Too Many Regulators Spoil the Market

Fragmented across thirteen provincial and territorial jurisdictions, the framework unleashes punishing regulatory and compliance costs on anyone that dares enter Canada’s capital markets.

Many commentators have advocated a national securities commission as the answer, but the regulators in Alberta and BC have been cool to the idea. Why is this the case? Are these commissions resistant to a national commission out of self-interest? In other words, is self-preservation their priority? Or is there validity to their concerns over regional markets? There may in fact be some self-interest behind their stances, but concerns over the impact a “one regulator fits all” model are valid.

While securities commissions have similar responsibilities in each province -- which include protecting investors from abusive conduct and preserving market confidence -- there is a clear divergence in philosophy and objectives. The interim report of a committee reviewing Ontario’s securities legislation summed up Ontario’s philosophy by noting, “Canada competes with other jurisdictions around the world for capital and investment opportunities. Our regulatory regime must be part of our competitive advantage. This requires that our regulators be able to operate efficiently and that our regulatory requirements not be more onerous than those existing in other jurisdictions (particularly the United States), except as may be required to satisfy our public policy objectives.”

In other words, the only constraint on how tightly Canada’s capital markets should be wrapped in red tape is avoiding the use of significantly more rolls of it than the US does.

In contrast, western commissions are less concerned with competing head-on with the SEC in international capital markets, an approach which serves the interests of a limited group consisting of Canada’s one remaining exchange, the major banks and legions of Bay Street lawyers. Out west, the focus is on the broader economic benefits of ensuring young companies have access to the capital they need to grow and prosper.

Proponents of a national regulator dismiss regional concerns by saying they could be addressed by establishing “regional offices.” But these proponents have not said what functions regional offices would serve. Presumably, these offices would perform such tasks as enforcement and surveillance. However, the important function for ensuring regional interests are served is policy-making, such as drafting rules. For efficient national regulation, policy-making would have to be centralized. Decentralization of the policy-making function would inevitably lead to fragmented centers of power within the commission’s bureaucracy. Thus, the national regulator would have many of the flaws of the existing system, only internalized within a single, more opaque, entity.

While not all the regulators agree with pursuing a national commission, there is consensus on the harmonization of regulation as well as support for delegation of regulatory responsibilities. Delegation would allow market participants regulated in one jurisdiction to have access to the rest of Canada without being regulated by any other jurisdiction.

But while harmonization of securities regulation across Canada has benefits, there are also costs.

According to Doug Hyndman, Chair of the BCSC, the real problem with securities regulation in Canada is that there are too many rules, and the rules are too complex. But every new harmonized instrument introduced by the Canadian Securities Administrators (CSA), not only harmonize rules across jurisdictions, but frequently add to the number and complexity. This continues to be the case, even after the announcement by the BSCS of its deregulation project that was established to reduce and simplify existing rules.

For example, the recently released CSA proposals to establish uniform continuous disclosure requirements across Canada do not simply harmonize disclosure requirements, but include several “enhancements” that are either new disclosure requirements, or significant expansions of existing requirements. For a sense of how the proposals increase complexity, one only needs to read the section on executive compensation performance graphs, which companies will need to hire PHDs in economics or mathematics to prepare, and which will ultimately confuse most of the investors that actually bother to look at them. The harmonized rules flowing out of the CSA tend to fit the OSC vision.

Efforts towards harmonization have been stepped up, with Stephen Sibold, ASC Chair, leading a CSA committee that is developing a completely harmonized statute for all jurisdictions. But it will be impossible to create one set of rules that will work for vastly different regulatory visions. Inevitably, until there is acceptance of a regulatory system that facilitates real delegation of responsibility, but incorporates adequate differentiation across regulatory regimes that will allow different segments of Canadian capital markets to blossom, the existing fragmented system will continue to inflect severe pain in Canada’s capital markets.