Title: Will Canada finally get a national securities regulator?

Sub-title: Experts say that capital markets regulation could be improved if the 13 provincial and territorial regulatory bodies were replaced by a cross-country one.


Canadian securities regulators have come under increasing fire in recent years. Their failure to protect investors from unfair, improper and fraudulent practices made headlines both during the financial crisis and the Vincent Lacroix and Earl Jones affairs. Late last month, pressures arising from those debacles, coupled with the shear inefficiency of having 13 provincial and territorial bodies regulate the country’s capital markets, finally prompted the federal government to release draft legislation to form a national securities regulator.


Questions abound as to whether this latest initiative will succeed. There are numerous obstacles to forming a single coast-to-coast financial regulatory body. Furthermore having one would be unlikely to provide a cure-all panacea that would protect investors from the many sharks out there. That said, there is significant agreement that a national regulatory body would provide a solid step in the right direction.


The potential for more effective enforcement

A national regulatory body has the potential to enhance enforcement activities says Philip Anisman, a securities lawyer. “Right now if a provincial regulatory body spots a scam, it can stop it by issuing an interim order. However although provinces do cooperate, there are sometimes long time-lags before other jurisdictions take actions. A national body could do so immediately.”


One of the biggest problems facing the existing regime is those 13 provincial and territorial regulatory bodies, each of which is headed and manned by armies of bureaucrats, many of whom will do anything to protect their jobs and turfs.  This stifles innovation and investor protection on a number of fronts.


“A national securities regulatory body has the potential to provide more effective international coordination that could benefit all investors and market participations,” Anisman. “For example during the recent crisis in financial markets, the US Securities and Exchange Commission was able to act quickly in concert with UK financial authorities to coordinate a ban on some short-selling. Here in Canada, the various provincial bodies were forced to watch from the sidelines.”



Ermano Pascutto, executive director of the Foundation for the Advancement of Investor Rights (FAIR) agrees. “Coordination between provincial bodies is a major problem,” says Pascutto. “For example we have been pushing for more than ten years to get regulators to force mutual fund companies to publish simple, easy-to-read, two-page information sheets about each of their products, to accompany their existing prospectuses. But it will likely take another two years before anything is finalized.” Pascutto contrasts Canadian financial regulatory bureaucracy with Hong Kong’s, which has a unified regime that was able to push through improvements following the financial crisis fairly quickly.


Problems with the new proposals

The irony is that a national securities regulatory body on its own would not solve many of the recent investor problems. For example assertions by minister Flaherty that a new regulator would be better able to tackle fraudsters need to be taken with a grain of salt. Earl Jones, for example, who bilked retirees out of tens of millions of dollars, was able to act with impunity, because his activities were not covered by existing regulations.


Nor was United States, which has a unified national securities regulatory body in place, immune to turmoil of its own. Its Securities and Exchange Commission ignored numerous warning signs, and eventually allowed Bernie Madoff to make of with tens of billions of dollars of investors’ money.


In fact regulators have long been accused of allowing themselves to be captured by the industry’s they are supposed to watch over. For example, the SEC recently turned a blind eye when the US Financial Accounting Standards Board, over which it has considerable moral suasion, changed accounting rules to allow banks to carry junk, sub-prime assets on their books, at values significantly above what they could sell them for. (Even more blatantly, the US Minerals Management Service allowed British Petroleum and other oil companies, whom it was supposed to watch over, to do deepwater drilling, without having backup plans in place should a spill occur),


According to Pascutto, effective regulation often comes down to proper execution. “You can have all of the structures in place that you want, but if you don’t have the right people running them, they will all break down,” says Pascutto.


Pascutto also stresses that any Canadian national securities regime would only work if the provincial bodies joined on a voluntary basis. Right now, Quebec, Alberta and Manitoba are all challenging the federal government’s plan. The federal government is sending its draft legislation to the Supreme Court of Canada to rule on its constitutionality. Finance minister Jim Flaherty has said that he expects the court to take 12 to 18 months to give its opinion.


Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.







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