Expert Panel on Securities Regulation

Creating an Advantage in Global Capital Markets


Table of Contents

Financial markets are more international than ever before. While we do not live in a borderless world, capital flows easily across borders and can significantly impact economic welfare. This point has been borne out by the recent stresses experienced by financial institutions around the world, originating with the precipitous decline in the sub-prime mortgage market in the United States that is now impacting employment and retirement savings worldwide. Market innovation has led to much greater prominence for institutions such as hedge funds and private equity funds, which are not subject to the same market oversight as traditional institutions. New instruments such as collateralized debt obligations and credit default swaps have allowed the transfer of risk in ways that are testing the world’s financial architecture. These developments, and the consequences of the growing global interdependencies, pose challenges for financial regulation.

As these observations indicate, the ambit of financial regulation is broad. The scope of the Expert Panel’s mandate, however, is relatively narrow. Our focus is on those areas that enhance the content, structure, and enforcement of securities regulation in Canada. One of the early lessons we take from the current financial crisis is that regulators, legislators, and rule makers must be mindful of macro-prudential considerations when designing regulation. In this context, one key tenet of our work has been to consider how to facilitate better coordination and cooperation between the authorities with responsibilities for financial stability and the various parts of our financial sector—banking, insurance, pensions, and capital markets—both across geographic borders within Canada and internationally.

Canada’s financial regulatory system is best described as a hybrid not common in the world.1  In common with most other countries, oversight of banking in Canada is a national responsibility, discharged by the Office of the Superintendent of Financial Institutions. The Bank of Canada, like most central banks, has a mandate for overall financial stability. Canada’s 13 securities regulators have provincial and territorial mandates. There is no securities regulator with a specific mandate for facilitating the reduction of systemic risk.

Following the terms of our mandate, this report begins by considering the objectives of securities regulation, examining the role of systemic risk, and discussing the often conflicting objectives of competition, innovation, and investor protection. This is followed by an examination of principles-based regulation as a possible response to a securities regulatory environment that many believe has become too reliant on rules. We also question whether securities regulators should make greater use of proportionate-based regulation given some of the unique characteristics of Canada’s capital markets. We conclude by examining whether regulatory matters should be adjudicated by an independent tribunal in Canada.

Our report goes on to discuss a number of areas where we believe investors could be better served. Although not a core mandate item, we felt compelled to address a number of investor issues in light of our findings. We focus on the complaint-handling and financial redress mechanisms in Canada as well as the lack of representation of investors in the securities regulatory policy development process.

We then go on to address which structural model, a passport system or single securities regulator, would be best for Canada, and why. This is followed by a discussion of opportunities to strengthen enforcement as well as to improve the regulation of derivatives. In the final section of the report, we provide a transition plan that identifies key issues and steps to get us from where we are today to the implementation of our recommendations. A key component of this transition plan is a draft Securities Act.2

Securities regulation must protect investors and promote market integrity, while achieving effective regulatory outcomes without imposing unnecessary compliance burdens. Our report recommends how this can be achieved. Our conclusions and recommendations have been shaped by the submissions we received, by our deliberations, consultations, and research,3 and by our experience.

Consultations and Stakeholder Input

Between April 21st and July 15th , 2008, the Panel held meetings with over 100 stakeholders across the country, representing the diversity of participants in Canada’s capital markets.

The Panel also met with certain regulators, policymakers, and market participants in the United Kingdom and United States in order to better understand the regulatory practices of these important jurisdictions and gain international perspectives of Canada’s capital markets.

In response to our consultation paper, the Panel received over 70 written submissions from firms, regulators, investors, business associations, and others. Quotes from a number of these submissions are presented in captions throughout this report.

The Stakeholder Report, released in August 2008, provides a summary of the face-to-face consultation meetings. The written submissions can be accessed at


1 A schematic of Canada’s securities regulatory system is provided in Appendix 4.

2 The draft Securities Act, with a commentary and a table of concordance, is accessible at The table of concordance relates the provisions in the draft Securities Act to the corresponding provisions in the applicable provincial securities acts, or if there are no corresponding provisions, to the relevant source(s).

3 More information on the commissioned research studies is provided in Appendix 3.