The report asserts that one central regulator would be more efficient, produce better policy, and more effectively enforce securities laws than our current system. It states, “investors will not tolerate outdated, cumbersome, or duplicative systems.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. . . .” Empirical evidence suggests otherwise.
In a 2006 study, the Organisation for Economic Co-operation and Development ranked Canada second in securities market regulation and investor protection. In a 2010 study, the World Bank ranked Canada fifth in investor protection. Canada weathered the recent global financial crisis far better than its counterparts. The International Monetary Fund’s latest economic outlook has Canada leading G7 countries in economic growth this year and next. Though Canada is ranked 14th by GDP, the Toronto Stock Exchange and TSX Venture Exchange (TMX Group) is the world’s eighth-largest stock exchange group with a market capitalization of $1.3 trillion. TMX Group ranks seventh in the world by public equity capital raised. All evidence Canada’s regulation of its financial markets is among the world’s best.
The Hockin report claims its “decentralized structure” (a central regulator with regional offices in major financial centres and a network of smaller local offices) would be less expensive than our existing decentralized structure. No research is presented to support this assertion. According to a study conducted by the CIRANO research group, the direct costs of regulation per million dollars in capitalization are $145 in Canada, $293 in Australia, and $141 (not including regulation at the state level) in the U.S. Moreover, the study found issuance costs for comparable amounts are substantially lower in Canada than south of the border.
The report characterizes Canada’s securities regulatory system as balkanized. However, through the concerted efforts of the Council of Ministers of Securities Regulation and the Canadian Securities Administrators, much has been accomplished in the past decade to streamline securities regulation and harmonize securities laws. The passport system, together with the Ontario interface, allows market participants to clear a prospectus, obtain a discretionary exemption, and register as a dealer or adviser by obtaining approval in their home jurisdiction and applying that decision across Canada. Far from being cumbersome and fragmented, issuers now deal with one regulator and one set of harmonized laws. With the high level of co-ordination and collaboration that exists among CSA members today, we already have a de facto national regulatory scheme.
Canada’s enforcement is poor and would improve under central management, asserts the report. Empirical evidence supports neither contention. Enforcement of securities laws in Canada is focused locally (as in the U.S., where the majority of enforcement is undertaken by state regulators) but co-ordinated nationally through reciprocal enforcement orders, information sharing, joint investigations, and joint hearings. In 2009, CSA members commenced 124 proceedings, concluded 141 cases, issued 83 cease-trade and asset-freeze orders, and granted 77 reciprocal orders. The swift and decisive handling of the recent Earl Jones matter by l’Autorité des marchés financiers, in conjunction with the police, other CSA members, and the Securities and Exchange Commission, is evidence of effective and responsive enforcement. In comparison, the SEC blundered the handling of the Bernard Madoff matter (in which the SEC had evidence of fraud as early as 2000), which demonstrates that centralization of enforcement does not necessarily improve, and may hamper, enforcement. Of course, a well-functioning and properly resourced criminal justice system is also required.
Without the unanimous support of the provinces, the creation of a federal securities regulator and the introduction of federal securities legislation will add another layer of rules and bureaucracy. Many of the recommendations contained in the Hockin report (i.e. performance measures, principles-based, proportionate-based, and risk-based securities regulation, and independent tribunals) are currently practised in one or more provinces. Such improvements and others can be accommodated and harmonized within our existing structure.
Bryan Haynes ([email protected]) is a partner and co-chairman of the commercial transactions practice group at Bennett Jones LLP. This column expresses the opinions of the writer, not his firm, and does not constitute legal advice.
