New rules harmonizing Canadian securities laws are either a “major achievement” or simply a mirror of the existing system that does little to reduce fragmentation in capital markets. It’s really all up to whom you ask.
The main exception to the simplified procedure is Ontario, which opted out of passport. Nevertheless, its regulator, the Ontario Securities Commission, will operate an interface allowing the province’s own dealers and advisers to register elsewhere automatically. Registrants from other jurisdictions won’t benefit from that same courtesy in Ontario, where the OSC will still have one day to make a decision on approving them.
The harmonized system also introduces new registration categories that capture those who previously fell outside of the rules. For example, exempt market dealers trading in securities that don’t require prospectuses will now have to register except in a few circumstances in Alberta, British Columbia, Manitoba, and the territories. Also affected are foreign firms that will be exempt from registration in some cases. As a result, they’ll face the choice of whether to register with provincial regulators or limit their business activities in Canada so they remain exempt, says Mark DesLauriers, a securities law partner at Osler Hoskin & Harcourt LLP in Toronto.
As well, part of the harmonization drive includes a move to set standard rules around the proficiency, solvency, and integrity of dealers and advisers. That means more market participants, such as exempt market dealers, will now be writing more exams, be required to meet minimum capital and insurance requirements, and have to submit to occasional compliance reviews, DesLauriers says.
For people like Shaun Fluker, all of these changes are significant and represent a “huge achievement” in securities law reform. “What is out there in terms of securities harmonizes 95 per cent of the law,” says the University of Calgary law professor and former legal counsel with the Alberta Securities Commission. “If you think about where we were starting from, getting 95 per cent harmonized is a huge achievement.”
Fluker, a skeptic of federal plans for a national regulator, calls the timing of the two projects — passport and Hyndman’s transition office — unfortunate. “It’s a bit ironic that it’s taking place at a time that passport is just getting going and is quite a viable framework for all companies and registrants to effectively work across the country but only deal with one regulator.”
What is clear, however, is the move to passport hasn’t silenced calls for a single federal body. While some observers suspect the recent changes are a bid to circumvent the federal route, organizations like the Investment Industry Association of Canada hope they’re merely the start of the broader overhaul proposed by Flaherty. “It’s a perfect stepping stone to a national regulator,” says Susan Copland, a lawyer and Vancouver-based director for the organization. “We’d like to see a national regulator because it’s more efficient, but this is certainly an improvement and a positive step on the way there.”
DesLauriers also argues the harmonization path hasn’t gone far enough, particularly in areas such as derivatives where the rules across the country vary widely. “There’s still a lot to deal with in terms of 13 jurisdictions and the nuances of each jurisdiction.” It’s when he spends hours explaining the vagaries of Canada’s rules to foreign firms that “it hits home that we’ve got a relatively difficult system to navigate. It doesn’t necessarily scare them away, but what it does is affect their decision to pursue a business line.”
In terms of companies issuing securities, lawyers point out harmonization moves thus far leave some limitations. The changes harmonize both registration and the rules around prospectuses. However, issuers, dealers, and advisers still have to pay fees to each jurisdiction they plan to operate in. The result sometimes is a disincentive to offer products and services across the country. That means a company might find itself working with a dealer who isn’t registered everywhere, limiting the market for its securities, says Bernard Pinsky, a securities lawyer with Clark Wilson LLP in Vancouver. “The cost to issuers is fantastic,” he says, adding in addition to paying fees, companies also have to hire lawyers in each province where they want to offer their securities.
Pinsky, a proponent of a national regulator, argues that a single body would not only streamline the rules but also make it easier to do the job of monitoring capital markets since it would allow for more specialization among those who work for it. “A larger scale of regulation allows people to concentrate in certain areas, which makes the ability to investigate and prosecute more efficient.”
For Copland, the proposed national body would be particularly helpful in improving enforcement capabilities because, she says, it would have a better chance of ensuring wayward dealers and advisers don’t fall through the jurisdictional cracks. “You may have the same problem in five provinces, but if the provinces don’t speak to each other or everybody’s dealing with their own problem, they’re missing the bigger picture. So a national regulator would hopefully address that because you would have the big picture as opposed to the problem stopping at the boundary of the province.”
Of course, the key stumbling block to Flaherty’s vision remains the provinces themselves. Quebec is already taking the federal government to court over the matter, arguing the plan for a single body intrudes on its jurisdiction over securities laws. Alberta and Manitoba are also major opponents of the proposal.
For MacLachlan, while a single body has clear benefits, the challenge will be setting up a system that recognizes regional interests. In Alberta, for example, the province has long maintained rules facilitating securities activity by junior oil-and-gas companies needing to raise money quickly. As a result, they can offer securities to targeted groups of sophisticated investors rather than putting them on the retail market, something that otherwise would require them to prepare a prospectus. That inevitably creates apprehension that a national system might threaten those provisions. “I think the only way to have a national regulator is if Alberta has strong representation.”
Fluker agrees saying, “The rules have to be slightly different, and it makes sense to have a regulatory regime close to home that’s sensitive to those issues.”
Pinsky, though, believes once the federal government gets a new body running after Hyndman completes his work next year, other provinces will eventually come on board. His prediction is Flaherty’s plans for voluntary participation in a single regulator will initially include British Columbia, Saskatchewan, Ontario, and the Atlantic provinces. Over time, the others — save for Quebec — will likely join, he says. “I could see 10 years from now you’re going to have nine provinces and three territories who’ve got a national regulator, and Quebec has its own regulator. That’s the way I foresee it.”
Hyndman himself turned from skeptic of a single body while chairman of his province’s securities commission to be the one tasked with getting Flaherty’s plans off the ground. Hyndman explains the change, noting his view was, it was always up to the provinces to decide on the issue, something a number of them — including his own under Premier Gordon Campbell — have now done by backing the proposal. In terms of the regional tensions, he acknowledges the challenge but says it’s an issue he’s determined to resolve. “That’s obviously something I’m very conscious of and committed to, having a regulator that’s flexible ÃƒÆ’Ã‚Â¢Ãƒâ€¹Ã¢â‚¬Â Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã†’ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¨ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¶ to regional economies.”
Doing so will require a balancing act between empowering the single regulator’s local offices to make decisions and the need to co-ordinate securities regulation across the country. “I think we have the opportunity to have an organization that is decentralized ÃƒÆ’Ã‚Â¢Ãƒâ€¹Ã¢â‚¬Â Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã†’ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¨ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¶ but there is enough communication so that they’re building on each other’s experience.”
Fluker believes the regional issue won’t go away easily. He predicts opponents will take the case all the way to the Supreme Court of Canada, which in his mind would likely rule either that the provinces have exclusive jurisdiction over securities or, in the best case scenario for Flaherty, the two levels of government share it.
In that latter instance, he argues nothing would improve since Canada’s major financial centres — Vancouver, Calgary, Toronto, and Montreal — would fall under different regulators and therefore still require some sort of passport system. “To the extent that Montreal and Calgary are not going to participate, basically your federal regime is going to cover Vancouver and Toronto.”
“I just don’t see how the national regulator is going to solve the problem that it purports to [address]. Lots of people are going to make a lot of money on it in the meantime.”
It’s perhaps that last sentiment that is one of the few certainties to come out of the melee between the new passport and related rules, and the planned national regulator.
As DesLauriers points out, the changes are keeping people like him busy advising clients on how to comply, a scenario that will repeat once a single body starts up. “There’s still more to come and a lot of work to do in the transition.”