Each province has its own securities regulator, which is either a self-funded commission or an entity funded within a larger government department. The securities regulator administers the province’s securities act and, correspondingly, promulgates its own set of rules and regulations. The securities regulator delegates certain regulatory responsibilities to national SROs, such as IIROC and the MFDA. Accountability for securities regulation extends from the securities regulator to the Minister responsible for securities regulation and, ultimately, the legislature, in each province.
The concerns about duplication and overlap expressed by market participants and SROs that largely operate nationally have motivated efforts by the provinces to better harmonize and coordinate securities regulation in Canada. The most important effort is the implementation of the passport system. Under the passport system, compliance with the rules and decisions of the principal regulator is intended to constitute deemed compliance with the requirements of all other participating jurisdictions, in essence providing a passport to undertake capital markets activity across Canada. The passport system is currently limited to prospectus filings and certain types of discretionary exemptions. Efforts are underway to expand it to include registration requirements, currently expected to be implemented by the end of 2009. Ontario supports the harmonization and improved coordination of securities regulation in Canada; however, it does not wish to participate in the passport system.27
We have spent considerable time debating the appropriate structure of securities regulation in Canada, reviewing the work of previous bodies, consulting with stakeholders and expert commentators, and listening carefully to our international counterparts. We believe that the passport system is a positive development. It will reduce compliance costs and the complexity of securities regulation for regulated entities operating in more than one jurisdiction. We have, however, a number of significant concerns that arise from the fragmented securities regulatory structure that the passport system is unable to address, even when fully implemented. Many of these concerns have been informed by how securities regulators have performed under the recent turmoil that continues to unfold in global capital markets.28
I. Concerns with the Current Structure
We believe that the fragmented structure, requiring decisions to be coordinated across up to 13 jurisdictions, makes it difficult for Canadian securities regulators to react quickly and decisively to capital market events. One illustration of this difficulty is the adoption in September 2008 by our international counterparts, including the United States and United Kingdom, of restrictions of short-selling of certain stock as a temporary stability measure. The Canadian response lagged behind the coordinated efforts of the United States and the United Kingdom, and was not uniform across the provinces. A second illustration is the delay between the freezing of the non-bank Asset Backed Commercial Paper (ABCP) market in August 2007 and the release of a consultation paper by the Canadian Securities Administrators to seek input on a number of proposals that aim to prevent similar capital market failures in the future.29 We find that the fragmented securities regulatory structure is prone to foster slow securities regulatory responses, which makes Canada vulnerable to market and reputational risks.
Second, we are concerned that our system of provincial mandates is incongruent with the national response required to address developments in capital markets that are increasingly national and international in scope. One of the important lessons from the recent capital markets crisis is that systemic risk is increasingly presenting itself in capital markets rather than being solely confined to banking institutions. We believe that effectively addressing systemic risk requires the coordination and collaboration of all financial sector regulators in Canada. It also requires working effectively with our international counterparts. We do not believe that multiple securities regulators will be able to work effectively as part of a national systemic risk management team, as structural challenges will likely compromise its ability to be proactive, collaborative, and generally effective in helping to address larger capital market issues on a timely basis. A delayed response, which is poorly managed by any one of the securities regulators, could have a detrimental impact on the integrity of Canada’s capital markets as a whole.
“Under the current system, the reality is that all local rules still have to be complied with, whether they are rules of the principal regulator’s jurisdiction or rules of the other non-principal jurisdictions.”
Canadian Bankers Association
Finally, we believe that the current structure fundamentally misallocates resources, causing securities regulation to be less efficient and effective. Resources must be devoted to keep 13 separate securities regulators operating in Canada. This is inefficient since each jurisdiction dedicates a different level of resources to securities regulation, which causes the intensity of policy development, supervision, and enforcement activities to vary across Canada. In addition, most efforts are duplicative, which results in unnecessary costs, overstaffing, and delays. Canadians, in turn, are afforded different levels of investor protection depending on the jurisdiction in which they reside or invest. Second, market participants will continue to be burdened with undue compliance costs, even with the full implementation of the passport system. Market participants will still have to pay fees in up to 13 jurisdictions. They will still have to deal with the general inefficiencies associated with differences between provincial statutes and regulations, the ongoing use of local rules, and variations in the interpretation of national rules.
