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National Securities Regulator: just do it
Manley's right to overhaul securities regulation
By Liberal MP Jim Peterson

PARLIAMENT HILL--Finance Minister John Manley has made a good move. Overriding provincial objections, he has appointed seven wise persons to overhaul securities regulation in Canada.

The current system, with 13 different provincial and territorial regulators is the most egregious example of bureaucratic overlap, duplication and waste, the very epitome of what our federation should not be.

Since the 1930s, there have been at least 19 attempts to rationalize the system, but all have failed. Provinces are attempting reforms, but are now heading in different directions producing even less conformity and greater uncertainty.

Even if the provinces agree on uniform rules, which is unlikely, there will remain 13 different ways of interpreting and administering them. Each will still have to sign off on every issue, serving as a profit centre that exacts vigorish from any issuer traded throughout Canada. There will still be the horror stories of how one major national issue had to be delayed because a provincial office was closed on Remembrance Day, another on St. Patrick's Day. Extra days will still be needed to get to market, even after the lead regulator has signed off.

Regulatory overlap affects more than just issuers. Traders must be licensed and registered in every province in which they do business. One Winnipeg securities firm calculates that it is out of pocket $8,200 per year for each national trader, not to mention the management time required for compliance with 13 provincial as well as three professional regulators.

Small dealers and issuers suffer most from these unnecessary costs. One mining company went to market to raise $600,000; its net was only $300,000. It cost a company that went public in just three provinces 25 per cent of its CEO's time and five per cent of its revenue. The system is skewed in favour of the big public corporations and Bay Street dealers who can better afford the extra fees and legal bills.

One justification advanced for having multiple regulators is that regulatory competition is beneficial. Issuers will go to the province, the argument goes, with "the best" regulatory regime. Competition to reduce disclosure, however, is not in the public interest. And duplication would continue, since other regulators would not recognize the rulings of a jurisdiction that did not meet their own high standards.

Another excuse for multiple regulators is that only provincial securities commissions can respond to "local needs." While this argument may have been more cogent in the past when Canada had six stock exchanges, each with a different mix of companies, there are now only two, both within the TSX Group.

It is true that regions of Canada have different economies and it is no surprise that the most knowledgeable regulators of oil and gas companies are in Calgary. But this does not mean that Alberta needs a separate commission to regulate all issuers, including energy. A single regulator could accommodate the energy sector through its Calgary office. Local offices with decision-making authority in Quebec and British Columbia could just as reliably respect "local needs," whatever they might be.

Intransigence to reform is rooted partly in money. Provincial treasuries net over $100-million-a-year from their securities regulators. But issuers, including start-ups which are the backbone of innovation and job creation, should not be gouged by provincial treasurers.

One suspects that reform is also being thwarted because the regions fear Toronto will play an even more dominant role than now in financial services.

Currently, the TSX lists virtually all -- 99 per cent plus -- of the market capitalization of all securities traded in Canada. The Ontario Securities Commission is the most important regulator in Canada, and very few issues are done without meeting its standards. Ontario's predominance will continue to grow in a system where the need for local regulators is increasingly seen as a costly nuisance. The only way for other provincial regulators to be relevant in the face of Ontario's ever increasing dominance is to become an integral and participating partner in a single regime that embraces both them and Ontario.

A constant reminder of our archaic system is that, alone among the nations of the world, Canada does not have one single regulator. At the last annual meeting of IOSCO, the international securities regulatory body, every other nation was represented by its national regulator; Canada was represented by Ontario, Quebec, British Columbia and Alberta. In making critical decisions over corporate governance and Sarbanes-Oxley, the constant plaint is "who speaks for Canada?" There is no body that can work with the U.S. and the E.U. to help implement Barbara Stymiest's call for mutual recognition of stock exchanges in order to reduce global transaction costs. In negotiations for admission to China of Canadian financial institutions, provincial regulators deal with their national regulator. We will never achieve the best global capital market strategies without a single national regulator who speaks for all Canadians.

In brief, if the current structure is left in place, small issuers and traders will be further marginalized, Ontario's dominance will continue to grow at the expense of others, and Canada will remain the only country in the world without a single regulator.

The wise persons have been asked to consider two principal alternatives, namely a "passport" system under which the 13 regulators would adopt uniform laws and give full recognition to the decisions of one another, and a single regulator. While a passport would eliminate some duplication, there would still be the unneeded expense of 13 commissions, and it would do nothing to resolve the overlapping issue of "who speaks for Canada?"

I am confident the wise persons will recommend a single regulator. When they do, we should create a National Securities Commission. There is sound legal opinion that both inter-provincial and international security trading, which cover most securities, are under federal jurisdiction. Provinces could still opt to retain their own commissions for the few securities issued and sold wholly within their borders.

On the other hand, should a substantial number but not necessarily all provinces choose to cooperate, the NSC could be either a federal or provincial body. All offices would work under one set of laws, most likely the uniform securities act currently being drafted by the Canadian Securities Administrators. Its directors could be selected through a nominating committee composed of a federal chair and a representative from each province. Regional offices, in say Montreal, Calgary and Vancouver could have power to ensure compliance, provide on-going policy input, and where they have special expertise, to review prospectuses and register market participants.

The choice is simple. If the provinces help create the NSC, they can have significant roles in its establishment and ongoing operation, with certainty that their "regional" or "local" concerns will be respected. In the absence of provincial cooperation, the federal government must act alone. We can no longer tolerate a system built on competition among provinces that makes Canada increasingly irrelevant in global capital markets.

Liberal MP Jim Peterson represents the federal riding of Willowdale, Ont., and is the former Secretary of State for International Financial Institutions.

This article was published in the Hill Times, April 28, 2003