On May 26, 2010, the Government of Canada released its long anticipated proposal for a Canadian Securities Act. The proposed Act draws on concepts currently found in provincial securities legislation, while at the same time introducing a framework designed to create a national regulator that would have the flexibility to respond to new developments. It also introduces provisions designed to respond to recent market challenges and to enhance the enforcement powers available to the regulator. But before the Government of Canada adopts the Act and before the principles in that Act can be fleshed out through regulations that the Canadian Securities Regulatory Authority (CSRA) would develop, the Supreme Court of Canada (SCC) must first reply to a critical question that the Government of Canada has referred to that Court: whether the proposed Act is “within the legislative authority of the Parliament of Canada?” The Courts of Appeal in Quebec and Alberta are scheduled to hear constitutional references from those provinces’ governments, cases that may also find their way to the SCC.
Some might have expected that the Government of Canada would follow a model put forward in January 2009 by a Government created panel (the Expert Panel on Securities Regulation in Canada) that would have given issuers the option to opt in to a federal regime regardless of their geographical location (and thereby to opt out of a province’s regime where that province had chosen not to opt in to the national regime). But the Government of Canada has instead signalled that it will only give provinces – not individual issuers – the option to opt in to the new regime, even while embracing certain other aspects of the Panel’s report. As a result, should the SCC confirm that the Government of Canada has authority to proceed, any province that chose not to opt in to the federal regime would continue with its existing provincial regulator and issuers dealing with investors in that province would continue to be subject to that province’s securities laws. In the short term, the outcome could therefore be a mix of a federal regulator and a more limited number of provincial regulators than currently exist. Numerous transitional issues would have to be worked through, such as the way in which the CSRA and remaining provincial regulators would coordinate their actions and the way in which the CSRA would fit into arrangements currently in place with other countries (such as the Multi-Jurisdictional Disclosure System currently in place with the United States). It would then remain to be seen whether over time provinces that had initially chosen not to join would eventually opt in to the CSRA.
New Canadian Act
The proposed Canadian Securities Act draws heavily on concepts that are currently found in existing provincial securities legislation. The Act nonetheless proposes an approach to securities regulation that would see a limited number of general principles set out in the Act and then leave it to the new federal regulator to spell out more detailed regulations concerning the application of the Act. For example, the Act’s provisions governing registration, prospectus requirements, the regulation of derivatives, continuous disclosure, market conduct and take-over bids are all relatively brief and provide that the regulator may enact regulations setting out more detailed requirements. In turn, the proposed Act would give the federal regulator extensive regulation making authority that is similar to the authority currently provided to many provincial securities commissions to enact rules. As with existing rule making authority, the Act’s regulation making authority would involve a notice and comment period, to be followed by approval by the Minister of Finance.
The rationale behind moving more of the substance of current securities law from the Act to regulations is that it will allow the regulator greater flexibility to adapt regulations to respond to new challenges as they arise. As a result, the proposed Act provides only part of the regime that would govern issuers once it came into force. The CSRA would use the existing body of national instruments as its starting point in developing regulations. But it will be necessary to see those proposed regulations before one will be in a position to provide a comprehensive assessment of the pros and cons of the regime that would ultimately govern relative to the regimes that are currently in place in Canadian provinces and territories.
New Canadian Regulator
Similarly, the Act does not tell all of the story concerning the structure that the federal regulator would come to have. The proposed legislation envisages the creation of a self-funded Crown Corporation with a government appointed Board of Directors. The Minister of Finance would have to consult with a Council of Ministers made up of ministers from participating provinces with respect to the directors to be named. The Chair of the Board would also be named by the Government after consultation with the Council of Ministers. The Government has also indicated that CSRA offices across Canada would initially consist mainly of staff from provincial securities regulators in order to ensure the continuity of regulatory expertise and to provide uninterrupted regional and local service. However, the politically sensitive question concerning the location of the head office remains an open question and the Government has chosen to put that decision off to a later date.
The CSRA would have two distinct divisions: a Regulatory Division and an independent Canadian Securities Tribunal. The Regulatory Division would be responsible for the regulation of capital markets in Canada, while the Tribunal would be responsible for the adjudication of securities regulatory matters.
The executive management team for the Regulatory Division would be led by a Chief Regulator and regional Deputy Chief Regulators. The Act does not prescribe the regions or cities where the offices would be located. But the Government notes that it expects that each participating province and territory would have an office with the expertise to meet the needs of the area it serves.
The Tribunal’s primary function would be to adjudicate matters arising under the CSRA, including administrative enforcement actions and reviews of regulatory decisions. The Tribunal would be headed by a Chief Adjudicator who would oversee the Tribunal and assign members of the Tribunal to hearing panels located in participating jurisdictions across the country.
To ensure policy coordination and regular engagement between the two divisions, a Regulatory Policy Forum (Forum) would convene the senior management of the two divisions and representatives from the board to discuss, consider and comment on policy initiatives and activities.