We think important progress has been made to date to make securities regulation more efficient. The fragmented structure, however, does not allow Canada to be as responsive and effective as it should be, especially when capital markets are under stress. It also imposes undue costs on market participants. Further changes will invariably be undermined by the inefficient structure. We believe that 13 securities regulators must be consolidated into one. Canada needs a single securities regulator. This echoes the views expressed by the vast majority of market participants that we consulted. It also reflects the vast majority of assessments by third-party international bodies, including, most recently, the International Monetary Fund and the Organisation for Economic Co-operation and Development (see Box 1).
“There would be advantages in moving towards a single securities regulator. Significant improvements to the regulatory system have been made as a result of the creation of the Canadian Securities Administrators, including those that will be brought about by the implementation of the passport system. Even so, moving further to a single regulator would allow policy development to be streamlined, reduce compliance costs, and improve enforcement.”
International Monetary Fund, Canada: Financial System Stability Assessment—Update, 2008
“The current diversity of regulations – for example, each province has its own securities regulator – makes it difficult to maximise efficiency, and increases the risk that firms will choose to issue securities in other countries [i.e., other than Canada]. A single regulator would eliminate the inefficiencies created by the limited enforcement authority of individual provincial agencies.”
OECD, Policy Brief: Economic Survey of Canada, 2008
II. Our Recommended Structure for Canada
Our recommended structure preserves and builds on the strengths of the current system while addressing its shortcomings. We need a single securities regulator that provides clear national accountability, reduces compliance burden, and strengthens enforcement. It must also better serve the needs of investors. However, we need the single securities regulator to maintain the high level of local service currently being provided, and to continue to advance the distinct needs of the regionally-based market participants and industry sectors across Canada.
We recommend the establishment of the Canadian Securities Commission to administer a single securities act for Canada. We recommend the adoption of the structure prescribed below.
a) Canadian Securities Commission
The Canadian Securities Commission would be responsible for policymaking and rulemaking activities as well as the investigation and prosecution of regulatory offences. The Commission would work to meet the core objectives of securities regulation by following our guiding principles of regulatory conduct, including facilitating the reduction of systemic risk in the larger financial system.30 The Commission would provide a high level of service to investors and market participants across Canada, operating in a manner that is efficient, including in the administration of rules and in the processing of disclosure documents and other filings.
Based on our earlier discussions, we believe that the Commission should focus particular attention in advancing a number of areas. The Commission should:
The Commission’s Executive Management Team would consist of the Chair (Chief Executive Officer), a number of Vice-Chairs, other members of the Commission, and an Executive Director. The members of the Commission, including the Chair and Vice-Chairs, would be appointed based upon the recommendations of the Nominating Committee described below. The Executive Director would be appointed by the Chair and would be responsible for managing the day-to-day operations of the Commission.
We note that the experience and reputation of the inaugural Executive Management Team, especially the Chair, will be critical to the success of the Commission. Ideal candidates would have a proven track record of managing large organizational changes, be highly regarded within the securities law and regulatory fields in Canada, and have strong leadership abilities. To attract the right people, staff compensation needs to be competitive, reflective of the compensation provided in the private sector for equivalent skills and experience.
We recommend that the Chair of the Commission become a member of the Financial Institutions Supervisory Committee (FISC) and the Senior Advisory Committee (SAC). These Committees are comprised of the heads of the federal departments and agencies that support the regulation of the financial sector and the financial stability of Canada.31 FISC is statutorily-mandated to review the health of regulated financial institutions and reports to the federal Minister of Finance. The SAC reviews financial sector policy issues, including legislation and regulation. With the addition of the Commission Chair, the Committees would bring together all key players involved in financial regulation and stability in Canada, promoting a more integrated view of emerging issues that will help to support improved responses to them.
We believe that the Commission’s head office should be located in one of the four largest provinces: British Columbia, Alberta, Ontario, or Quebec (assuming these provinces participate). The final decision will likely reflect negotiations with the participating jurisdictions. We strongly encourage the Commission to establish regional offices in major financial centres, each headed by a Vice-Chair in the largest provinces, to be responsive to the distinct needs of regionally-based sectors and local market participants. Smaller local offices will be maintained to properly service local market participants and support local enforcement actions. Regional offices in certain areas of Canada could specialize in the regulation of specific sectors or types of financial instruments. For example, British Columbia could specialize in the mining sector; Alberta in the oil and gas sector; Ontario in the financial services sector; and Quebec in derivatives. The regional and local offices should initially consist largely of staff from existing provincial securities regulators to ensure the continuity of regulatory expertise and to provide uninterrupted regional and local service.
