Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, January 2009
On January 12, 2009, the Expert Panel on Securities Regulation (the Panel) delivered its final report (the Report), including a draft Securities Act, to the federal Minister of Finance and the provincial and territorial ministers responsible for securities regulation. The Panel's recommendations on how securities should be regulated in Canada are built upon a consideration of the objectives underlying securities regulation and how these might best be achieved. The Panel's overarching conclusion, that securities should be federally regulated, is only the latest call for such a development; however, the Report also includes a plan for transitioning to a federal securities regulatory regime, including a proposal to allow market participants to opt to be governed exclusively by federal securities laws in all jurisdictions, including those jurisdictions that have not voluntarily participated in the federal regulation system.
In light of the long-standing opposition of some provinces to a national securities regulatory regime, observers may justifiably question the degree to which the Report's recommendations will be implemented. However, the new emphasis on the need for a national regime to ensure that Canada is able to effectively respond to events that pose a systemic risk to its financial markets is a subject that is likely to attract significant attention. This and other topical issues raised – when combined with a transition plan that contemplates the possibility, if necessary, of unilateral federal action on the matter – ensure that the Report will receive a significant amount of attention from all interested parties.
Uniform Objectives and Guiding Principles
As a starting point, the Panel considered the objectives underlying securities regulation and recommended that the following be adopted as uniform core objectives of Canadian securities regulation:
(i) protecting investors from unfair, improper, or fraudulent practices, and
(ii) fostering fair and efficient capital markets and confidence in those markets.
The Panel also recommended that, in pursuing such objectives, the conduct of securities regulators be guided by certain principles of regulatory conduct, including: facilitating the reduction of systemic risk; recognizing that the costs should be proportionate to the benefits sought and realized; maintaining the competitive position of Canada's capital markets; facilitating innovation in Canada's capital markets; promoting the informed participation of investors in the capital markets; and recognizing the needs of regional markets and sectors.
Standardize Performance Measurements
In order to determine how effective Canada's securities regulators are in achieving their stated objectives, the Panel recommended the adoption of a single, comprehensive system of performance measurement for securities regulation in Canada. The Report noted that the degree of performance measurement in securities regulation in Canada varies significantly among the provinces and territories, which has implications for the ability of market participants and the public to hold securities regulators accountable.
Adopt More Principles-Based Securities Regulation
The Panel recommended that Canada adopt a more principles-based approach to securities regulation. Under such an approach, greater emphasis would be placed on establishing high-level principles for business conduct, with individual issuers having greater flexibility to determine how they might best meet the desired regulatory objectives. Regulators would assist issuers by providing guidance on appropriate regulatory practices. The Panel noted that a number of regulators, both in Canada and internationally, have been advancing principles-based regulation and that the flexibility inherent in this approach has been favoured in the regulation of complex and rapidly evolving securities such as derivatives.
Adopt More Proportionate-Based Securities Regulation
The Report notes that securities regulation is sometimes criticized for being applied in a manner that insufficiently accommodates the differing circumstances of public companies. In response to this concern, the Panel expressed the view that effective outcomes can be achieved if securities regulation is tailored to the economic characteristics of market participants and recommended that the resources of securities regulators be allocated to market participants and investment instruments in a manner that corresponds to the relative risks they pose to the economy and investors. The Panel also recommended further examination of opportunities to better regulate market participants through the advancement of proportionate-based securities regulation.
Improve Investor Redress Mechanisms and Provide Input Opportunities
The Report notes that investors are often not provided with the information required to understand the full range of options available to seek redress for damages suffered as a result of violation of securities laws. In addition, the Report notes that there are variations in the degree of financial redress provided by various securities regulators. To improve the redress mechanisms available to investors, the Panel recommended that securities regulators have the power to order compensation for violation of securities law (as opposed to resorting to the courts), the establishment of an investor compensation fund funded by the industry, and mandatory participation of registrants in dispute resolution. Further, to ensure that interests of investors are advanced, the Panel recommended the establishment of an independent investor panel and a dedicated investor issues group.
