Canada's finance minister tackles securities cop issue

Date: Monday, July 10, 2006
Author: David Clarke, InvestmentNews.com

OTTAWA - Canadian Finance Minister Jim Flaherty isn't making much progress in the latest battle to create a national securities regulator.

But it has been a long war, with many more battles yet to ensue.

Mr. Flaherty late last month met in Niagara-on-the-Lake, Ontario, with provincial ministers responsible for securities regulation.

"I tried to encourage them to look forward someday to a single securities regulator," he told reporters after the four-hour meeting. "It may not happen quickly, but I would hope, over time, that we can move in that direction."

The federal government's only provincial ally is Ontario.

"It's been, I guess, 40 years of debate," said Gerry Phillips, Ontario's government services minister. "I think [the meeting is] another step in the constructive dialogue we have."

The remaining nine provinces and three territories have agreed on a "passport" system to allow a company that complies with one province's regulations to be recognized in others.

"Look at the progress we've made - recognize that 12 provinces and territories are agreeing on this," said Alberta Finance Minister Shirley McClellan. "You have one province that wants a different system."

"We could see ourselves participating in the passport if we kind of saw a road map to a common regulator, so we've never said we wouldn't participate in it," Mr. Phillips said. "I'm a pretty patient person, and I'm pretty determined to work with my partners to see if we can't find a solution."

"Ontario has said, 'We have three principles we follow: We'd like a common securities law, we'd like a common regulator, and we'd like a common set of fees,'" Mr. Phillips added.

"Those are the only three sort of key criteria. The rest is, frankly, detail."

"We're not at different purposes. The difference is over the structure that you achieve to get there; we're not offside on that," Ms. McClellan said.

Mr. Flaherty thinks that the passport system is a move in the right direction toward a national regulator.

"The passport system is something upon which we can build to get to that place. That was the sense around the table today," he said.

"It wasn't that we're going in different directions. It was about how we get there," Mr. Flaherty said.

"It's not a question of one process or another process; it's a question of shared objectives, and I think there is a sharing there," he said.

"It was another step along the road."

The battle for Quebec

Two days before the inconclusive June 28 meeting, the skirmishing began when Quebec's finance minister, Michel Audet, issued a release stating that in "its most recent study on the economic outlook, the [Paris-based Organisation for Economic Co-operation and Development] ranks Canada second among all nations for its securities regulations."

"I reaffirm Quebec's full support for the passport system," he concluded.

But what the OECD actually said was more nuanced. That organization's economic survey of Canada, 2006, stated: "Financial-market efficiency could be improved. Efficient financial markets contribute to the rate of growth. Overall, Canada's financial sector is well developed and diversified, and has performed reasonably well … Provinces currently exercise responsibility for regulating securities markets. Substantial gains could be achieved by establishing efficient and effective Canada-wide securities regulation, but governments to date have not agreed on the appropriate model to adopt. Every effort should be made to reach a decision as quickly as possible."

Mr. Audet is a member of Quebec's federalist Liberal party. Mr. Flaherty is a member of a minority Conservative party that needs votes in both Ontario and Quebec to win a majority in the next election.

On June 19, he had an exchange in Parliament with Yvan Loubier, a member of the separatist Bloc Quebecois Party, that shows how politically explosive the topic of a national regulator can be.

Mr. Loubier said, "Mr. Speaker, the finance minister announced this morning that he intends to create a Canadian securities commission. In doing so, he will be going against the wishes of Quebec and most of the provinces, catering only to Toronto's point of view."

Mr. Flaherty retorted, "We are the only Western industrialized society that has multiple securities regulators. We want to work on that in cooperation with the provinces toward a common national securities regulator … We acknowledge the work that has been done by the provinces and the territories with the passport system as they have tried to move toward harmonization. Unfortunately, it means harmonization with pages and pages of exceptions … The reality is that the Ontario Securities Commission is now regulating something like 83% of the business, and that is hardly paying respect to the regions across Canada and the involvement of the various provinces."

Compounding the difficulty of the political equation, the Ontario and Quebec regulators are viewed differently. Quebec's Autorit%E9; des march%E9;s financiers has been criticized for the way it has handled scandals - including those involving Norbourg Asset Management Inc., and hedge-fund operator Norshield Financial Group and the related Mount Real Corp., all of Montreal. Both of those scandals cost investors hundreds of millions of dollars.

On other hand, the Ontario Securities Commission has won praise for dealing with the defunct Toronto hedge fund Portus Group. On June 19, receiver KPMG Inc. of Toronto said that claims from investors total $706 million (U.S.), and they may recover as much as 85.8%, though the firm acknowledged that it is "unable to project with certainty the amount of, or the timing of, any distributions."

And more than seven in 10 registrants and reporting issuers said that the OSC is effective, according to the 2006 Stakeholder Satisfaction Study, conducted June 28 by Toronto-based Ipsos Reid Public Affairs Canada.

"The study results clearly show that the OSC continues to be assessed by its key constituencies as performing very well in delivering against its mandate," said Darrell Bricker, president of Ipsos Reid. "The results, quite frankly, are positive for a regulator."

Mr. Flaherty has a strong ally in Joe Oliver, president and chief executive of the Toronto-based Investment Dealers Association of Canada. Speaking in Whistler, British Columbia, June 27 at the inaugural meeting and conference of the Investment Industry Association of Canada, his organization's former industry association arm, Mr. Oliver said, "There is very little more for Ontario to give without undermining the very efficiency, flexibility and responsiveness that motivate structural change."

"Although [the provinces] contend that the passport was a major accomplishment, no one can really believe we have reached the goal post," he said.

"The provincial governments must move from mutual reliance to true legal delegation of decision-making authority. Until power is legislatively delegated to the principal jurisdictions, the system will break down whenever a single commission decides to impose its will, for example, on a prospectus filing," Mr. Oliver said.

'A growing impatience'

"There is growing impatience with historical anomaly, territorial tenaciousness and political inertia. Arguments increasingly resonate about the need to enhance efficiency and competitiveness, to bolster enforcement, to present a united front internationally," he said.

"There have been numerous false starts, but dare I suggest … that it is beginning to feel less like a matter of whether but when," Mr. Oliver said. "If a Pan-Canadian commission is finally established, commentators may be left to wonder why we didn't achieve it much earlier, since its value is self-evident."