The Commission should be self-funding with fees set on a cost-recovery basis, to reflect the cost of administering regulation. We recognize that the fees collected by some provincial securities regulators represent revenues that fund government expenditures. We encourage the federal government to negotiate a direct compensation arrangement to ensure that these revenue shortfalls are not provided through fees levied by the Commission.
The Commission would be accountable to federal Parliament through the federal Minister of Finance. The Minister would have the right to veto rules proposed by the Commission.
b) Special Independent Panels
We recommend the establishment of two independent panels; one would represent the views of investors and the other would represent small reporting issuers to the Canadian Securities Commission. The Commission would be required to consider and respond to any views expressed or proposal made in a representation by either panel, with a written statement publicly released by the Commission if it disagrees with a representation. Both panels would be supported by a dedicated secretariat and funded separately. Each Panel would prepare an annual report that reflects on its activities and discusses the actions taken by the Commission to address its concerns.
i) Investor Panel
The investor panel would work to ensure that the views of investors are captured as the Canadian Securities Commission develops securities regulatory policy. It might contribute to support the development of a more principles-based approach. It would help to steward the development of more effective investor education programs. The panel should be comprised of individuals that have a broad knowledge of, and a keen interest in, investor issues. Candidates could include investor advocates, journalists, academics, lawyers, and retired civil servants.
ii) Small Reporting Issuer Panel
The small reporting issuer panel would advise the Canadian Securities Commission of the impact of its regulatory and policy initiatives on small reporting issuers. The panel would identify regulatory issues that have a disproportionate adverse effect on small issuers. It is anticipated that it might support the implementation of more principles-based regulation and, in particular, advance proportionate regulation for small issuers. The panel should be made up of individuals that understand the compliance obligations of small reporting issuers, including lawyers, accountants, and managers.
c) Governance Board
A Governance Board would oversee the Canadian Securities Commission. Certain Panel members wanted the role of the Board to be focused on the operational effectiveness of the Commission in areas that include financial resources, services, property, personnel, and contracts. The Board would provide strategic perspective on the Commission’s financial and other non-regulatory affairs, supporting sound management practices and effective service delivery. Other Panel members wanted the role of the Board to be expanded to include providing strategic perspective on regulatory affairs and providing an oversight role in policy and rule changes proposed by the Commission for consideration by the federal Minister of Finance. There are arguments to support either view of the role of the Board in the oversight of the Commission. Both should be carefully considered by the architects of the Commission.
All members of the Board would be independent of the management of the Commission. The Chair of the Commission would, however, be an ex-officio member of the Board. The Board would be required to periodically report the findings of its oversight activities to the federal Minister of Finance.
d) Federal-Provincial Nominating Committee
The federal Minister of Finance and the participating provincial jurisdictions would each be given the opportunity to appoint a member to the Nominating Committee. The Nominating Committee would be responsible for recommending candidates to the federal Minister of Finance for the members of the Canadian Securities Commission, including the Commissioners (i.e., Chair, Vice-Chairs, and other Commissioners), the members of the Governance Board, and the adjudicators of the independent adjudicative tribunal (discussed below). The federal Minister of Finance would only be able to consider appointments based on the candidates proposed by the Nominating Committee. This would support the promotion of regional balance in the appointment process.
e) Council of Ministers
A Council of Ministers should be established comprising the federal Minister of Finance and a Minister designated by each participating jurisdiction. The Council would discuss the development of securities policy and the ongoing administration of the system. It would serve as a forum to discuss emerging issues in Canada’s capital markets and work to ensure that securities regulation supports the distinct needs of regions and industrial sectors across Canada. The Council would consider proposed legislative amendments to the Securities Act. The provinces would have the power to veto any proposed legislative amendments.32
f) Independent Adjudicative Tribunal
We support the creation of an independent adjudicative tribunal. Under our recommended structure, the tribunal would assume adjudicative functions that would otherwise be exercised by the Canadian Securities Commission. The Commission, however, would retain jurisdiction over certain decisions, such as discretionary exemptions from the securities regulations and rules as well as matters regarding contested takeover bids. Cases involving quasi-criminal or criminal matters would continue to be referred to the appropriate authorities and tried in the court system.33 The adjudicators would be appointed based on the recommendations of the Nominating Committee. The federal Minister of Finance would order the Commission to allocate a certain amount of funds each year to fund the tribunal.There were differences of opinion among the panel members as to the role of the Governance Board in the oversight of the tribunal. Some suggested that the Governance Board should oversee the tribunal to promote operational efficiency while others thought that the Governance Board should not have such a function as it might compromise the independence of the tribunal.
