Federal Finance Minister Jim Flaherty announced on September 19, 2013 that a deal between the federal government, Ontario and British Columbia has been struck to create a single cooperative national capital markets regulatory system whereby the federal government and those provinces that participate will delegate their authority over capital markets to a single cooperative capital markets regulator. All provinces and territories are being invited to join the proposed cooperative system. Ontario, B.C. and the federal government are currently targeting that the new regulator will be in operation by July 1, 2015.
Provincial Opposition
As has been well publicized, this is not the federal
government's first attempt at creating a national system for
securities regulation in Canada. It was only in December 2011 that
the Supreme Court of Canada (SCC) ruled that the federal
government's proposed act to create a national securities
regulator was beyond its powers and therefore unconstitutional (as
we discussed in our previous Davis LLP bulletins
here and
here).
When the federal government previously proposed a national
securities regulator, both Alberta and Québec submitted
references to their respective Courts of Appeal which successfully
challenged the constitutionality of the proposed legislation. It
seems that the new proposed cooperative system, which appears to
have come as a surprise to many provinces, has not won over the
federal government's old foes on this topic.
Québec's Minister of Finance Nicolas Marceau has
indicated in an initial press release that the Québec
government is against the federal government seeking to do
"...indirectly what it cannot achieve directly".
Québec's opposition stems from its view that the federal
government is trying to move jobs away from Montreal to Toronto, as
Mr. Marceau stated that "The federal government's true
objective is clear, i.e. to transfer the 154,000 jobs in the
Québec financial sector to Toronto".
Québec's Minister for Canadian Intergovernmental Affairs
Alexandre Cloutier emphasized that once the draft legislation is
released, Québec will not hesitate to challenge its
constitutionality in court, if it has to. In a subsequent press
release, Mr. Marceau stated "We do not have any interest in
participating in a project that seeks to centralize in Toronto
regulation of the financial sector."
The response from Alberta's Minister of Finance Doug Horner
was only somewhat more muted. While he expressed surprise at the
lack of provincial consultation, Horner noted he would
"...need time to review it before understanding its full
implications". However, he emphasized that he would
"...continue to protect Alberta's interests and ensure
that decisions affecting our province are made in
Alberta."
The Current Passport System
A substantial part of the Québec and Alberta
Ministers' objections to the proposed cooperative system is
that Canada already has a highly harmonized and cooperative
securities regulatory framework with the "passport
system" and the many national and multilateral instruments and
policies that have been developed by the Canadian Securities
Administrators. The current passport system is a system of
instruments and policies that were developed and adopted by all of
the provinces and territories of Canada, except in certain
circumstances, Ontario, with the goal of providing a single window
of access to Canada's capital markets for domestic and foreign
issuers. It enables participants to clear a prospectus, obtain a
discretionary exemption and to register as a dealer or adviser, by
obtaining a decision from the securities regulator in their home
province or territory and have that decision apply in all other
jurisdictions. Opponents to the creation of a new national
regulator point to the passport system as already providing a
suitable, cooperative national system.
To that end, the "Provincial-Territorial Ministers
Responsible for Securities Regulation" put out a
Communiqué on September 24, 2013 responding to the proposed
cooperative system, stating that "Except for Québec,
which has already rejected the federal initiative, Council members
will conduct their own due diligence regarding the best path
forward" and that Council Ministers have agreed to continue to
develop a Memorandum of Agreement to improve Canada's current
securities regulatory framework.
Federal Persistence
The SCC did not completely shut the door to a national
securities regulator in its 2011 decision. As was noted in the
judgement, "...a cooperative approach that permits a scheme
that recognizes the essentially provincial nature of securities
regulation while allowing Parliament to deal with genuinely
national concerns remains available."
The federal government obviously took encouragement from this part
of the decision and it is apparent that the new proposed regime is
carefully and deliberately designed to address the objections
raised in the SCC's 2011 ruling. The federal government's
continuing efforts in this area have been telegraphed by the fact
that The Canadian Securities Transition Office, which was set up
when the federal government first proposed the national securities
regulator, had its funding extended in the 2013 Federal Budget. The
2013 Federal Budget stated that "The Government's
preferred approach to improving the regulation of Canada's
capital markets is through a common securities regulator
established cooperatively with provinces and territories." In
addition, the 2013 Budget noted that "...the Government has
consulted with provinces and territories on establishing a common
securities regulator on a cooperative basis as outlined by the
Court."
The continuing push in this area appears in some part to come from
Mr. Flaherty himself. He has indicated that following the 2011
Supreme Court ruling, "The government, some of my colleagues,
had doubts about the wisdom of persisting on this subject." He
then reportedly added "But hope springs eternal."
Key Features of the Proposed Cooperative System
Some of the key features of the proposed cooperative system are
as follows:
Offices: Although the head office will be located
in Toronto, the new regulator will have offices in each
participating province with staff, expertise and resources
commensurate with the needs of that jurisdiction. Regulatory
offices will provide the same range of services currently provided
in the applicable jurisdiction.
New Legislation: To create the proposed
cooperative system, the participating provinces and territories
will each adopt a uniform act and regulations which will cover all
the areas that current provincial securities legislation covers.
The federal government will also adopt a complementary act at the
federal level to address criminal matters, matters relating to
national systematic risks and national data collection. The new
regulator will administer both the provincial and federal
acts.
Fees: The new regulator will introduce a single,
simplified fee structure designed to allow it to be self-funding,
without imposing unnecessary costs on market participants. The
federal government will also provide transitional funding to
provinces and territories that lose net revenue as a result of
transitioning to the proposed cooperative system.
Oversight: Oversight of the new regulator will be
through an expert board of directors appointed by the Council of
Ministers. The Council of Ministers will in turn be made up of the
Ministers responsible for capital markets regulation in the
provincial participating jurisdictions and the Minister of Finance
of Canada. The Council of Ministers would also be responsible for,
among other matters:
- approving new regulations proposed by the board of directors (although the initial regulations would be published in each participating jurisdiction for comment);
- proposing amendments to provincial legislation and the complementary federal legislation (although the new legislation would be agreed to in advance of establishing the proposed cooperative system); and
- requesting the board of directors to consider making specific regulations.
Tribunal: The new regulator would have an
adjudicative division consisting of an independent adjudicative
tribunal with the ability to conduct hearings across Canada.
Mr. Flaherty has also reportedly indicated that the new regulator
will have some jurisdiction over the derivatives market in
Québec as part of its goal to oversee matters relating to
national systemic risks. He stated that "Assuming we fulfill
our constitutional responsibility – which we will –
then we will have to keep an eye on the derivatives market in
Québec".
Moving Forward
The federal government, Ontario and B.C. have agreed to use their best efforts to meet various implementation milestones, including:
- execution of a Memorandum of Agreement by each participating jurisdiction, setting out the terms and conditions of the new system with the new draft legislation attached, by January 31, 2014;
- publication of draft regulations for public comment by March 31, 2014;
- execution of an agreement by each participating jurisdiction setting out the terms and conditions for integration by May 30, 2014; and
- the enacting of the new legislation by each participating jurisdiction by December 31, 2014.
Conclusion
As can be seen by the proposed timeline, the federal government, Ontario and B.C. are optimistic about the potential success of the proposed cooperative system. It is an interesting question, however, as to which other provinces besides B.C. and Ontario will participate in the proposed cooperative system. Certainly Alberta and Québec, both of whom have an important share of the capital markets in Canada, do not appear likely to join the cooperative system, at least not initially. In any event, even without these two key players, if the proposed cooperative system moves forward and is successfully established, it will have a profound impact on the securities regulatory landscape across Canada.
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