Independent Adjudicative Tribunal
The Panel noted that numerous commentators expressed the view that the current multifunctional commission structure fosters the perception that the adjudicative process is unfair, lacking independence and impartiality. To promote the perception of fairness in the adjudication of regulatory matters, the Panel recommended the establishment of an independent adjudicative tribunal, with securities regulators retaining jurisdiction over certain matters, such as discretionary exemptions from regulations and matters regarding contested take-over bids.
Recommended Regulatory Structure for Canada
Having examined how the objectives and principles discussed above might best be met, the Panel concluded that Canadians are ill-served by the current system of 13 separate securities regulators overseeing 13 distinct regulatory regimes. Generally speaking, the Report concludes that the current system fundamentally misallocates resources, promotes inefficiency, lacks effectiveness and causes the intensity of policy development, supervision, and enforcement activities to vary across Canada. In considering the need to protect against systemic risk, the Panel concluded that the requirement of co-ordinating a response among 13 separate securities regulators makes it difficult to provide an effective, timely response to a rapidly developing financial crisis.
For each of its proposals described in the paragraphs above, the Panel expressed reasons why a single, national regulator would be preferable. For instance, the adoption of a uniform set of objectives and guiding principles and implementation of a standardized system of performance measurement would be best implemented through a single, national securities regulator. In the case of adopting a more principles-based approach to securities regulation, the Report states that, while stakeholders who commented were generally supportive of such an approach, some felt that it would be difficult to do without a single regulator applying uniform principles and guidance. The Panel noted that the degree of proportionate-based securities regulation and the priority for its advancement varies significantly among the current regulators. The Panel stated that the benefits of such an approach should be available to all market participants, not just those of a single province, and that a single, national securities regulator would be better positioned to advance such an approach. In advocating that investors be provided with better redress mechanisms and a more effective voice on investor issues, the Panel noted that investors would be more effectively compensated through the use of a single compensation fund and that an independent, national investor panel would provide a stronger voice on investor issues. Similarly, a single independent tribunal adjudicating matters under a national securities regulation regime overseen by a single regulator would deliver more consistency in decisions and benefit from the concentration of expertise.
In proposing a national regulatory structure, the Panel was sensitive to the need for strong regional representation. The proposal provides that a national securities commission be established with its head office located in one of the four largest provinces: British Columbia, Alberta, Ontario or Quebec – assuming they participate. The commission would also have regional offices in major financial sectors that would be responsive to the distinct needs of regionally-based sectors and local markets. Smaller local offices would be maintained to service local market participants and support local enforcement actions. The Panel also suggested that various offices might specialize in regulating a particular sector, such as mining or oil and gas, or a particular investment instrument, such equities or derivatives. The commission would be self-funding with fees set on a cost-recovery basis.
Transition to a Single National Regulator
The Report includes a proposed transition path to a comprehensive national regime. As a starting point, the Panel proposes that a national Securities Act be adopted only if a sufficient number of jurisdictions support the initiative and that, initially, its application be limited to only those jurisdictions that opt to participate. During this period, the federal Securities Act would have no application in non-participating jurisdictions. As a result, market participants operating in both participating and non-participating jurisdictions would be subject to both the federal Securities Act and the securities laws of the applicable non-participating jurisdictions.
In the event that the national regime is not adopted by all jurisdictions, the Panel proposes a two-fold mechanism for extending the regime's scope into non-participating jurisdictions. After an initial period, market participants based in non-participating jurisdictions would be permitted to elect to be regulated under the federal regime only, to the exclusion of the securities laws of non-participating jurisdictions. Concurrently, market participants located in participating jurisdictions would be governed exclusively by the federal regime throughout Canada (including in non-participating jurisdictions). Foreign issuers and other participants without a substantial connection to a particular Canadian jurisdiction would be deemed to be regulated by the federal regime. This would effectively extend the scope of the federal regime into non-participating jurisdictions. Since the Report's release, the finance ministers of the provinces of Alberta, Manitoba and Quebec have publicly objected to the plan to create a national regime.
The federal Minister of Finance has indicated that he will announce his government's initiative on this matter when he presents the federal budget on January 27, 2009.
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