There are strong arguments in favour of a national securities regulator which have been voiced numerous times over the past few decades: greater efficiency in transactions, consistent and coherent presence internationally, single enforcement body, uniform securities legislation, lower costs for issuers and registrants, etc. Flowing from a series of federal, provincial and industry reports, these arguments make a coherent case for a national regulator notwithstanding the usefulness of the passport system of regulation over the past few years.
Recently, Finance Minister Flaherty provided another reason for a national securities regulator: current market turmoil (see Toronto Star, Nov. 2). However, while a number of financial market issues are on centre stage in this context, only some of these issues fall within the jurisdiction of securities
regulation per se. Thus, while the time seems ripe to bring this issue to forefront of the political agenda, the need for a national securities regulator is not obvious from current financial market conditions alone.
Importantly, a main focus of the financial market meltdown has been the banking area. In particular, the failure of large US investment banks (e.g. Bear Stearns, Lehman Bros) led to the introduction of a massive US federal government bailout plan under which the US government authorized the Department of Treasury to purchase troubled assets and other financial instruments with a newly-created body to oversee the program.
In Canada, intervention on this scale has to date proven to be unnecessary and indeed has been limited (e.g. the federal government has purchased a bulk of CMHC mortgages, the Bank of Canada has intermittently injected liquidity into Canadian markets over the past few months). This relatively limited response speaks to strength of the Canadian economy and its institutions. It is unlike the US and many European countries (e.g. UK, France, Belgium and Greece) where governments have intervened not only to create liquidity but also to guarantee deposits in their respective economies.
The key is that credit markets have stagnated in these jurisdictions and the focus of much government reform will likely be in the banking sector. In Canada’s banking sector, it is not clear that additional or new regulation will be necessary; while credit markets are undoubtedly tight and deals have slowed, Canadian investment banks have been relatively insulated from the economic turmoil that has crippled their US counterparts. There are various reasons for this: in the United States, the investment banks that failed were by and large banks that did not have a retail base of cheap capital unlike the banking system in Canada in which there has not been the same degree of separation between the investment banking and retail banking (i.e. in Canada's big banks). Thus, while Lehman Brothers and Bear Stearns collapsed in the US, Bank of America remained relatively stable. And, we should note that after the repeal of the Glass Steagall Act in 1999, the legal regime in the US actually permits the combination of retail and investment banking, but many banks chose not to adopt that structure.
Why would the creation of a national securities regulator be more important at this time in financial market history? One issue that stands out from a securities standpoint is the regulation of derivatives such as credit default swaps (CDSs). The way in which financial institutions were extended because of CDSs calls into question whether securities regulation appropriately addressed trades in these instruments. In the US, the Chair of the Securities and Exchange Commission (SEC) has indicated that greater transparency in the CDS market is warranted. This, and the proper regulation of derivatives generally, is without question an important issue to examine in the Canadian context. However, it is not clear that this issue in and of itself warrants a national regulator given that the Canadian Securities Administrators (CSA) have generally been effective in issuing national policy statements and instruments that all jurisdictions have agreed to. A coordinated approach to the regulation of derivatives could emerge through this body (following on Quebec's lead in issuing legislation regulating derivatives.)
A further possibility is that Minister Flaherty views a national response to securities market issues as being crucial. When the SEC temporarily banned short-selling in September 2008, the Ontario Securities Commission (OSC) followed suit immediately thereafter. The CSA issued a press release supporting the OSC’s temporary ban. Arguably, it would be more effective to have one statement that affects all securities trading and markets in the country. Coordination on this and other issues would be de rigeur under a national securities regulator. However, the CSA response is indeed a useful second best solution at the current time. It has been quite vigilant in issuing guidance to capital market participants, including investors, about the risks inherent in trading under current financial conditions.
A final argument underpinning the need for a national securities regulator relates perhaps to enforcement issues. In the US, a number of issues have arisen from a governance perspective relating to golden parachutes of management of failed investment banks. Enforcing financial markets crimes may come to be important in this context. But again, we have not seen the failure of investment banks in Canada and the corresponding enforcement issues that have been brought to the fore in the US. It is not clear that a national securities regulator is necessary because of enforcement issues arising from the credit crisis alone.
All of this is not to undermine other valid arguments in favour of a national securities regulator and indeed the political opportunity may now be present to proceed with this crucial initiative. At the fore of the agenda should be structural change to bring more effective securities law enforcement (as Minister Flaherty himself has supported over the past few years). However, the issues emerging from the credit crisis extend beyond the reach of securities regulation and implicate banks, rating agencies and credit markets generally. Any discussion about possible reform measures should include a focus on more than securities regulation per se and extend across financial market players more broadly.
