Status Quo for Securities Regulation
March 29, 2012
Streamlining Secondary to Constitutional Considerations
By Barbara Carss
A recent Supreme Court of Canada ruling means that publicly traded real estate companies will continue to deal with multiple securities commissions – at least until the federal and provincial/territorial governments can agree on how a single national regulator would operate. The Justices unanimously decreed the proposed Canadian Securities Act unconstitutional, thus derailing the federal government’s unilateral effort to assume the role now carried out by 13 provincial and territorial securities commissions.
The decision, which was released in late December 2011, does recognize a federal interest and suggests that a harmonized system could be developed cooperatively with provincial/territorial input. Converts will have to be won, however, since Ontario was the only province to support the federal legislation.
“It certainly would have been simpler to have only one regulator to deal with, but it’s not a major concern. Many changes have already been made to the system to streamline it,” observes Allan Goodman, a Partner specializing in securities and corporate law with Goodmans LLP.
“We haven’t heard any concerns from our members,” concurs Ryan Eickmeier, Manager of Government Relations and Policy with the Real Property Association of Canada (REALpac).
Regulated entities typically choose to file a prospectus for new offerings to the market with all 13 regulators since it is a requirement of raising capital in any province or territory. A cooperative agreement, known as the passport system, among 12 of the 13 securities commissions has simplified the process by designating the province where the issuer is located as the principal regulator. Issuers file one prospectus with their principal regulator, but pay fees in each of the provinces/territories where they wish to offer securities.
The Ontario Securities Commission (OSC) is also deemed a principal regulator for this purpose even though it does not participate in the passport system. Companies based in Ontario file just one prospectus with the OSC, while issuers located in other provinces file what’s known as a dual prospectus with their principal regulator and the OSC.
“To the issuer, it is fairly seamless. To the regulator, it is very important,” Goodman says. “Everybody, including Ontario, would like to be the regulator.”
Indeed, Ontario’s support for a single Canadian regulator is at least partly premised on the assumption that the bulk of its work will be carried out in Ontario. The OSC’s Statement of Priorities for the 2011-12 fiscal year notes: “To reflect the reality of Canadian capital markets, the Canadian Securities Regulator should be based in Canada’s financial capital, Toronto.”
Likewise, the Toronto Financial Services Alliance – a public-private coalition of interests that derive business, tax revenue and/or other spinoff economic benefits from the financial industry – was both an early supporter of the proposed Canadian Securities Act and an active promoter of Toronto as a national regulator’s “logical” headquarters.
“Canada is the only major developed country without a unified approach to securities regulation and that puts us at a competitive disadvantage in a world where financial regulation is becoming more and more harmonized,” the Alliance’s President, Janet Ecker, said after the Supreme Court’s ruling was released. “I urge our government leaders to put good public policy first and reach a cooperative solution – as our governments have done in the past when matters of vital national interest have arisen.”
In contrast, constitutional debate and decisions address jurisdictional authority to govern, not necessarily the reasonableness of the policy or law. The federal government staked its claim on its responsibility for general trade and commerce, while opposing provinces asserted their power of property and civil rights.
The Supreme Court ruled that the federal government’s reasoning did apply to the issue of systemic risk, but that the main thrust of the proposed legislation couldn’t be justified because it would simply replicate day-to-day operations that are clearly within the realm of provincial responsibility.
RED TAPE RELATIVE
The Justices did not consider how the proposed law might affect either regulated entities or investors in the market. Nevertheless, proponents of a national securities regulator emphasize the practicalities of the proposed reform, such as more efficient administration, reduced fees, streamlined enforcement and consistent rules for investor protection.
Some critics of multiple securities commissions also contend that they have been an off-putting obstacle to foreign companies’ efforts to raise capital in Canada. Other market observers counter that administrative details are peripheral to that business case.
“Most foreign companies come to Canada because when they look at our markets, there are many reasons to be here,” Goodman maintains. “Our regulatory environment might appear to be complicated, but, practically, it’s not that difficult to manoeuvre. For example, we do not have some of the same administrative burdens imposed by Sarbanes-Oxley legislation in the United States, which can make the Canadian markets more appealing.”