Note: the following was first published in the National Post, Nov. 20, 2014
A shiny bright “Cooperative Capital Markets Regulatory System” (CCMRA), a cooperative enterprise between the federal government and five provinces to create a one-stop securities regulator, is set to hit the show room floor next September. Regrettably, instead of a Porsche Carrera, it looks much more like a Ford Edsel.
For some years now, the federal government has been hell bent for leather to supplant Canada’s existing 13 securities regulators (10 provincial and three territorial) with a single pan-Canadian regulatory body. In 2011, however, the Supreme Court of Canada ruled that that the federal government’s constitutional authority in the securities law domain is limited to matters of systemic risk affecting the country as a whole. As discussed in this space yesterday and the day before, the CCMRA is thus an attempt to marry the respective constitutional authorities of provincial and federal governments in a single entity. To date, five provinces (B.C., Ontario, Saskatchewan, N.B., and P.E.I.) have signed on. They will all adopt common legislation that will be administered by a common regulatory authority called the “Capital Markets Regulatory Authority” (CMRA). In like fashion, the feds will adopt the “Capital Markets Stability Act” and delegate their power to administer this statute to the CMRA.
This may sound like progress to many. The nominal advantages include the application of a single set of rules in all participating jurisdictions. The CMRA will be endowed with the full panoply of provincial and federal powers relating to securities regulation, allowing for comprehensive and seamless enforcement of securities laws across the participating jurisdictions. Proponents of the legislation tout the fact that market actors will have but a single regulator (and single fee structure) to deal with. For years, supporters of a multi-jurisdictional regulator have also asserted that, by eliminating duplication and exploiting economies of scale, a common regulator will reduce the aggregate governmental costs of supplying regulatory services. Another reputed advantage is that Canada will have a unified voice at the table in international negotiations over securities regulation. And of course, the feds have long championed the view that the CCMRA will lead to more effective control of systemic risk.
The reality may be rather different.
Take the “single voice” problem. At present, there are typically four provincial actors who show up at in international goings-on related to securities regulation: Ontario, B.C., Alberta, and Quebec. If the CCMRA goes through, this will be reduced to three; the CMRA, Alberta, and Quebec. Indeed, as Quebec and Alberta look to be hardened targets resilient to the most spirited barrage of federal bunker-busters, the number may never be fewer than three. Hardly a problem solved.
Nor will the goal of achieving a single regulator be realized. To date, only Ontario, B.C., Saskatchewan, N.B., and P.E.I. have signed on. Thus, if the CCMRA were to be adopted tomorrow, there would still be five provincial and three territorial regulators outside the fold. If Quebec and Alberta continue to be unsympathetic suitors, market actors doing business across the country will have at least three regulators to deal with.
To grease the wheels and ensure a truly seamless regulatory environment for pan-Canadian market activity, logic suggests that the folks at the CCMRA should commit to a fresh iteration – indeed an expansion — of the current inter-provincial passport system, under which each market actor has but a single provincial regulator to deal with. This, however, seems unlikely. Just as Ontario (an enthusiastic supporter of a single Canadian regulator) has done in the past, the CCMRA will likely refuse to formally commit to a passport system. It will do so purely for strategic reasons — i.e. putting pressure on recalcitrants to join up. After all, why let the passport system strut its stuff and show that it can actually work?
Proponents of a cooperative scheme have long claimed that a single regulator will achieve fiscal savings by eliminating the duplication of regulatory functions performed in a multi-regulator system. There is little reason to believe that the CCMRA will achieve this result. Regulation is an activity with a high labour-to-capital ratio. For example, for the past several years the OSC’s employee compensation and occupancy costs have totalled about 85% of its annual budget. Thus, if more than marginal savings are to be achieved, this can only be done by reducing the aggregate number of employees involved in securities regulation across the participating jurisdictions.
