The following first appeared in the National Post, November 17, 2014
Anyone in the business community who draws breath will be aware that for some time now the federal government has been on the warpath to eliminate the provincially-based system of securities regulation and substitute a single national regulator. Unfortunately for the feds, in 2011 the Supreme Court ruled that the federal government does not have the constitutional power to enact a comprehensive scheme of securities regulation. The Court, however, did suggest that the feds have the power to enact securities laws designed to address nation-wide systemic risks, and to collect securities market information on a national basis.
Following this decision, the federal government and Ontario spearheaded an effort to get as many provinces as possible to sign on to a common piece of legislation known as the “Provincial Capital Markets Act” (PCMA) and to delegate their respective authorities to administer this statute to a common regulator – the Capital Markets Regulatory Authority (CMRA). Under the cooperative agreement (known as the “Cooperative Capital Markets Regulatory System, or CCMRA), the federal government is to adopt a statute called the “Capital Markets Stability Act,” which will deal with those matters within the feds’ constitutional capacity. They will also delegate their authority to administer the statute to the CMRA.
Those many business folk who have supported the creation of a pan-provincial regulator over the years need to take a very close look. Today, and in subsequent days, I will discuss various reasons why, to paraphrase Geena Davis in The Fly, they should be afraid. Very afraid.
In a provision that would be very much at home in Albania, North Korea, or The Peoples Republic of China, the federal legislation empowers the “Chief Regulator,” without holding a hearing or even giving advance notice, to “issue a notice of violation [for breach of the statute or regulations]… if the Chief Regulator has reasonable grounds to believe that the person has committed a violation.” The notice may specify a penalty of as much as $1-million for an individual and $15-million for non-individuals.
It is only after this notice is delivered that the person from whom the fine is demanded has an opportunity to make representations, and these representations are made to the very person who levied the fine in the first place – the Chief Regulator. Despite the potential economic burden, the pertinent burden of proof in the hearing is the civil standard (balance of probabilities) rather than the more demanding criminal law standard (beyond a reasonable doubt). Any director or officer “who authorized, permitted or acquiesced in the contravention” is potentially liable for the full amount of the fine.
The Chief Regulator can also order any person with a connection to capital markets to furnish the regulator (the “Authority”) with any kind of information, including information that is personal and/or confidential. No judicial warrant is required.
This information can be passed on to a law enforcement agency or “a governmental or regulatory authority, in Canada or elsewhere.” Indeed, it can be passed on to anyone of the Authority’s choosing. It can also be made public, if “the public interest in disclosure outweighs any private interest in keeping the information confidential.”
The statute specifically excludes any appeal to a court; the only appeal is to the regulatory tribunal. But let’s face it; once the information has been collected and disseminated, the right of appeal is useless in any case. All this means that there is no obvious check on the ability of the Authority to use its new information-gathering powers to conduct any number of speculative fishing expeditions into the affairs of anyone connected with the capital markets, looking for violations of securities laws – or perhaps other laws.
While under existing provincial legislation the licensing powers of the regulators are limited to “registrants,” under the new legislation these powers can arbitrarily be extended as the Authority chooses to virtually anyone connected with capital markets. Mediators, for example (and potentially anyone supplying investors with any kind of service) will be drawn into the regulatory net. At the whim of the Chief Regulator, they will be required “to provide the Authority with any information, record or thing in [their] possession or under [their] control that relates to the administration or enforcement of capital markets law or the regulation of the capital markets.” It is an offense to fail to cooperate.
Perhaps more startlingly, the Chief Regulator will have the power to tell these parties what they can and cannot do by way of carrying on business, in addition to making orders relating to any “by-law, regulatory instrument, policy, procedure, interpretation or practice” of the entity.
“Control persons” (which includes not just controlling shareholders, but those who have the power to materially affect the control of an issuer) are also drawn under the regulatory umbrella, and will be subject to many aspects of regulatory control now reserved for “registrants.” Like mediators, they will become subject to an obligation to supply whatever information the Chief Regulator demands. They can also be required to submit to a review of their practices and procedures; to make changes to those practices and procedures; and to submit to a review of their business and conduct.
Another provision effectively allows the Authority to re-write the coverage of the legislation at will. Not an “insider” under the legislative definition? Don’t feel too secure, because the Authority can simply designate you as an insider, subject to potential insider-trading liabilities. You thought your capital raising efforts were safely made under an exemption from the prospectus requirement? Think again, because the Authority can designate any trade as a “distribution” requiring a prospectus. Any private company or other entity can be designated a “reporting issuer,” or a “mutual fund,” with all the attendant regulatory requirements. Any security can be designated a derivative, or derivative a security, and any person can be designated a marketplace. There is no appeal to anyone (either court or tribunal) regarding any of these arbitrary designations.
Procedural protections against ill-considered, wrong-headed, arbitrary, or even malicious rule-making by the Authority have been greatly weakened. Thus, for example, the new legislation effectively allows the Authority to issue what were colloquially known as “blanket rulings” under their discretionary powers to exempt a class of market actors from any provision of the legislation or rules. While this sounds harmless, the current legislation expressly prohibits regulators from doing so. The reason? Under the guise of granting “exemptions,” the regulators previously misused this power to effectively create entire new regulatory structures replete with a plethora of positive obligations. The short-form prospectus system, for example, was at one time entirely a creation of an “exemption” from the prospectus requirement.
In like fashion, the new provincial legislation allows the Authority to formulate rules defining anything at all as an “unfair practice”. While this can only be done via a regulation, it nonetheless represents an abandonment of the current legislative practice of expressly defining the matters in respect of which the regulator can make rules. Instead we are now to have a regulatory carte blanche. Indeed, the federal legislation makes this quite express, simply stating that “the Authority may make regulations for carrying out the purposes and provisions of this Act.” The legislation thus turns the regulator into its own legislature.
The regulators are also taking a stab at implementing a measure that failed in a previous attempt because of widespread opposition – giving the regulatory tribunal the power to “compensate or make restitution to one or more persons” where they have determined that there is a violation of securities law. This is a startling usurpation of the role of the courts. It allows the tribunal to function like a court, but without any of the evidentiary or procedural protections associated with a lawsuit. The tribunal, for example, can decide its own rules of evidence. Worse, because it has no obligation to follow its own prior decisions, it can do so in an ad hoc manner. Nor will the vast majority of other procedural protections associated with a civil suit be available.
The power to award compensation or restitution arises in any case in which “capital markets law” is violated. That term is broadly defined to include a discretionary finding by the tribunal that a person has breached “the public interest.” Past tribunal and court decisions have made it clear that the public interest may be breached without any violation of the statute, or the rules or regulations made under the statute. Thus, the tribunal will be empowered to award the equivalent of civil damages without any violation of pertinent legal requirements, and it will be able to do so on a completely ad hoc basis.
The proposed legislation also adds a new offense – doing anything that “results in an unjust deprivation or a risk of an unjust deprivation.” This is a completely undefined term. Precisely because no one knows what it means or how the tribunal or courts will interpret it, it can be dangled by the regulators (like the power to award compensation or restitution) like a Sword of Damocles over the supine body of any market actor it chooses. A fine way to secure a settlement or dictate a course of action.
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.
