NOTE: This article first appeared in the Financial Post, November 20, 2014
A selection of the shortcomings of the “Cooperative Capital Markets Regulatory System” (CCMRA), a cooperative enterprise between the federal government and five provinces to create a one-stop securities regulator, have been discussed in these pages in recent days. The CCMRA, if adopted, would be a watershed event in the architecture of Canada’s political institutions. And in no way for the better.
Since the Great Depression, the rise of the welfare state has been associated with a vastly expanded role for government, and this vast expansion has received its expression in the commensurate growth of the administrative state. Government administrators, who exercise powers delegated to them by government, have tentacles into virtually every walk of life, from the TV we watch to how we behave in the workplace to the pedigree of the hamburgers we throw on the barbie in the summer.
More and more the Leviathan that tells us what we can and cannot do is not Parliament or the provincial legislatures, but administrators exercising delegated power to promulgate rules of their own creation. For this reason, the political and legal accountability of these administrative agencies is of foundational importance to our representative democracy. There must be both timely and effective redress for citizens whose rights are trampled, flouted or ignored by careless, indifferent, or abusive administrators.
Various features of the CCMRA suggest that the administrative officials who staff the agency will be largely unaccountable to anyone. One of these arises out of the pesky little problem of maintaining legislative uniformity going forward, which will require legislative amendments in each and every one of the provinces and territories that are party to the scheme. Given the overwhelming lack of importance of securities regulation to the polity, and therefore the average politician, moving the legislative behemoth in a single jurisdiction is labour enough. Doing it in multiple jurisdictions is like attempting to safely shepherd an army of banana slugs across King and Bay during rush hour.
Unfortunately, the proposed cure for this problem is worse than the disease. The CCMRA essentially cuts the various legislatures out of the regulatory process. This is done by turning the uniform provincial legislation (the Provincial Capital Markets Act, or PCMA) into a skeleton, and imbuing the CMRA with the authority to tack on the fleshy structures that constitute the pith and substance of the regulatory apparatus. They do this via a purely administrative rulemaking process.
A good measure of just how much securities law is to be swept out the collective doors of the provincial legislatures and into the steel and glass towers of the regulatory agencies may be found in the comparative lengths of the new and the old. The draft PCMA is less than half the length of the current Ontario Securities Act (85,000 words versus about 42,000). Some features of the statute have been almost completely gutted. The Ontario Securities Act provisions relating to takeover bids, for example, currently run to about 12,000 words. The PCMA has fewer than 700. Equally astonishingly, the statutory provisions relating to the various continuous disclosure obligations are poised to shrink from about 3300 words to fewer than 300. Thus, where once the legislature erected the framing and basic architecture of the regulatory edifice and allowed the administrative agency to decorate the interior, now the regulators, via rules of their own creation, get to do both.
This is deeply troubling. While our parliamentary system is far from perfect, it is comparatively easy to hold politicians’ feet to the fire in relation to primary legislative enactments. The process is fully transparent to the press and to the public at large. The legislative forum invites parties with different regulatory philosophies to engage in an active debate reflecting a variety of viewpoints. There are no kinks or gaps in the causal connection between the legislature and the law that might allow the politicians to evade responsibility. Moreover, whether convenient or not, the process of exposing major changes in the regulatory framework to legislative debate imposes a layer of discipline on regulators that is an important piece of the accountability puzzle.
The rules that are promulgated by administrative agencies are buried one layer deeper in the institutional onion, at one remove from those who are directly accountable to the public via the ballot box. True, securities regulators are required to expose proposed rules to a public notice and comment procedure, to publicly respond to the comments they receive, and to secure the approval (or at least the non-disapproval) of their Ministerial masters. However, aside from periodic scandals that provide a custom-made dais for some spirited posturing, politicians typically take little interest in the arcane and voter-irrelevant world of securities regulation. Thus, little effective oversight originates from that quarter. Similarly, Ministry bureaucrats know little about securities regulation and are largely content to let the regulators do their thing. Indeed, Ontario and many other provinces have moved securities regulators out of Ministry digs and into “independent” crown corporations, precisely to minimize political involvement (or “interference”). This makes it all the easier for politicians and Ministry officials to dodge responsibility for regulatory actions.
Nor do other potential sources of oversight work well. The Supreme Court of Canada has instructed Canadian courts to give a high level of deference to administrative tribunals acting within their expertise. For this reason, judges have largely adopted a hands-off policy and appeals from decisions of the securities regulators almost never succeed.
Market actors who are treated badly by securities regulators have little incentive to fight back. The practical imperative is almost always to get on with the business at hand. And everyone knows that fighting the regulator by insisting on a regulatory hearing is a mugs game. The regulators have made it clear that they will treat those who don’t “cooperate” (i.e. settle on Commission-dictated terms) much more harshly than those who role over and play dead. And if they decide to cream you, your right of appeal plus $4.08 will buy you a Grande Latte at Starbucks. Added to this is the powerful and ever-present incentive of securities lawyers and their clients to remain in the good books of the regulators, lest present squalls breed future tempests.
In short, even under our current system of provincially based securities regulation, where a single Minister is on the hook, there is a something approaching a vacuum of accountability in the securities regulatory domain.
The CCMRA only exacerbates these problems. At the top of the CCMRA governance hierarchy stands a Council of Ministers with as many Ministers as there are provinces and territories participating in the system, plus the federal Minister of Finance. This makes it child’s play for any individual Minister to dodge political responsibility for regulatory actions by blaming the other Ministers who sit on the Council. Since Council debates will be held in private, who can gainsay what any one of them might claim about what went on behind closed doors?
The multiplicity of political overlords also creates a problem of incentives. Since any individual Minister’s vote will not necessarily be pivotal, why waste time and effort monitoring what the regulators are up to? Better to let the other Ministers and their staffs do the work. Unfortunately, as each is subject to the same incentives, there doesn’t seem to be anyone who we count on to supply meaningful oversight.
There is also the question of expertise. How much will the Ministers know about securities regulation? How much will their staffs know? If the past is a reasonable guide to the future, the answer to both of these questions is – virtually nothing.
In fact, the Ministers who sit on the Council of Ministers can further deflect blame by pointing their collective finger at the Board of Directors that stands between them and the regulatory boots on the ground. The Board has the responsibility of supervising the day-to-day management of the regulator. If something goes wrong, the politicians can simply fire one or more directors and sweep their own responsibility under the carpet.
If we consider Canadian capital markets to be the patient, one could be forgiven for thinking that the ghost of Jack Kevorkian (a/k/a “Doctor Death”) is the spiritual force animating (dis-animating?) the CCMRA. It is an ill-considered and opportunistic proposal that should be completely scrapped. If pan-provincial legislation is desirable, the adopters owe it to Canadian capital markets to start with something that looks very much like what we have now, and to institute changes only going forward and on a sufficiently incremental basis to allow for fulsome discussion and reflection. Public comments on the proposed CCMRA close on December 8. Please don’t sit on your hands.
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.
