What is the federal government’s proposal to develop a national securities regulator?

The federal government continues to press ahead with the proposed creation of a national securities regulator. So far in 2010, Finance Minister Jim Flaherty released in May a proposed draft Canadian Securities Act (the “Proposed Act”). The Proposed Act was drafted and released by the Canadian Securities Transition Office (the “CSTO”), a body previously established by the federal government to assist in establishing a national securities regulator.

The CSTO subsequently released a detailed transition plan in July (the “Transition Plan”) to seek to provide an intended roadmap for establishing the Canadian Securities Regulatory Authority (the “CSRA”).

The federal government has also announced that the CSTO intends to begin discussions with each participating province for the purposes of coordinating the establishment of the CSRA and implementing the proposed national securities regulatory regime. The federal government indicated that it has set aside up to $150 million to enter into financial arrangements with the participating provinces to assist with the move from provincial and territorial regulators to a national securities regulator.

Why is the federal government proposing a national securities regulator?

In proposing a national securities regulator, the federal government is arguing that the Canadian capital markets are now part of a much more globalized system that has developed in recent years. In addition, the rationale for a national securities regulator is also based, in part, on the new emphasis in certain financial and political circles on a perceived need for a national securities regulatory regime to ensure that Canada is able to effectively respond to worldwide events that may pose a systemic risk to its financial markets.

According to the federal Department of Finance, the proposed national securities regulatory regime will provide:

  • better and more consistent protection for investors across Canada;
  • improved regulatory and criminal enforcement to better fight securities-related crime;
  • new tools to better support the stability of the Canadian financial system;
  • faster policy responses to emerging market trends;
  • simpler processes for businesses, resulting in lower costs for investors; and
  • more effective international representation and influence for Canada.

What do the Proposed Act and the CSRA look like?

The Proposed Act is similar in its regulatory approach to the approach currently found in existing provincial securities legislation. The Proposed Act contains a limited number of general principles and therefore contemplates that the new CSRA will provide more detailed regulations for the application of the Proposed Act. For example, the Proposed Act’s provisions governing registration, prospectus requirements, continuous disclosure, market conduct and take-over bids are all quite brief and provide that the further regulations will set out more detailed requirements. The CSRA would be given regulation-making authority that is similar to the authority currently provided to many provincial securities commissions to enact rules. As with existing provincial rule-making authority, the CSRA rule-making authority would involve a notice and comment period, to be followed by approval by the federal Minister of Finance.

The CSRA is to be comprised of two divisions, the Regulatory Division led by the Chief Regulator, which would be responsible for administering the Proposed Act, and the Canadian Securities Tribunal, which would be headed by the Chief Adjudicator and would be responsible for adjudicating matters arising under the Proposed Act. The Proposed Act states that the Canadian Securities Tribunal is to be independent of the CSRA in the performance of its adjudicative functions.

Why are certain provincial governments opposing a national securities regulator?

There are numerous hurdles to the creation of a national securities regulator, starting with the adamant and formidable opposition of the provincial governments in Alberta, Québec and Manitoba (not to mention the recent rumblings out of British Columbia suggesting less than rock-solid support there). Alberta and Québec cabinet ministers and government officials have repeatedly stated that the proposed national securities regulator is an unwanted, unnecessary and improper intrusion by the federal government into an area of provincial jurisdiction.

Provincial opposition is also concerned about the possibility that the CSRA would be principally located in Toronto, which would result in substantial losses of jobs and economic activity related to securities regulation in Calgary and Montreal. It should be noted, however, that the proposed Transition Plan contemplates establishing various regional offices in the participating provinces, rather than a centralized “head office” approach. That, in turn, has caused debate over whether such a decentralized approach would allow the proposed national securities regulator to be more effective than the current system, which is the essential requirement of the new regime that proponents of a national securities regulator want to see.

The Alberta government also argues that Alberta has a distinct regional capital market that consists of a large number of junior or micro-cap companies at one end of the spectrum, and large oil and gas issuers at the other end, which would not be given the same attention or priority if a single national securities regulator is headquartered outside of Alberta. Alberta's argument that it has a distinct capital market which would be jeopardized by a national securities regime reached the point where the Alberta finance minister was recently quoted as saying it would make much more sense for Saskatchewan and Alberta to have a single commission. However, these reports considering the creation of a regional securities regulator were later denied by the Alberta government. The Alberta government also believes that it can achieve substantially the same results as would be achieved through the proposed national securities regulator through the current “passport” system of securities regulation in Canada that has developed in recent years, which also allows for customization of its regional needs, such as the oil & gas industry and Alberta's unique junior capital markets.

