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Canada to set up new markets watchdog, but scope limited

Date: Friday, September 20, 2013
Author: Reuters

OTTAWA (Reuters)—Canada's federal government and two of its provinces will set up a common securities regulator as a first step toward their ultimate goal of replacing the current patchwork of provincial agencies with a more efficient national markets watchdog.

Federal Finance Minister Jim Flaherty and his counterparts from Ontario and British Columbia unveiled details of the plan on Thursday [Sept. 19]. Together, Ontario and British Columbia are home to about two-thirds of the country's capital markets.

Ottawa has tried for decades to persuade the country's 10, mostly reluctant, provinces and three territories to create a national regulator similar to the U.S. Securities and Exchange Commission. Flaherty has lobbied hard for it since he became finance minister in 2006 with the election of the Conservative government.

The version of the plan revealed on Thursday is less ambitious than earlier efforts, but is designed to win over additional provinces before its 2015 launch. Still, the French-speaking province of Quebec, led by a separatist government, rejected the plan and hinted at fighting it in court.

Flaherty said the agreement "represents the best of what can be achieved when a shared responsibility becomes a mutual goal." He said he expects other provinces join the plan quickly but that the intention is to push ahead with the initiative even if there are holdouts.

The three governments said they would enact provincial legislation and complementary federal legislation by the end of 2014 so that the new regulator can start operating in July 2015.

Tougher Watchdog Sought

The new body will replace the Ontario Securities Commission, which is now the country's major securities regulator, and the British Columbia Securities Commission as well as their counterparts in any other provinces that choose to participate.

Canada has been criticized by the International Monetary Fund for being the only advanced economy without a national capital markets regulator. The federal government hopes the new commission will improve Canada's poor reputation for cracking down on white-collar crime. Recently, Canadian regulators were criticized for their oversight of Sino-Forest Corp., one of several North American-listed companies with Chinese operations whose accounting disclosure practices came under scrutiny.

Other major goals of the plan are to make it easier for investors to navigate the system by eventually having a single set of rules nationwide, and to give Canada a single voice in global discussions of regulatory issues.

Ontario Finance Minister Charles Sousa said the partial deal is better than the alternative: a purely federal regulator that Flaherty had threatened to create if he could not forge a deal with provinces.

"To introduce yet possibly another federal regulator with all the others included would create an international reputational signal that would say, you know, we don't have our act together," he said.

Quebec Fiercely Opposed

Many provinces, particularly Quebec, have seen the federal government's efforts to create a national regulator as an intrusion on their powers.

The Supreme Court ruled in December 2011 that it was unconstitutional for Ottawa to impose a common regulator on the provinces and territories. As a result of the court ruling, Flaherty has switched from a unilateral approach to a cooperative format with willing provinces.

But more legal wrangling could be in store. The Quebec government said it might challenge the plan in court.

"We will ask the justice ministry for a legal opinion to analyze the proposal that was announced this morning and we will not hesitate to go to court," said Alexandre Cloutier, Quebec minister for intergovernmental affairs.

Proponents of the existing "passport system" in nine of the 10 provinces, excluding Ontario, say it does not need fixing. It allows a company that obtains approval in one province to get automatic approval in another.

Alberta, the country's oil-rich province, had at one point been leaning in favor of Flaherty's approach, but earlier this year it came out in favor of the status quo. Alberta Finance Minister Doug Horner said on Thursday his province and some others were not even consulted on the new plan before it was announced.

One advocate of Flaherty's proposal was disappointed at its lack of support among the provinces.

"The announcement would have looked a little stronger had they had four or five provinces involved instead of just two," said Richard Steinberg, chairman of Fasken Martineau's securities and mergers and acquisitions group. "That way it would have looked like a stronger proposal and it would have given it more momentum."

Corey MacKinnon, a partner at the corporate law group at Heenan Blaikie, applauded the compromise deal, however, and predicted others would jump on the bandwagon.

"Ontario and British Columbia are very good starting points, if they can get Alberta onside you have effectively achieved the critical mass that you need," he said. "I would be very surprised at that point to see any of the other provinces, other than Quebec, not fall in line."

The three governments emphasized the cooperative nature of the agreement. The head office of the new agency will be in Toronto, the dominant market. But a council of ministers from all participating provinces will oversee the body. And the federal government will compensate provincial governments for any revenue loss resulting from the loss of their own regulators.