As investors, we tend to focus most of our attention on our actual investments and pay minimal attention to systems in place to regulate and facilitate them. This is a good thing, as it is evidence of a system that does what it is supposed to do. But that may be about to change.
A panel commissioned by the federal government released its report yesterday (known as the Hockin Report) calling for the creation of a single national securities regulator. While this idea has been bounced around for at least the last 20 years or so, the current financial crisis is increasing the political will to try to actually make it happen, despite the fact that such a move will do virtually nothing to address current challenges and may well prove to be unconstitutional. It’s a move that makes it look like the government is doing something while placating Ontario at the same time, and is therefore a nifty cause du jour.
How things work (and yes, they work)
Presently, each province and territory has its own securities regulator, its own regulations, and its own enforcement mechanisms. While there are federal criminal laws that apply to certain activities like insider trading and separate provisions for federal incorporated companies, securities are largely regulated at the provincial level. However, most provinces have signed on to a “passport” system that provides for mutual recognition of provincial approvals to reduce red-tape and increase efficiency.
Regulation at the provincial levels allows provinces to regulate and serve their markets based on local needs. Provincial regulators are best equipped to meet local needs and to work with domestic companies on regulations and exemptions, as well as addressing concerns such as fraud and local scams. It should also be noted that provincial regulation allows the development of expertise in each province and keeps those experts at home, rather than having the industry forcibly concentrated in a few major centres.
However, the federal government and some industry players don’t like this system, and would prefer a single national regulator to handle matters. Federal Finance Minister Jim Flaherty has suggested that if provinces aren’t willing to agree to a single national regulator, he’ll force it upon them.
Wait, can they do that?
In my opinion, no.
Under the Constitution, securities regulation falls within provincial jurisdiction over property and civil rights (that’s s. 92(13), for you cite buffs out there). Provinces have regulated their own markets efficiently and effectively since the beginning of time, or at least the beginning of modern markets.
In typical federal fashion, Ottawa claims that it can castrate provincial regulation by implementing a national securities regulator using the federal trade and commerce power (s. 91(2) of the Constitution Act, 1867). There are those, including Alberta, Quebec, Manitoba, and MoneyGrubbingLawyer, who respectfully disagree. The regulation of domestic trade in securities, as well as the regulation of corporate structures are capital arrangements, is a matter that is in pith and substance related to provincial responsibilities and any federal intervention in these matters is an intrusion on provincial jurisdiction. That darn Constitution may be a pesky little thing, always getting in the way of “efficiency” and the consolidation of power in central Canada, but it remains the backbone of our nation. Provincial jurisdiction must be respected, and failure to do so will certainly result in a constitutional challenge.
Is there even a need?
Proponents of a single national regulator claim that a single body will allow rapid response to problems that arise, and that recent events in the market have emphasized the need for such a system. In fact, if anything the recent market turmoil proves that the existing systems work, and work well. Canada was one of the first nations in the world to suspend the short selling of financial stocks when markets began to tank, and provincial regulators have more than adequately addressed concerns relating to trading behaviour and practices. The existing securities regulation regime in Canada has had absolutely no bearing whatsoever on the financial crisis or Canada’s response to it. Put simply, the need for a national regulator just isn’t there.
A second claim, emanating primarily from the white shoe Bay Street world, is that the current “patchwork” system of regulation is inefficient and puts Canada at a competitive disadvantage. While I have yet to see any empirical evidence supporting this argument, any inefficiencies in the current system can be addressed adequately through mutual recognition programs such as the Passport system- a system which, by the way, enjoys the support of every province except Ontario. Yes, it seems that the province screaming the loudest for greater efficiency is the province least willing to actually cooperate towards achieving it- unless, of course, the efficiency is obtained by concentrating power in Toronto.
What happens next?
With the release of the Hockin Report, it appears quite likely that the feds are going to push forward with their plans for a national regulator. Quebec, Alberta, and Manitoba have all been vocal in their opposition, and it can be expected that the matter will wind up before the Supreme Court of Canada within a few years.
For investors little will change, at least in the short term. We can continue to buy, sell, research, and issue shares using the normal procedures until a new regulator is either in place or the idea is abandoned. Meanwhile, our politicians will be wasting their time, energy, and money trying to implement an unconstitutional system to address a non-existent problem. Perhaps we need a national office to regulate that.
You might also enjoy:
{ 4 comments… read them below or add one }
Hey, thanks for the info. I heard about this on the radio but didn’t really get what the big deal was. You should submit a blog post to Canada Writes ‘09 (http://www.cbc.ca/canadawrites/)
The current system can’t be called effective or efficient. It’s burdensome and full of duplication. It’s about time that Canada join the rest of the world with a single regulator for a single market. And as for the constitutional issue, experts say they have the power to do this.
I have a few friends who are securities lawyers. They have told me that they basically do all their work as though Ontario is the only province it goes to, since the Ontario Securities Commission has the tightest regulations. Once it’s good enough for Ontario, it is fine everywhere else. Prior to the internet, they used to send articling students to fly across the country to personally deliver the materials to each province. A bit waste of time, but I’m sure it was fun for the student.
Not sure I totally agree - I think a central system would be beneficial.
Isn’t Canada kind of behind the times with respect to this?