Davies has submitted a comprehensive comment letter on the proposed Provincial Capital Markets Act (PCMA), raising concerns over significant substantive law changes and a "platform approach" that allows for regulation by regulatory fiat. The PCMA is proposed to be adopted under the memorandum of agreement between the provinces of British Columbia, Ontario, New Brunswick, Saskatchewan and Prince Edward Island and the Minister of Finance (Canada) regarding the creation of a Cooperative Capital Markets Regulatory System. Davies’ comment letter can be read here.
Substantive Changes Proposed Without Adequate Consultation
The achievement of consensus among the participating provinces is a great accomplishment. That said, we have an overarching concern that makes it difficult to support this legislation at this time. Our concern is with the extent to which the PCMA introduces significant substantive changes into the law and the lack of a meaningful consultation process.
The PCMA introduces numerous substantive changes from the current securities law of Ontario. These include:
- change to the long-standing and widely used definition of "misrepresentation";
- the broadening of the insider trading prohibition to include conduct that stops short of a sale of a security and to include transactions in securities of non-reporting companies;
- change to the exception to the tipping prohibition;
- introduction of a novel fiduciary relationship between underwriters and their clients;
- unprecedented regulation of shareholders holding 20% or more of a public company as if they were "market participants"; and
- introduction of a novel "obstruction" prohibition prohibiting the withholding of information from the regulatory authority and potentially intruding on the solicitor/client relationship.
As a general principle, the introduction of the PCMA should not be used as an opportunity to introduce major substantive changes to securities law unless the adoption of these changes is preceded by a thorough public consultation and study of the changes. The long-established process of the Ontario Securities Commission and the Canadian Securities Administrators in this regard ought to be followed here. If that process were followed, each change would be identified in a request for comments, and its implications explained and the necessity justified. Comment would be sought from the broad community in a process that is often iterative and sometimes extends for months or years.
Here, the changes are buried in an avalanche of draft legislation in the context of a fundamental regime change, without the benefit of any justification for the change or any explanation as to its expected or intended implications.
We recognize that the PCMA is not based on the Ontario Securities Act (a decision we question given that this Act governs the largest portion of Canada's capital market), and that it reflects various elements of the provincial securities acts. Nonetheless, we believe it is incumbent on the Province of Ontario to identify, in the manner described above, the changes against the Ontario legislative base line and to ensure a robust consultation process.
Legislation by Regulatory Fiat
We are also concerned about the extent to which the PCMA takes a platform approach to legislation. Not only are entire areas of the law proposed to be addressed in regulations, but the legislation omits a number of well-established elements of securities law. We believe that fundamental established elements of the existing law should be enshrined in the legislation itself. The commentary accompanying the release of the draft legislation noted that the platform approach was intended to promote "regulatory flexibility allowing the Authority to respond to market developments in a timely manner". Our concern with this is threefold:
- It allows for legislation by regulatory fiat with limited political accountability.
- It undermines one of the key features of a sound capital market − namely, stability and predictability in the legal and regulatory regime, which are essential to transaction planning. With vast sections of the law, including key cornerstone elements, being left to regulation, there is significant risk of instability in the law, with the potential for substantive changes to be effected through a process subject to no more discipline than a 90-day request for comments.
- We are sceptical of the premise that more regulatory flexibility is required than exists under the current regime. In fact, with the introduction of the federalCapital Markets Stability Act, which will allow the cooperative regulator to act to address systemic risks to the capital markets, one could argue that less rather than more regulatory flexibility is necessary at the PCMA level.
Interface with Non-Participating Jurisdictions Omitted
The PCMA does not address the nature of the interface between the cooperative regulator and the non-participating jurisdictions. The quality of that interface is critical to the successful implementation of the new regime, and we are hopeful that resolution of the issues regarding the interface will be a precondition to the implementation of the new system.
Getting It Right…the First Time
It is essential that the participating governments conduct a robust consultation process whereby each substantive change to existing securities legislation is identified, discussed and justified. In the absence of a meaningful consultative approach, the regime will lack credibility among market participants. This is all the more critical here, given that the PCMA, once passed into legislation by the several participating provinces, will be exceedingly difficult to change. It is imperative that the regulators get it right − the first time.