The agreement between the provinces and the feds, however, provides initially for the secondment, and subsequently for the transfer to the CMRA of all provincial employees currently engaged in securities regulation. In addition, no provincial regulator will disappear. Rather, each will morph into a branch office of the CMRA. Thus, there appear to be essentially no initial economies in moving to a cooperative regulator. Savings can only be achieved in the long run through expensive buy-out packages or attrition.
No doubt this is a handy-dandy inducement to get more provinces and territories to sign up, since no one in any of those respective organizations need hand out any pink slips. And indeed, to the extent that duplication is in fact eliminated, many employees will end up with a substantially reduced workload. As Ella Fitzgerald succinctly stated, “nice work if you can get it” (although those who support a multi-jurisdictional regulator might want to ponder the implications of a horde of underemployed securities regulators actively seeking out ways to fill up their workdays). But in any case, this makes mincemeat of the argument, long one of the stoutest arrows in the quiver of the “one regulator” crowd, that regulatory amalgamation will produce substantial fiscal savings.
Another much-touted advantage of a common regulator is the application of a single set of rules, or, as the Memorandum of Understanding (MOU) states, “common standards reflected in cooperatively-developed regulations consistently applied.” However, the meaning of neither legislation nor rules is self-executing. Any legal text is subject to interpretation by the courts, and courts in different provinces may give common statutory provisions different meanings, sundering the much-touted uniformity.
A further perusal of the MOU indicates that the rules may in fact differ from one jurisdiction to another. The MOU allows any participating jurisdiction to request special rules in order “to accommodate provincial or territorial government programs that relate to specific economic development initiatives within [the] provincial or territorial Participating Jurisdiction.” The meaning of this phrase is conveniently left undefined, and it is fraught with manifold political baggage.
In the past, one of the greatest bones of contention between provincial holdouts such as Alberta (and, at one time, B.C.) is that the capital markets that they administer are “venture capital” markets with a much greater preponderance of small entrepreneurial endeavours than found in Ontario’s large-firm-dominated regulatory environment. Westerners have long argued that these small companies require a different regulatory calculus so as not to stifle economic growth. It is difficult to imagine that this concern is merely an artefact of past political wrangling that will easily melt into little-lamented obscurity. Rather, it is likely that these long-standing concerns will create abiding pressure for an expansive interpretation of “specific economic development initiatives.” It is not beyond the ken of man to imagine, for example, that some provinces will press the argument that the phrase embraces exemptions from the requirement to file a prospectus when raising capital. The ability to maintain custom-designed exemptions has long been a rallying cry of western opponents of a pan-Canadian regulator, and maintaining different provincial exemptions would be a serious blow to the cause of uniformity.
The tension between the desire for uniformity and the drive to accommodate special needs has given us an MOU that totters on the brink of schizophrenia. The MOU states, for example, that “the Initial Regulations will be drafted taking into consideration the economic and regional interests of each Participating Jurisdiction” and will “reflect the needs of the various participants in those capital markets within a common securities framework.” On the other hand, the MOU’s explicit aim is to develop “common standards… consistently applied.” On its face, this is Orwellian doublethink of an Olympian character. How can you take into account the varying needs of different jurisdictions with a single set of uniform rules?
Will the CCMRA better address systemic risks than the current provincially based scheme of securities regulation? This is highly doubtful, and based on the manifestly false premise that the Credit Crisis of 2008 might have been averted had Canada had a pan-Canadian regulator. The Credit Crisis leaked into Canada from the U.S., which, coincidentally, happens to have a powerful national regulator. There was a regulatory failure in Canada just as there was in the U.S., and it had nothing at all to do with the regulators’ respective jurisdictional domains.
Even if we believe that the feds have an ability to deal with systemic risks or gather information on capital markets that the provinces lack, this can be effected without the joint delegation of provincial and federal powers to a common regulatory authority. The proof of this lies in the fact that the CMRA will exercise its federally delegated powers not only in provinces that are a part of the cooperative scheme, but in non-participating provinces as well.
Jeffrey MacIntosh is the Toronto Stock Exchange Chair in Capital Markets Law at the Faculty of Law at the University of Toronto and a director at CNSX Markets Inc.
