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 on January 12, 2009.

The Expert Panel is the latest of several initiatives tasked with addressing the absence of a single, common, national or federal securities regulator for Canada.

Five tasks were set out in the Expert Panel’s mandate — namely, identifying the objectives, outcome indicators and performance measures for securities regulation; examining proportionate and more principles-based regulation to replace the current rules-based approach; examining enforcement and related adjudicative tribunal matters; choosing between the passport system and a single regulator as the best structural model for securities regulation in Canada; and developing a model act and a transition plan.

Recommendations

The Report makes a number of recommendations, set out in Appendix 9, 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 in the Report, but not as one of the formal recommendations, the Expert Panel also recommends a ‘market participant opt-in’ under which market participants, namely, 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. This market participant opt-in feature is described in some detail in Appendix 8. The Report goes further to suggest 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 — Recognizing that some of the distinctions between principles-based and rules-based legislation are semantic, the Report recommends a more principles-based, proportionate-based and risk-based regulatory regime. Modest proposals for that approach are reflected in the draft securities act delivered with the Report. The content of the rules ultimately made by the Commission pursuant to a federal act will determine to what degree they are principles-based.
  • Independent Adjudicative Tribunal — On the enforcement front, the Report pays tribute to the approach implemented in the Province of Québec in 2004 with the creation of Québec’s independent adjudicative tribunal, the Bureau de décision et de révision en valeurs mobilières, and recommends the creation of a national adjudicative tribunal (Tribunal) independent from the Commission to enhance the perception of fairness in the adjudication of regulatory matters and to facilitate consistency of enforcement. The Report concedes that a single regulator would not of itself dramatically improve enforcement in Canada. This recommendation is also presented as worthy of consideration by current regulators even in the absence of progress in the creation of a single securities commission.
  • Advisory Panels — Investors/Small Business — The Commission would also house and be assisted by two panels, namely, an investor panel designed to ensure that 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. Investor protection was not specifically identified in the Expert Panel’s mandate but drew significant comment during the consultation phase. Appendix 6 contains an overview of the consumer complaint and redress mechanisms currently available to Canadian investors.
  • Regulatory Objectives and Performance Management — The Report, responsive to one of the remaining components of the Expert Panel’s mandate, 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. The Report praises the performance measurement systems implemented by the B.C. Securities Commission and by the U.K. Financial Services Authority.

A further mandate of the Expert Panel is satisfied by its publication of a draft securities act, described below.

As also mandated, a transition path identifying key issues and steps to move from the recommendation stage to the implementation stage is laid out in the Report, together with heads of matters for inclusion in a Memorandum of Understanding between the federal government and provincial and territorial governments, attached as Appendix 7 and also described below.

The Report concludes with recommendations for the regulation of derivatives, both exchange-traded and over-the-counter, and provides, at Appendix 5, a description of the current provincial regulation of these instruments in Canada. These recommendations were not part of the Expert Panel’s mandate, but were made in response to the current financial crisis.

In making its case for a single regulator, the Expert Panel also makes reference to the Canadian experiences in struggling to respond on a timely and consistent basis with measures to mimic the freeze on short-selling of the shares of certain financial institutions imposed in the United States and elsewhere in the fall of 2008, and in responding to the Canadian non-bank asset-backed commercial paper (ABCP) crisis that arose in August 2007. The Expert Panel cites concerns about systemic risk in the capital markets and the need for one national entity accountable for the stability of Canada’s national capital markets, as a counterpart to the Bank of Canada or the Office of the Superintendent of Financial Institutions.

Creation and Structure of the Canadian Securities Commission

As described in the draft act, the Commission would be established as a corporation without share capital consisting of its appointed members. It would also be an agent of the federal Crown and a Crown corporation. The members of the Commission, consisting of a Chair (Chief Executive Officer), a number of Vice-Chairs, and other members would be appointed by the federal Minister of Finance or the Governor-in-Council based upon the recommendations of a Nominating Committee. The Executive Director, ex-officio a member of the Commission, would be appointed by the Chair and would be responsible for managing the day-to-day operations of the Commission.