The tribunal should be designed in a manner that would maximize its effectiveness. First, adjudicators should have expertise in securities regulation, capital markets, and adjudication. This could include retired judges and former commissioners of provincial securities commissions. Appointments should be up to a maximum term of five years. Second, the tribunal should be designed to ensure regional presence. Strong consideration should be given to establishing tribunal offices across Canada in order to conduct hearings locally and foster the development of local expertise. Finally, the tribunal should have a Chief Adjudicator to oversee the operations of the tribunal.
g) Self-Regulatory Organizations
The SROs, such as IIROC and the MFDA, and other regulatory organizations, such as the TSX, should continue to play a critical role in the regulation of Canada’s capital markets. In our recommended structure, SROs would only be overseen by the Canadian Securities Commission. This would reduce the compliance costs of the SROs, and it would likely result in more consistent regulation, as the Commission could ensure greater consistency between its policy and those of the SROs.
While the Panel believes that self-regulation is an important feature of our regulatory system that should be preserved, the Panel heard numerous complaints about the lack of independence of the SROs from the industry, the contractual relationships with the regulator (rather than a legislative one), and the concerns from investors about the process of complaint-handling and redress. A full review of SROs was beyond the scope of our mandate. The Commission, once formed, should take stock of the performance and responsibilities of the SROs.
h) Capital Markets Oversight Office
The establishment of the Canadian Securities Commission will take some time to negotiate and implement. We believe, however, that immediate action should be taken to establish a strong national presence in securities regulation.
We recommend the immediate establishment of a Capital Markets Oversight Office reporting to the federal Minister of Finance.
The Office will be responsible for providing leadership in the regulation of securities, both domestically and internationally. It will collaborate with regulators to develop policies that reflect the best interests of Canada rather than those of a single jurisdiction. It will closely monitor global financial markets. We envision that the role and function of the Office will be absorbed by the Commission when the latter becomes operational.
III. Why Our Recommended Structure is Better for Canada
The proposed structure provides clear national accountability to market participants and to the public. The federal Minister of Finance and, ultimately, the federal Parliament would be accountable for securities regulation in Canada. Decisions would be made by a single entity, rather than 13, facilitating quicker, more decisive action. The regulation of capital markets would have a national mandate that would complement the national character of Canada’s capital markets. The Canadian Securities Commission would support improved coordination with domestic and international financial sector regulators. Canada, overall, would be able to respond from a position of greater strength to financial instability.
The decentralized structure, with regional offices in major financial centres and a network of smaller local offices, would work to ensure that provincial and regional interests are thoroughly represented at all levels of decision-making while benefiting from coordination, both in terms of internal management, and relationships with other domestic and international financial sector regulators. The regional and local offices would support local enforcement actions, serve as a first point of contact for complaints of regulatory misconduct, and generally provide a high level of service to meet the needs of local market participants and the public.
The structure would consolidate all policymaking and rulemaking activities for Canada into the Canadian Securities Commission. This would provide for more cohesive and responsive securities regulation. As discussed earlier in the report, it would support greater regulatory innovation, including more proportionate, principles-based regulation, and it would allow for the advancement of a comprehensive system of performance measurement in securities regulation for Canada. Regulated entities would also no longer have to comply with and pay fees in up to 13 jurisdictions. They would only be subject to a single fee and comply with a single set of rules and regulations. This would reduce compliance burden and allow resources to be put to more productive uses.
