The Expert Panel on Securities Regulation released its report, "Creating an Advantage in Global Capital Markets" (Report) in January 2009. The Report recommends that the federal government, cooperatively with participating provinces, proceed to establish a single federal securities regulator for Canada. The Report is the latest in a long history of reports recommending that Canada move away from its current patchwork approach to securities regulation, whereby responsibility for securities regulation resides with regulators in each province and territory of Canada, to a single regulator for the Canadian markets.
In 2003, for example, the federally appointed Wise Persons Committee recommended that the federal government establish a single regulator for Canada in collaboration with the provinces. The regulator would be accountable to the federal government. In 2006, the Crawford Committee recommended a similar structure; but, in contrast to the Wise Persons Committee and the Expert Panel, the Crawford Committee recommended that the provinces work collaboratively to establish the regulator and that the regulator would be accountable to the legislatures of the participating provinces and the federal government.
Expert Panel Considerations and Recommendations
As part of its mandate from the federal government, the Expert Panel looked at a number of other topics relating to securities regulation including:
(1) objectives, outcomes and performance measurement in securities regulation;
(2) advancing proportionate, more principles-based securities regulation;
(3) an independent adjudicative tribunal;
(4) better serving investors;
(5) opportunities to further strengthen securities enforcement; and
(6) improving the regulation of derivatives in Canada.
Several recommendations emerged from the Expert Panel's consideration of these issues which have not been addressed in previous reports. The Expert Panel recommended that Canadian securities regulation be more proportionate, reflecting the reality that Canadian markets are composed of many smaller (rather than larger) issuers, and that securities regulation move to a more principles-based (or outcomes-based) approach.
The Panel also recommended a number of initiatives to better protect investors:
(1) improving complaint handling mechanisms and redress opportunities for investors;
(2) establishing an independent investor panel of the new Canadian Securities Commission (CSC); and
(3) forming a dedicated investor issues group within the CSC.
Structure of the Canadian Securities Commission
The recommended structure of the CSC is not dissimilar to the structures proposed in previous reports. The Panel recommended that:
(1) the head office of the CSC be located in one of B.C., Alberta, Ontario or Québec (assuming that those provinces participate in the CSC);
(2) regional offices and the head office of the independent adjudicative tribunal be located in other provinces; and
(3) local offices in each province service local market participants and support local enforcement actions.
The CSC would be overseen by a Governance Board, all members of which would be independent of CSC management (although the Chair of the CSC would be an ex-officio member of the Board). A federal-provincial nominating board would recommend candidates to the federal Minister of Finance for membership on the Board and as Commissioners. The Expert Panel also recommended establishing a Council of Ministers of all participating jurisdictions to discuss the development of securities policy and the ongoing administration of the system, and to ensure that securities regulation supports the distinct needs of the regions and industrial sectors across Canada. Through this Council, the provinces would have the power to veto any proposed legislative amendments.
Establishment of a Single Regulator
One thorny issue for every committee and panel that has recommended the creation of a single securities regulator is how to establish this regulator. The Expert Panel has recommended that the federal government take the initiative to establish the CSC and negotiate with those provinces which wish to opt in to it. Indeed, in its recent budget, the federal government allocated $33 million to fund a Canadian Securities Regulation Regime Transition Office and $150 million for the Minister of Finance to make payments to provinces and territories for matters relating to the establishment of a Canadian securities regulatory regime and regulatory authority.
The novel suggestion which the Expert Panel makes, however, is that after a period of time, if a sufficient number of provinces do not choose to opt in to the CSC, then there should be a market participant “opt in” feature included in the transition provisions of the new Securities Act. Market participants (issuers and registrants) not based in a participating province would be given the right to opt in to the CSC for themselves, their related entities and their respective activities. Market participants which opt in would then be governed exclusively by the federal legislation; those who did not so opt would be regulated by the relevant non-participating jurisdiction.
Management of Systemic Risks
The Expert Panel's Report builds on a long legacy of reports which have concluded that the best structure for Canadian securities regulation is a single regulator. As the Report notes, by moving to a single regulator "[t]he regulation of capital markets would have a national mandate that would complement the national character of Canada's capital markets." The Report comes in the midst of some of the greatest capital markets dislocations in history which have, among other things, brought to the forefront the need for securities regulators to be able to manage systemic risk. While past systemic failures were largely confined to banking institutions, increasingly systemic failures have been manifesting themselves in the capital markets. It is the view of the Expert Panel that such risks in the capital markets must be managed on an increasingly coordinated global basis and that, from Canada's perspective, such management can only be done properly through a single securities regulator.
The current capital markets crisis may provide an impetus for a move to a single regulator. In addition, the federal government’s public commitment of money to establish a transition office and to fund payments to the provinces for the establishment of a single regulator is the government’s most public commitment to date to move forward on this matter. Recently, British Columbia indicated its willingness to participate in this process, joining Ontario, which has long supported the move to a single regulator. Finally, the potential for a market participant opt-in feature may encourage the provinces and territories to participate in the negotiations to establish the CSC. It will be interesting to see if these developments do, indeed, result in the establishment of a single securities regulator in Canada.