Another aspect of the provincial opposition is over the fact that the current “passport” system works quite well. The passport system was initially set up by all of the Canadian jurisdictions with the notable exception of Ontario. Now the passport system, with Ontario’s cooperation, provides a single entry point of access to the capital markets for all Canadian participants and the harmonization of existing regional securities laws. It allows for participants in the Canadian capital markets to clear a prospectus, obtain an exemptive ruling or order, and register as a dealer or adviser by applying to their home jurisdiction, obtaining approval and then having that approval recognized across Canada.

While the current passport system is a considerable improvement over the previously existing process, proponents of a national securities regulator would point out that the matters addressed by the passport system do not really relate to matters of securities law enforcement. The passport system essentially covers matters of corporate finance (such as clearing prospectuses), registration and exemption applications.

A major focus for advocates of a national securities regulator is “streamlining” and “rationalizing” what they see as an unduly balkanized system of securities law enforcement in Canada. A classic efficiency analysis would suggest that a single securities enforcement agency would be more efficient than having 13 of them. Under the existing system, it is also true that there are multiple parties and agencies involved in securities law enforcement, depending on the specific context, such as securities commission staff, Crown attorneys, local police, the RCMP and Integrated Market Enforcement Teams (“IMETS”). IMETS are groups of specialized investigators for detecting, investigating and prosecuting serious capital markets fraud offences, with individual IMET members drawn from several agencies and sources including the RCMP, the Public Prosecution Service of Canada, other federal law enforcement agencies, provincial securities commissions, local law enforcement agencies and forensic accountants.

What are the constitutional issues?

As an illustration of the continuing jurisdictional battle between, on the one hand, the federal government and, on the other hand, Alberta and Québec, there are no less than three references to Canadian courts in process on the subject of a national securities regulator. The federal government has referred the Proposed Act to the Supreme Court of Canada, with the question: Is the annexed proposed Canadian Securities Act within the legislative authority of the Parliament of Canada? The constitutional reference case is expected to be heard by the Supreme Court in April, 2011 and the eventual decision is expected to take anywhere between 10 and 24 months after that to be released. In addition, both of the Alberta and Québec provincial governments are bringing references to their respective Courts of Appeal. The fundamental issue on these references is whether the Proposed Act is within the legislative authority of the federal government. There is also the possibility that certain public companies will seek to join in these court references.

In its constitutional reference to the Supreme Court, the federal government is likely relying on the “opt-in” form of the proposed national securities regulator being constitutional, by virtue of being within the federal power to regulate trade and commerce. There is also considerable discussion in Canadian constitutional law circles as to whether the federal government has the additional power to have federal securities legislation specifically override provincial securities legislation by using an express paramountcy clause.

What happens if the national regime is not adopted by all provinces?

In the event that the national regime is implemented, it is the federal government’s position that participation by the provinces is to be voluntary. There was previously a recommendation for a mechanism for extending the regime's scope into non-participating jurisdictions, which came from the panel of experts previously set up by the federal government to consider a national securities regulator. This expert panel released its report in 2009 and it recommended that after an initial period, market participants based in nonparticipating 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). This would have sought to effectively extend the scope of the federal regime into non-participating jurisdictions. However, this recommendation was not carried forward into the Proposed Act or the Transition Plan.

What is the outlook for the implementation of a national securities regulator?

Provinces that support the Transition Plan were asked to officially signal their intention to participate by September 2010. By supporting the Transition Plan, provinces would commit to providing regulatory staff and information for the creation of the new CSRA.

Based on their attitudes and public positions stated to date, Alberta and Québec will not opt in to the national regime under any circumstances, so the political debate will continue and become more heated and a federal/provincial showdown is sure to follow. Despite the significant opposition and issues outlined above, the Transition Plan sets a very ambitious starting date of July 1, 2012 for the CSRA, with the lofty goal of it being “an integrated national body with local service delivery.”