited and it still falls short of what is required in today’s global marketplace. We agree. The shortcomings of the present system are clear: it remains too slow, too cumbersome, and too expensive. At a time when speed counts, policy development is protracted, negatively affecting Canada’s ability to respond in a timely manner to national and global developments.

The Panel heard repeated—and often passionate—concerns about the cost and confusion caused by our fragmented system of 13 separate securities regulators. In this, our work echoes that of our predecessors. While the terminology has differed over the years— single, common, Canadian, national, or federal—the conclusion of virtually every study has been the same: Canadians are ill-served by such a balkanized system. It is worth noting that Canada is the only developed country without a national securities regulator.

The lack of a national Canadian securities regulator also raises wider concerns about systemic risk as there is no national entity accountable for the stability of our national capital markets. Systemic risk is no longer confined to just banking institutions; it now increasingly presents itself in capital markets, as the current financial crisis has clearly demonstrated. Neither the Canadian Securities Administrators nor the provincial and territorial securities regulators can provide a counterpart to the Bank of Canada or the Office of the Superintendent of Financial Institutions—federal agencies that are accountable for their role in the stability of Canada’s financial sector. We are convinced, therefore, that the federal government needs to have a strong presence in the regulation of Canada’s capital markets. We are assured by our constitutional advisor that the federal Parliament has the constitutional authority to enact legislation that would provide for comprehensive capital markets regulation in Canada.

With a mandate to find common ground and propose a workable solution, our central recommendation is that Canadians need a single securities regulator, with a strong decentralized structure that recognizes Canada’s unique makeup and regional and local expertise, provides clear national accountability, and offers more effective enforcement and redress for investors.

At the same time, we want to build on the best of the current system. Those features that have served Canadians well—and helped attract foreign capital to our markets—have been retained and strengthened in our recommended structure.

We believe there are compelling reasons—and substantial benefits—for provinces and territories to participate in the new regulatory regime. If, however, after a reasonable period of time, some provinces or territories remain outside of the new structure, market participants—issuers and registrants—in those non-participating jurisdictions should have the opportunity to opt-in and reap the benefits of a single, national securities regulator, administering one Act, applying one set of rules, and collecting one set of fees.

Our report provides a clear and comprehensive roadmap to move Canada from where it is to where it must be. To facilitate the transition to the new structure, we have included a draft Securities Act. The steps we are proposing are both overdue and essential. They will finally provide Canadians with true national accountability across the full spectrum of financial regulation and align Canada with emerging trends in international financial markets. This will simplify the system, reduce costs, and attract investment.

Positioning Canada for success in today’s interconnected markets is critical. The challenges are too great and the opportunities too numerous to muddle through as before. We must act—and we must act now.

Thomas Hockin

The Honourable Thomas Hockin, P.C.
January 2009