On January 12, 2009, the Expert Panel on Securities Regulation in Canada, appointed in February 2008 by Canada’s Minister of Finance, published its Final Report and Recommendations — Creating an Advantage in Global Capital Markets. As discussed in an earlier article, the Expert Panel was given several mandates, including choosing between the passport system and a single regulator as the best model for securities regulation in Canada.

Recommendations

The Report makes a number of recommendations, including:

  • Single Regulator — The Expert Panel’s central recommendation is that Canadians need a single securities regulator with a strong, decentralized structure that recognizes Canada’s unique makeup and regional and local expertise, provides clear national accountability, reduces the compliance burden, and offers more effective enforcement and redress for investors. The Canadian Securities Commission (Commission) would be created pursuant to federal legislation to administer a single securities act for Canada. The passport system is commended but adjudged to be too slow, too expensive and too cumbersome — resulting in protracted policy development that negatively affects Canada’s ability to respond in a timely manner to national and global developments.
  • Opt-in Model — The Commission would be the securities regulator for those provinces and territories agreeing to participate initially, and the structure would provide for the opting-in of other provinces from time to time. Ontario and British Columbia, among others, have expressed support for a single regulator. Alberta, which has led the development of the passport system, is strongly opposed to it, as is Québec. Manitoba does not support the change. In additional commentary, but not as one of the formal recommendations, the Report also recommends a ‘market participant opt-in’ under which market participants (registrants and issuers) would be entitled to elect to be regulated by the federal regime. Upon doing so, they would be entitled to ignore the provincial regulatory schemes that would otherwise apply to them. The Report goes further, suggesting that in the event the transition to a single regulator is not achieved in the transitional phase, the federal government should exercise its constitutional power and act unilaterally to completely occupy the field of securities regulation in Canada, to the exclusion of any provincial securities legislation.
  • Principles-Based Regulation — The Report recommends a more principles-based, proportionate-based and risk-based regulatory regime. The draft federal securities act delivered with the Report reflects modest proposals for that approach. The content of the rules ultimately made by the Commission pursuant to a federal act will determine the degree to which they are principles-based.
  • Independent Adjudicative Tribunal — On the enforcement front, the Report recommends the creation of a national adjudicative tribunal (Tribunal) that is independent from the Commission to enhance the perception of fairness in the adjudication of regulatory matters and to facilitate consistency of enforcement.
  • Advisory Panels — Investors/Small Business — The Commission would also house and be assisted by two panels: an investor panel designed to ensure the voice of small investors is heard, and a small reporting issuer panel designed to ensure the proportionality of regulation for small issuers, which in number represent the greater share of Canadian public companies.
  • Regulatory Objectives and Performance Management — The Report also identifies the appropriate objectives of securities regulation and identifies a performance measurement model to assess and provide a score card for performance of the regulator.

Creation and Structure of the Commission

The proposed federal regulatory regime would include the Commission, a Nominating Committee, a Council of Ministers and a Governance Board. Two independent panels would provide advice to the Commission; one to be the voice of investors and the other to address the regulatory needs of small reporting issuers.

The Commission would be self-funded, with fees charged to market participants set on a cost-recovery basis. In turn, the Commission would fund the Tribunal.

The Report recommends that the head office of the Commission be located in British Columbia, Alberta, Ontario or Québec, provided that the chosen province is a participating jurisdiction. The Report encourages the establishment of regional offices in major financial centres, with smaller local offices in other jurisdictions initially utilizing staff from existing provincial securities regulators.

Administrative enforcement matters would be adjudicated by the Tribunal, and criminal matters would be brought before criminal courts by the law enforcement authorities in Canada. The Commission, however, would retain jurisdiction over certain decisions, such as discretionary exemptions from the securities regulations and rules as well as matters regarding contested takeover bids.

Capital Markets Oversight Office

The Expert Panel also recommends the immediate establishment of a Capital Markets Oversight Office reporting to the federal Minister of Finance to provide leadership in the regulation of securities, both domestically and internationally, until such time as the Commission is established.

Draft Securities Act

The Expert Panel commissioned and provided with its Report a draft securities act based for the most part on the Alberta Securities Act. A companion commentary on the draft act provides insights as to its source and content. The commentary notes that the draft act was developed in a short time frame and without the benefit of public consultation.

Transition Path

The transition path to a federal securities regime would be expected to consist of two phases over a total period of approximately three years.

In the first phase, a transition and planning team would be created to support the intergovernmental negotiations, oversee the transition to a federal regulatory system, and plan for the Commission and the Tribunal. The team would negotiate a memorandum of understanding with the participating jurisdictions. This first phase is expected to last approximately one year and end with the passing of the federal act.

The second phase, expected to last two years, would continue until proclamation of the federal act. During this phase, the Nominating Committee and Council of Ministers would be established, and the members of the Commission and the Governance Board and the adjudicators of the Tribunal would be appointed. The Commission and Tribunal would hire staff and occupy offices in cities across Canada.

The securities legislation of participating jurisdictions would be repealed — with effect as of the time that the federal act, rules and regulations become effective.

What’s Next?

The federal government has announced, in its budget presented to Parliament on January 27, 2009, that it intends to move forward quickly to establish the Commission, at the same respecting constitutional jurisdiction, regional interests and expertise. The government has also stated that it is prepared to discuss financial arrangements with participating jurisdictions. It will table a federal securities act in the House of Commons in 2009 and in the budget has earmarked $154 million to establish and fund a transition office in 2009.

If the current financial and economic crises do not provide sufficient incentives to enable some structural change in Canadian securities regulation, the next window for change will be some long way in the future.

For a more detailed analysis of the Final Report, please see our Legal Update.