The enforcement of securities law would no longer be fragmented across 13 different jurisdictions. It would fall under the sole responsibility of the Canadian Securities Commission. This would facilitate the better use of enforcement resources and concentrate expertise. It would provide for uniform enforcement priorities and investor protection across Canada. Enforcement would be improved by advancing a more principles-based approach and building on the risk-based approach currently employed in Canada. The establishment of an independent adjudicative tribunal would help to ensure that market participants across Canada would benefit from a fair hearing.
Investors would be better represented by the recommended structure. The independent investor panel would work to ensure that securities regulatory policy is developed in a manner that is more mindful of the considerations of investors. It would provide an independent voice on investor issues to the Canadian Securities Commission. Basic investor education could be provided by the Commission or through another regulatory entity. Investors across Canada would also benefit from having the option of seeking financial redress at the Commission without having to engage the court system. Investors that have been subject to wrongdoing would be compensated expeditiously through the use of the Commission’s investor compensation fund.
The structure would strengthen the reputation of Canadian capital markets regulation internationally. The Canadian Securities Commission would be able to better represent Canada at international meetings and negotiate with a strong, single voice. The Commission would, for example, be able to work more effectively with other countries in addressing many pressing global regulatory issues, including the development and oversight of international accounting and auditing standards, the oversight of credit rating agencies, and the regulation of derivatives. In addition, a single, streamlined regulatory approach would make Canada’s capital markets more attractive to foreign issuers and investors.
“The status quo is not acceptable and the pace of reform toward an efficiently operating capital market is painfully slow. The federal and provincial governments must lead the bold reform that industry and all market participants have been calling for.”
Advocis
The fragmented structure of securities regulation weakens Canada’s financial sector regulatory framework that otherwise exhibits strong federal leadership. Our consolidated structure should be implemented as soon as possible so that Canada can position itself to better respond to financial instability and attain better securities regulatory outcomes.
IV. Future Directions to Modernize Financial
Sector Regulation
We believe that once the path to the Canadian Securities Commission has been established, a larger assessment should be undertaken to examine whether Canada should reform the regulation of its financial sector. Many of Canada’s financial institutions engage in activities that cut across banking, insurance, and securities. Yet, the regulation of these financial institutions is often undertaken by separate regulators looking at separate parts, rather than examining the activities as a whole. This has had implications for the safety and soundness of the financial system and the general efficiency of regulation. There may be an opportunity, therefore, to reform the structure of financial sector regulation to better reflect the realities of the modern financial services industry. In this regard, we are intrigued by the recommendations of our research study on this topic that Canada should consider implementing an objectives-based regulatory approach, under either a single, consolidated financial sector regulator, or under a twin peaks model that would create separate agencies for prudential regulation and business conduct.34
Endnotes
27 The reasons why Ontario does not wish to participate in the passport system are explained in Ontario Securities Commission Notice 11–904, “Request for Comment regarding the Proposed Passport System.”
28 Other concerns about Canada’s securities regulatory structure have been described by previous expert bodies and commentators. See, for example, the Crawford Panel on a Single Canadian Securities Regulator (2006), the Wise Persons’ Committee to Review the Structure of Securities Regulation in Canada (2003), or Harris, Douglas A. “White Paper: A Symposium on Canadian Securities Regulation: Harmonization or Nationalization?” Capital Markets Institute (October 2002).
29 For information on the non-bank ABCP crisis in Canada, see Chant, John. “The ABCP Crisis in Canada: The Implications for the Regulation of Financial Markets.” Expert Panel on Securities Regulation (2009).
30 See the section in the report entitled “Objectives of Securities Regulation.”
31 FISC is chaired by the Superintendent of OSFI and includes the federal Deputy Minister of Finance, the Governor of the Bank of Canada, the Chair of the Canadian Deposit Insurance Corporation, and the Commissioner of the Financial Consumer Agency of Canada. SAC is comprised of the same senior officials, but it is chaired by the federal Deputy Minister of Finance.
32 An amendment may be vetoed by provincial ministers representing at least a majority of participating provinces having in total not less than a majority of the population of all participating provinces.
33 Most provincial securities acts contain provisions creating quasi-criminal offences for breaches
of securities law. Quasi-criminal offences can lead to punitive penalties, including imprisonment. Quasi-criminal offences are currently prescribed in provincial securities acts while criminal offences are prescribed in the federal Criminal Code.
34 Pan, Eric J. “Structural Reform of Financial Regulation in Canada.” Expert Panel on Securities Regulation (2009).