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Canada moves to a federal securities regulator

November 23, 2010 | Nick Paraskeva

Canadian officials outlined the path to a federal securities regulator in line with the US and international practices. The Canadian Securities Regulatory Authority would be the equivalent of the Securities and Exchange Commission, and is planned to replace the13 provincial regulators from 2012.

The event was entitled Canada's Path to Securities Regulation Reform, and was held on November 18, 2010 in New York. Professor Eric Pan of the Heyman Center on Corporate Governance moderated the panel, which featured of Douglas Hyndman, chairman and CEO of the Canadian Securities Transition Office and Lawrence Ritchie executive VP of the Canadian Securities Transition Office. Also on the panel were John White and Michael Mann from private practice, both former officials with the SEC.

Hyndman said the project is very important. Although not as large as global initiatives or the Dodd-Frank Act, this has been discussed for many years –– as early as 1935 –– and now with a fair shot of making it happen. The Canadian Securities Transition was set up in 2009 as a statutory body. It spent last year consulting across Canada with firms and regulators, while drafting a proposed Canadian Securities Act building on the provincial law. Legislation was released in May, now being reviewed.

The transition plan issued in July covers what the regulator would be and a road map towards that goal. There are 13 regulators to be melded into one with a single management structure. Canada has always had provincial securities regulators but have other federal regulators in the form of "OSFI" –– the Office of the Superintendent of Financial Institutions, which is the sole regulator of Canadian banks. International observations from the OECD, IMF, and others also point towards a federal approach.

The current system contains 13 provincial regulators, with the largest being the Ontario Securities Commission. Part of the consolidation process involves harmonizing the provincial laws, although they are relatively consistent. There has been a mutual reliance system, whereby provinces rely on their peers in the location of the principal regulator where the firm's home office is based. This is now in the equivalent of a passport system, although Ontario has not fully joined.

The new proposed system establishes a single regulator and statute with one approach to regulation. It would not be centralized, but distributed in offices across the country. This would achieve one voice for Canada internationally, which is more important after the credit crisis, including work by the G-20 and a bigger role for IOSCO.

The Act contains a section that sets out to provide protection to investors from unfair practices and fraud. It is also to foster fair and efficient capital markets, and to contribute to the stability of the financial system. The Canadian Securities Regulatory Authority would join the already existing stability grouping that brings together the federal bodies including the Bank of Canada, the Department of Finance and the OSFI. To conform to G-20 standards, the new law would cover hedge funds, rating agencies and derivatives depositories.

Ritchie said the legislation is innovative in having stronger investor engagement, a strong risk and financial stability mandate. Enforcement is a strong aspect, as the current system is diffused. Provincial commissions have played an important role in investigations, but in an administrative law setting. The criminal code is also involved for more serious offences. The result has been diffusion, and the act aims to set out a standard for prohibited conduct that will apply across all provinces. In the paper yesterday, an attorney general dropped the prosecution of a Ponzi scheme that had been investigated for years due to having inadequate resources. The federal regulator would be available for such cases.

Constitutional challenges to the legislation have come from the provinces of Quebec and Alberta that are working their way through the provincial courts. The Government has also brought the question to the Supreme Court and requested an interpretation on its constitutionality. The court challenges will be heard by April 2011, and the targeted launch date of the new regulator is July 2012.

Michael Mann stated his experience at the SEC on agreeing to a 1986 memorandum of understanding with the Canadian provincial regulators. This required amendments to legislation in the US and Canada, and then survived court challenges over 13 years. The uncertainty during this period impeded regulatory cooperation between the US and Canada. Change is coming on the international front, (MJDS multiple jurisdictional disclosure of securities). Canadian issuers could get clearance from provincial regulators and then get clearance to issue in the US.

The regulator can be established even if only ten of the 13 provinces join, as expected, on day one. This is because the government has adopted an opt-in model making it voluntary for provinces to participate. However, the aim is for CSRA to be an attractive regulator that all provinces will eventually want to join. Thus, overseas regulators will prefer to interact with the new federal regulator rather than a province. Most of the industry supports the move towards federalism, as helping to simplify regulation and reduce compliance costs. However, some broker dealers in Quebec and Alberta oppose it for different reasons.

A new regulator would be a member of IOSCO for an international perspective. Ontario and Quebec are both members of IOSCO and jointly represent Canada, but going forward IOSCO may decide that they only want one representative from the country. Foreign regulators may prefer to deal with a federal regulator and in this way put pressure on the industry to become regulated by this body.

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