Talk of sole Canadian regulator begins to heat up

Date: Monday, May 15, 2006
Author: David Clarke, InvestmentNews.com

OTTAWA - Tantalized by Canadian opportunities, U.S. and Canadian investors alike have been paralyzed by concerns about the adequacy of securities regulation here.

Apparently, politicians and the industry have been listening

The first Conservative budget after 13 years of Liberal rule, released early this month, addresses the issue. Subsequently, a report by a panel empowered to study the efficacy of a single Canadian securities regulator, and comments by a central bank official, added some kindling to the fire.

The S&P/TSX Composite Index is expected to reach a record high of 15,000 by the end of next year, courtesy of soaring energy prices, CIBC World Markets Inc. of Toronto predicted May 1. "Exploding energy prices should drive much of the gain in the stock market both this year and next," according to the firm. But Canadian markets have been plagued by scandal.

One of the biggest scandals riling investors involves the accounting practices of Nortel Networks Corp. The Brampton, Ontario, telecommunications equipment maker said late last month that it again was restating financial results and shaving another $1.5 billion (U.S.) off revenue dating back to 2003.

Portus Alternative Asset Management Inc., a Toronto-based hedge fund now in bankruptcy proceedings, was at the root of the biggest of 2005's many scandals.

Many observers say that the ultimate cause of such scandals is that Canada is the only industrialized country that lacks a true national securities regulator.

The federal budget, released May 2, is important for Canada's financial services sector. It alters the federal capital tax on financial institutions.

The tax is levied at a rate of 1% on taxable capital employed in Canada between $200 million and $300 million (Canadian), and 1.25% on taxable capital in excess of $300 million. The new budget will increase the threshold above which the tax begins to apply to $1 billion and will adopt a single tax rate of 1.25% over that threshold.

The changes will apply as of July 1.

Perhaps more important in the long run, Finance Minister Jim Flaherty's budget set the national-regulator issue simmering. "The government believes that Canadians would best be 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," according to the budget.

Praising scope, quality

After the budget came out, the temperature increased.

On May 4, the Crawford Panel on a Single Canadian Securities Regulator released summaries of input received on its discussion paper, "A Blueprint for a New Model."

"The panel is pleased with both the scope and quality of input received from participants in the consultation process," said the panel's chairman, Purdy Crawford, a legal authority on securities regulation. "The comments are quite constructive and will help guide the panel in the preparation of a final report expected in early June."

The Ontario minister responsible for securities regulation established the Crawford panel in Ottawa a year ago.

The panel released its discussion paper Dec. 7. Regional round tables subsequently were held to ensure that the panel received a cross section of opinion, comment and suggestions on its proposed model.

"There was a sense that the initiative needs a stronger overarching mission that speaks to the globalization of the markets ... and the need to ensure that Canada is an attractive market for capital," according to its report.

Those submitting comments concurred that there needs to be "political will" to move the project forward and that the financial services industry can't back the initiative without the help of investors. "The enforcement issue may be the most important to the retail investor."



Harmonization welcome

Then, last Monday, the issue was brought up by David Longworth, deputy governor of the Bank of Canada, the nation's central bank. "It is essential that the Canadian regulatory framework be guided by principles that are at least as good as, if not better than, those of other countries," he said in a speech to the conference of the Association des Economistes Quebecois in Montreal.

Mr. Longworth decried overregulation and varied regulation. "So yes to regulatory requirements that vary with size, but no to regulatory requirements that vary by province," he said. "I would like to welcome and encourage the harmonization efforts that are ongoing among provincial securities commissions, including Quebec's Autorit%E9; des march%E9;s financiers."

That was a timely reminder of the alternative to a national securities body: the Montreal-based Canadian Securities Administrators' passport system of securities regulation.

On May 3, the Saskatchewan Financial Services Commission said that its Securities Amendment Act 2005 comes into force June 1.

The act will implement provisions to allow the commission to adopt the CSA's passport system, including the power to grant exemptions based on the fact that an issuer or trade is in compliance with the laws of another jurisdiction and the power to adopt decisions of other jurisdictions.