The Nominating Committee, to which each of the Ministers of Finance would be entitled to appoint a member, would recommend to the federal Minister of Finance candidates for appointment by the Minister or the Governor-in-Council as members of the Commission.

A Council of Ministers from the participating provinces and territories, as well as the federal government, would provide input to the Commission with respect to the formulation of securities law policy and the administration of the securities legislation. Provinces representing a majority as to number and population of the participating provinces would have the power to veto proposed legislative amendments.

A Governance Board reporting to and presumably appointed by the federal Minister of Finance would oversee the Commission and provide input on policy and rule changes. The Expert Panel was divided as to the role of the Governance Board.

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.

As noted above, 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 Report recommends that the head office of the Commission be located in one of British Columbia, Alberta, Ontario or Québec, provided that the chosen province is a participating jurisdiction. Within minutes of the release of the Report, Ontario raised its ministerial hand and declared itself the best choice for the head office venue.

The Report encourages the establishment of regional offices in major financial centres, each headed by a Vice-Chair in the largest provinces, to be responsive to the distinct needs of regionally based industry sectors, e.g., financial, mining, oil and gas and derivatives, and to local market participants, with smaller local offices in other jurisdictions to serve the needs of local market participants. These regional and local offices should initially utilize staff from existing provincial securities regulators.

On the enforcement front, the establishment of a National Enforcement Branch within the Commission with an administrative enforcement division and a criminal enforcement division is proposed. 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, without much detail, 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. The activities of this office would be absorbed by the Commission upon its establishment.

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, including a table of concordance with the Alberta Securities Act and other securities legislation. The commentary notes that the draft act was developed in a short time frame and without the benefit of public consultation. Among the provisions of the draft act that are novel and relate to the recommendations are the following:

  • statements of the purposes of the act and guiding principles of the Commission, including its role in facilitating the reduction of systemic risk in capital markets in co-operation with other domestic and international financial authorities;
  • use of a business trigger rather than a trade trigger with respect to registration requirements, being a change already recommended by provincial securities regulators;
  • relegation to rule-making of the technical requirements of more of the substantive provisions, including those related to prospectuses as well as the takeover bid provisions, some of which Ontario declined in 2008 to relegate to rule-making;
  • establishment of an independent small reporting issuer advisory panel;
  • establishment of an independent investor advisory panel;
  • establishment of the Tribunal;
  • empowerment of the Commission to order compensation for investors; and
  • inclusion of the ability of the Commission to designate a third-party dispute resolution body and to require registrants to participate in its dispute resolution mechanisms.

Matters not yet dealt with in the draft act include transition provisions, institutional aspects of the Commission such as staffing and funding, and operational provisions relating to the Tribunal.

Transition Path

The transition path is expected to consist of two phases over a total period of approximately three years.

Following announcement of the federal government’s intention to move forward, negotiations would commence with the provinces and territories with a view to their participation in the national regulatory system, including discussions as to compensation for foregone revenue.

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. The team would also work with the federal government and participating jurisdictions in overseeing preparation of the federal securities act for introduction in Parliament. This first phase is expected to last approximately one year and end with the passing of the act.

The second phase, expected to last two years, would continue until proclamation of the federal act. During this phase, the Nominating Committee and the Council of Ministers would be established, and the members of the Commission and the Governance Board, and the initial group of adjudicators on the Tribunal would be appointed. Existing rules and regulations of the participating jurisdictions would be adopted as rules or regulations under the federal act or redrafted into federal rules or regulations.

The Commission and Tribunal would hire staff, substantially all of whom would initially be drawn from existing employees of participating jurisdiction regulators. The Commission and Tribunal would acquire office space and other assets in the various participating jurisdictions. The Commission might also negotiate one or more memoranda of understanding with non-participating jurisdictions for the purpose of coordinating securities regulation, analogous with the current passport system. Finally, the 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?

In the short-term, the federal government is expected to include some elements of an action plan in its budget to be presented to Parliament on January 27, 2009. In the medium-term, it will work to sign up provinces and territories to be initial participants in the federal regime. 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.