Canada may cave on bid for national securities cop

Date: Monday, January 22, 2007
Author: David Clarke, InvestmentNews.com

OTTAWA — Less than nine months after stating in its budget a preference for a national securities regulator, Canada’s federal government seems to be caving in to the political realities and focusing on the passport model used by the nation’s provinces and territories.

Along with its most recent budget, released May 2, the government issued a discussion paper entitled “Restoring Fiscal Balance in Canada,” which states that: “The government believes Canadians would be best served by a common securities regulator that administers a single code, is responsive to regional needs and has a governance structure that ensures broad provincial participation.”

“I think we are making progress [reaching that goal],” Finance Minister Jim Flaherty said Dec. 22. “I think we have more support among the provinces now to move to a common securities regulator, and we certainly have more provinces and more finance ministers who are prepared to continue to discuss the issue and move toward that goal.”

That appears to be a very optimistic assessment.

‘The best answer’

“Only a Quebec regulator, present and involved, can appreciate the needs of our citizens for protection,” Quebec Finance Minister Michel Audet said in a November speech. “At the same time, the industry needs a regulator whose headquarters are in Quebec and whose primary concerns are the needs and priorities of the Quebec industry … The passport system is without a doubt the best answer to those who are arguing for one securities commission in Canada.”

Indeed, while talking a good line about progress on a national regulator, Mr. Flaherty also is focusing attention on the passport model, which regards each entity’s rules as applicable to all.

In a statement released Dec. 18 after a meeting of the Council of Ministers of Securities Regulation, he said: “Ministers also agreed to accelerate progress on more collaborative and efficient securities regulation and enforcement in Canada, with a focus on performance and outcomes.”

The passport rule is used by the Canadian Securities Administrators, the Montreal-based council of the securities regulators of Canada’s provinces and territories.

Industry observers say, with caveats, that the CSA does good work. And it is busy.

On Dec. 21, for instance, it was seeking comments on proposed National Instrument 41-101, “General Prospectus Requirements.” In an effort to harmonize prospectus requirements across Canada, the proposal is aimed at providing market participants, including certain types of investment funds, with a transparent set of general prospectus requirements.

“The major achievement of this proposal is the consolidation of related prospectus rules and policies into one instrument,” said Jean St-Gelais, chairman of the CSA. “The harmonization and streamlining of the various jurisdictional requirements under the proposed rule will make it easier for issuers to distribute securities in Canada’s financial markets.”

But do the individual provinces have the power needed to do their job?

Mr. St-Gelais also is president and chief executive of the Autorité des marchés financiers, Quebec’s securities regulator. In a November speech, he recommended to the provincial government a package of legislative changes aimed at making penalties harsher for securities infractions, strengthening investigative powers and improving wronged investors’ ability to sue public companies.

“Economic crimes are just as serious for society as other types of crimes, and they should be treated with the same severity,” Mr. St-Gelais said. “It’s unacceptable to allow fraud artists to believe that they can get off easy in Quebec.”

The AMF has been criticized

for failing to head off problems at Montreal-based Norbourg Asset Management Inc. — where $120 million allegedly was embezzled from mutual funds the firm administered — and for its handling of another case, involving hedge fund operator Norshield Financial Group, also of Montreal. Indeed, the AMF was named in October as a defendant in a class action brought on behalf of 9,200 Norbourg investors.

New mandate for SRO

The CSA believes that the provinces need help from beefed-up self-regulatory organizations. A Dec. 11 CSA report suggested that the organization should increase the degree of reliance on SROs and market infrastructure entities “where they can clearly demonstrate that they meet their public interest mandate and the high-level standards in their recognition orders and related documents.”

The report notes that the SROs indicated that they currently do not have sufficient enforcement powers.

They have sought various additional powers, such as: the authority to file disciplinary decisions with the courts; the power to compel third parties to cooperate with investigations; statutory immunity; and jurisdiction over non-registered employees of members, and over firms and employees that leave the SRO.

The proposed new enforcement mandate must be much on the mind of one new figure on the regulatory scene.

On Dec. 20, the Investment Dealers Association of Canada and Market Regulation Services Inc. — known as RS — announced the appointment of Ontario Securities Commission Vice Chairwoman Susan Wolburgh Jenah as president and CEO of the proposed new SRO, which is intended to succeed the IDA and RS, which are both based in Toronto.

“Combining member and market regulation into a single entity makes a lot of sense.This is a unique opportunity to build on the considerable depth of knowledge and expertise that resides in each of the merging organizations to further enhance the high quality of the regulatory system in Canada,” Ms. Wolburgh Jenah said.