The Expert Panel on Securities Regulation appointed by the federal Minister of Finance has released its final report. The Expert Panel, chaired by The Honourable Thomas Hockin, P.C., recommends that the current system of 13 provincial and territorial securities regulators be replaced with a single national regulator.
Those who have followed the progress of Canadian securities regulation will recognize that the Expert Panel’s report, released on January 12, 2009, is the latest in a series of studies and reports over the years calling for a single Canadian securities regulator. However, a significant departure from the earlier reports is the Expert Panel’s focus on the need for a national securities regulator to address systemic risks in the capital markets and represent Canada on the international stage. Given the recent turmoil in the global financial markets, this emphasis on the need for a unified approach to systemic risk and globalization, coupled with some of the innovations recommended by the Expert Panel (discussed below) may mean that these latest proposals will find more resonance than the earlier proposed reforms.
The report provides a transition path from the current regulatory structure to a national regime. The Expert Panel advocates cooperation between the federal and provincial governments, but suggests that, in the absence of cooperation, the federal government has the constitutional power to proceed unilaterally. The Expert Panel also suggests that market participants be permitted to opt into the federal regime and therefore be exempt from any provincial or territorial securities regulation that remains.
Recommended Regulatory Structure
The Expert Panel recommends that the federal government establish a Canadian Securities Commission to administer a national Securities Act. This recommendation seeks to achieve:
- improved securities regulatory response to events and risks;
- coordination and collaboration in addressing systemic risk; and
- better allocation of resources.
The Canadian Securities Commission would be a federal crown corporation with an independent Governance Board accountable to federal Parliament through the federal Minister of Finance. The executive of the Canadian Securities Commission would include a Chair and a number of Vice-chairs appointed by the federal Minister of Finance and an Executive Director appointed by the Chair. The Expert Panel suggests that the Canadian Securities Commission’s head office be located in one of the four largest provinces: British Columbia, Alberta, Ontario or Quebec, with regional offices in major financial centres, each headed by a Vicechair (in the largest provinces). The Commission would be self-funding with fees set on a cost recovery basis.
Recommended governance of the Canadian Securities Commission, in addition to the Governance Board referred to above, includes:
- Nominating Committee – The federal Minister of Finance and each participating provincial jurisdiction would appoint a member of a Nominating Committee. The Nominating Committee would be responsible for recommending candidates to the federal Minister of Finance for the members of the Canadian Securities Commission, the Governance Board and the Independent Adjudicative Tribunal. The Minister of Finance would be required to choose from among the recommended candidates.
- Council of Ministers – A Council of Ministers comprising the federal Minister of Finance and a Minister designated by each participating jurisdiction would discuss the development of securities policy and proposed legislative amendments. A majority of participating provinces would have the power to veto any proposed legislative amendments.
- Independent Adjudicative Tribunal – An Independent Adjudicative Tribunal would be created to hear applications in respect of certain enforcement matters and appeals from decisions of the Executive Director. This is similar to the current structure in Quebec. The Canadian Securities Commission would have jurisdiction to hear applications relating to contested take-over bids and certain discretionary orders, as is the case with the current provincial regulators. Quasi-criminal or criminal matters would continue to be referred to the relevant prosecutorial authorities and tried in the criminal court system.
- Special Independent Panels – Two independent panels would provide input to the Canadian Securities Commission. The first panel would represent the view of investors and the second would represent small reporting issuers. Each panel would be supported by a secretariat funded by the Canadian Securities Commission.
- Capital Markets Oversight Office – Recognizing that the establishment of a Canadian Securities Commission will take some time, a Capital Markets Oversight Office reporting to the federal Minister of Finance would be established to provide leadership in the regulation of securities both domestically and internationally.
Transition Path to a National Regime
The first stage of the creation of a national regime would involve negotiation with, and potentially monetary compensation to, the participating provinces and territories and the introduction of a federal Securities Act. Creation and staffing of the Canadian Securities Commission, the Independent Adjudicative Tribunal and the other governance institutions of the national regime would take place as a second stage, to be followed by the review and replacement of existing provincial and territorial rules and regulations with federal rules.