In announcing the proposed Act, the Government of Canada stated that key features of the proposed Canadian securities regulatory regime include not only an attempt to modernize the Commission’s mandate and to have the Act set out clear guiding principles, but also to give the CSRA a role in promoting financial stability. This theme runs through the legislation and has repeatedly been held out by the Government as a central rationale for pushing ahead with a national regulator in the face of strong opposition from a handful of provinces, notably Alberta and Quebec. Similarly, the Government has made a point of emphasizing that the proposed Act would involve a strengthened enforcement regime that it believes would deliver better protection for investors than existing provincial securities laws.
The CSRA’s mandate would consist of three core objectives: (i) to provide protection to investors from unfair, improper or fraudulent practices; (ii) to foster fair, efficient and competitive capital markets in which the public has confidence; and (iii) to contribute, as part of the Canadian financial regulatory framework, to the integrity and stability of the financial system. The first two objectives are consistent with those of most provincial and territorial securities regulators today. The third objective is one that is not currently spelled out in provincial legislation and reflects the Government of Canada’s view that the CSRA should support the stability of the financial system by working with other key players in Canada’s financial regulatory framework, notably the Department of Finance, the Bank of Canada, the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada.
The CSRA would be given regulatory tools designed to contribute to the integrity and stability of Canada’s financial system, including the power to gather information from market participants such as reporting issuers, dealers, investment fund managers, exchanges, and self-regulatory organizations. As well, the CSRA would be able to share information with other financial regulatory authorities in Canada and abroad.
The CSRA would also have a clear mandate to regulate a broad range of instruments, including exchange-traded and over-the-counter derivatives. Indeed, considerable thought has gone into both the framework that the Act would put in place for the regulation of derivatives and the kinds of derivatives that would be subject to the Act. The CSRA would also be given the power to regulate market participants, including not only dealers, advisers, investment fund managers and exchanges, but also clearing agencies, self-regulatory organizations, credit rating organizations, trade repositories and auditor oversight organizations. In addition, it would have the flexibility to designate and regulate new types of market participants.
Through registration, designation and recognition, market participants would be subject to governing frameworks established by the CSRA that reflect domestic and international best practices. For example, the oversight framework for credit rating organizations (a particular source of concern during the recent financial crisis) would take into account the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies.
The Act also envisages a comprehensive enforcement framework, building on current provincial and territorial enforcement regimes. The CSRA would have the power to undertake regulatory enforcement actions that could result in a range of sanctions. Rather than referring almost all securities-related criminal matters to the police for investigation, the CSRA would also play a role in the investigation of securities-related crime in a manner that would be set out in agreements with the provinces.
The Act contains securities-related criminal offences that are equivalent to those that are currently prescribed in the Criminal Code. These include offences for securities fraud, market manipulation, prohibited insider trading and misrepresentation. Importantly, these offences would apply nationally, in both participating and non-participating jurisdictions. The Act includes the aggravating circumstances, non-mitigating factors, and maximum sentences that currently apply to securities-related criminal offences in the Criminal Code. It also reflects legislation recently tabled in Parliament that would amend the Criminal Code to strengthen sentencing measures for fraud and measures for victims of fraud.
The Attorney General of Canada and the Attorney General of a province or territory would continue to have concurrent jurisdiction over the prosecution of criminal offences. The provinces and territories would have the right of first refusal on these prosecutions, under an administrative arrangement that currently applies to the prosecution of securities-related criminal offences in the Criminal Code.
New evidence-gathering tools would enhance securities-related criminal investigations. These tools would include:
- Production Orders (Written Statement): Criminal investigators would be able to obtain a court order to compel entities, such as publicly-traded companies or brokerage houses, to respond in writing to questions about certain aspects of alleged misconduct.
- Production Orders (Names): Criminal investigators would be able to obtain a court order to compel a recognized entity to provide a list of registrants who purchased or traded a security during a specified period and to compel a registrant to produce a document that contains the names of all persons on whose behalf the registrant purchased or traded a specified security during a specified period as well as the time and date of the purchase or trade. This power would provide investigators with information needed to build cases concerning trading misconduct, such as market manipulation or prohibited insider trading.
- Civil Immunity: The regime would provide immunity from civil action to persons who cooperate and disclose information to regulatory or criminal investigators that they reasonably believe is true. This measure is meant to promote voluntary witness cooperation in securities-related investigations.
It is important to note that the criminal offences and powers in the Act would apply in all jurisdictions, including non-participating provinces, once the Act is in force. The Government has exclusive jurisdiction over criminal law in Canada and as the relevant offences would be transferred from the Criminal Code to the Securities Act, they would also apply nationally.
The Department of Finance notes in a background paper released with the proposed Act that the target is to have the CSRA established within the next three years. The Canadian Securities Transition Office overseeing the creation of the CSRA is expected to deliver an organizational and administrative transition plan in July, 2010. The plan is to provide a high level road map for establishing the CSRA by building on the infrastructure and expertise of participating provincial and territorial securities regulators. Details of the transition plan would be refined in consultation with participating provinces and territories.
The Government of Canada has referred the Act to the SCC for an opinion as to whether the Act is within the legislative authority of the Parliament of Canada. The SCC will likely take between 10-24 months to issue its opinion. Should a favourable opinion be received, the Government then intends to introduce the proposed Act in Parliament so that it may be passed into law. Numerous transitional issues relating to the adoption of regulations and the CSRA’s interaction with other securities regulators would also have to be addressed.