This is the first in a series of blog posts examining the Ontario Securities Commission’s (“OSC”) Burden Reduction Initiative. In this post we summarize three roundtable discussions organized by the OSC to facilitate public feedback on its Burden Reduction initiative.
In January 2019, the Ontario Securities Commission (“OSC”) announced the formation of a Burden Reduction Task Force aimed at minimizing regulatory burdens and enhancing competitiveness. The initiative is an important one for market participants and investors alike. It aligns with the Ontario government’s objective of “lowering business costs” as set out in Finance Minister Fideli’s budget speech. The balance between the regulator’s prime objectives of investor protection and maintaining and enhancing safe and robust capital markets can be affected through the easing of regulatory burdens. Accordingly, the nature and extent of reform is both an opportunity and a risk.
In response to the burden reduction initiative, the OSC launched a public consultation process comprising of three roundtables where interested stakeholders were invited to submit suggestions on ways to lessen regulatory burdens. The third and final roundtable was held on Monday May 27, 2019.
The following highlights from the roundtables suggest that industry is supportive of the OSC’s efforts to reduce burdens and that there is an appetite to shift from a prescriptive rules-based regulatory environment to one focused on principles-based regulations.
First roundtable – Introductory roundtable (March 26, 2019)
Maureen Jensen, the Chair and CEO of the Ontario Securities Commission, opened the introductory roundtable and emphasized that in pursuing its Burden Reduction Initiative, the OSC was looking at all options and that burden reduction was consistent with the OSC’s mandate. Ms Jensen said:
“Nothing is off the table, but that said, this in no way changes the mandate of the OSC. We are reducing burden. We are not reducing our focus on investors. In fact, the goals of reducing burden and protecting investors do go hand in hand. We know that when our requirements are clear and our processes are simple, all investors and market participants get better disclosure. That helps everyone make better decisions and we get better data which also helps us tailor our oversight and we get better information.
So I think we can all agree that duplication, redundancy and outdated processes don’t benefit anyone.”
Panelists suggested that moving away from prescriptive regulations in favour of a principled-based approach would allow the OSC to have fewer, simpler, and clearer regulations without sacrificing certainty or flexibility.
Panelists commented that certainty can be achieved through clear guidance from the OSC as to the interpretation of the principles in certain common situations. Specific guidance can be set out in companion policies, notices, or speeches. However, this certainty does not come at the cost of flexibility as the principles can be applied flexibly depending on circumstances. In other words, the guidance from the OSC as to the interpretation of principles in one situation does not necessarily apply to all situations.
While the panelists propounded the flexibility of a principled-based approach, they also recognized the onus it places on industry participants.
As Patricia Callon, Senior Vice-President and General Counsel of Sun Life Financial Canada recognized, a “principles-based approach facilitates innovation and encourages industry to take more responsibility for thinking through consequences and implications.” Her remarks highlight that the corollary of moving away from a prescriptive regulatory environment is that industry participants will be required to interpret and apply the principles set out in the regulations to their business.
Second roundtable – Registration, compliance, and investment funds (May 6, 2019)
In the second roundtable, panelists emphasized the frustration and cost caused by duplicative, unclear, and inconsistent regulation. In particular, panelists focused on two causes of concern.
First, panelists worried that the OSC had begun to elevate its own guidance to the level of regulatory requirement. Panelists shared experiences of the OSC raising deficiencies based on guidance, as opposed to regulatory requirements. By developing new standards through guidance, Staff were said to be circumventing the public rule-making process.
In addition to criticisms regarding “legislating by way of audit”, panelists were also concerned that it allowed for inconsistency. Different reviewers were coming to inconsistent audit findings and creating an uneven playing field within the industry. Panelists suggested that while the rule-making process is slower, it is preferable to legislating through guidance as it is fairer and ensures that the rules are thought-out and easier for market participants to follow.
If the OSC moves towards a principled-based approach to regulation, the OSC’s approach to guidance will take on central importance and those advocating for such a shift will be keen to ensure that prescriptive guidance does not undermine the flexibility of a principled-based approach.
Second, panelists also emphasized the burden of interacting with multiple regulators and explored ways in which the OSC can reduce duplication. It is particularly burdensome for registrants to comply with different regulators who have similar rules with different interpretations.
Among others recommendations, it was suggested that (i) regulators share interpretative issues and agree on a shared approach, (ii) compliance reviews should be conducted by the principal regulator only, and (iii) Ontario should join the Passport System in order to ensure consistency of views and interpretations across various jurisdictions.
Third roundtable – Trading, marketplaces, issuer requirements, and derivatives rules (May 27, 2019)
In the third and final roundtable panelists consistently emphasized the desire for the OSC to simplify the regulatory burden faced by industry by streamlining the oversight process and modernizing reporting procedures.
Panelists emphasized how a complicated regulatory regime can stifle innovation, which can be seen in the disproportionate impact that the regulations have on small issuers. Panelists noted that smaller issuers used to be able to complete a significant number of filings themselves, but that this was no longer the case as a result of filings becoming more granular and spread across multiple platforms. As a result of this complexity, smaller firms must hire intermediaries (e.g., lawyers or SEDAR filers), thereby increasing costs.
To help simply the oversight and reporting procedures for smaller firms, panelists suggested that various rules could be applied differently to reduce the burden on smaller firms. For example, it was suggested that smaller issuers should be permitted to report financing on a quarterly basis (instead of the current requirement to report within 10 days after closing financing).
The suggestion that different standards may be appropriate for smaller issuers is consistent with the theme expressed throughout the roundtables that the approach to regulation should shift away from prescriptive and rigid rules and towards a more flexible principled-based approach. The emphasis throughout the roundtable was on finding a balance of proportionate regulation that ensures investor protection and confidence in the capital markets, while still fostering innovation and efficiency