The Expert Panel advocates for cooperation between the federal and provincial governments, but anticipates provincial opposition to its recommendations. If there is insufficient participation, the Expert Panel suggests that the federal government consider unilateral action. Moreover, the Expert Panel recommends that market participants be permitted to opt into the federal regime and be discharged from having to comply with the provincial or territorial securities laws of the non-participating jurisdictions. The Expert Panel asserts that the federal government has the constitutional authority to implement this opt in model and/or to proceed unilaterally to implement a national securities regulator.
Draft Federal Securities Act
The Expert Panel recommends that a comprehensive federal Securities Act be adopted to govern Canadian capital markets. The Securities Act would apply across Canada, although it would initially apply only in those provinces and territories that opt in.
The draft Securities Act published by the Expert Panel identifies the purpose of the legislation in a fashion similar to existing provincial legislation (investor protection and efficiency of, and confidence in, capital markets). The Securities Act also describes twelve fundamental principles that would be applicable to pursuing these purposes. While some of these principles are today found in provincial legislation, some are new; such as a principle that regulation should promote the informed participation of investors in the capital markets and the need for the Commission to facilitate the reduction of systemic risk and to monitor and coordinate with international securities regulators.
The general approach taken with respect to the draft Securities Act is consistent with existing provincial legislation and contemplates that detailed requirements will be implemented through rules to be adopted by the new Canadian Securities Commission. This approach addresses in part the perceived benefits of "principles based" regulation and allows greater flexibility in adopting rules that reflect regulatory needs, including adopting so-called "proportionate" regulation that would affect some market participants differently than others.
Many areas regulated by the draft Securities Act are consistent with existing provincial legislation but some are new:
- Provisions addressing continuous disclosure, distribution of securities and take-over bids are consistent with the rules and provincial statutes currently in force.
- Provisions relating to registration of dealers and advisers have been drafted to be consistent with the harmonization and reform of the registration regime across Canada currently in process. Accordingly, the requirement for an intermediary to be registered as a dealer or an adviser would be based on being "in the business" of trading or advising in securities. Investment fund managers would also be required to register.
- Exchange-traded derivatives would be regulated under the federal Securities Act. This approach is consistent with the current regulation of "exchange contracts" in British Columbia and Alberta. The Expert Panel recommends that the Canadian Securities Commission explore regulation of over the counter derivatives, similar to Quebec’s new Derivatives Act.
- Provisions are provided to empower the federal Minister of Finance to designate a federal dispute resolution body to deal with complaints involving registrants. All registrants would be required to participate in the dispute resolution process of this body.
- Civil liability provisions have been modelled on existing provincial legislation in respect of offering documents and circulars as well as continuous disclosure documents and public oral statements.
- Insider trading and self-dealing provisions correspond to existing provincial legislation with some changes to allow for adoption of rules dealing with technical reporting requirements.
- Detailed rules relating to the investigative functions of the Canadian Securities Commission and its Executive Director are provided in a manner consistent with the current provincial approach. The Expert Panel recognizes that these provisions may need to be adapted to federal policies relating to powers of administrative agencies to perform an investigative role.
- Public interest order powers of the Canadian Securities Commission have been modelled on comparable provisions of certain provincial statutes.
- Enforcement provisions contemplate quasi-criminal sanctions currently provided in provincial securities legislation while criminal sanctions would remain in the Criminal Code. The Expert Panel recognizes that quasi-criminal sanctions may need to be adjusted to conform to federal legislation.
- Provisions allowing the Canadian Securities Commission to order compensation of aggrieved investors incurring losses as a result of a violation of securities regulation are included. This is new for most provinces and is modelled on the process of financial redress established by the Quebec securities regulators. An industry funded investor compensation fund is recommended.
The Expert Panel’s recommendations provide much stronger support for unilateral federal action than other recent proposals. Coming at a time when the capital markets remain in some turmoil, there may be additional impetus for the federal, provincial and territorial governments to move forward with these proposed initiatives. In addition, the recommendation to allow market participants to opt into federal regulation (and so be relieved from provincial regulation) could potentially change the dynamics of the long-standing debate over a national regulator. However, we note that the governments of Manitoba, Alberta and Quebec have signalled their strong disagreement with the Expert Panel’s assertion of federal constitutional authority. We look forward to seeing the consequences of the Expert Panel’s recommendations.
Please click http://www.expertpanel.ca/eng/reports/index.php for a copy of the Expert Panel’s report.