Note: the following first appeared in the National Post, Nov. 19, 2014
Many are still unaware that a major proposal to reform our securities regulatory system is now on the table. The “Cooperative Capital Markets Regulatory System” (CCMRA) will replace the securities regulators in five provinces (Ontario, B.C., Saskatchewan, N.B., and P.E.I.) with a new regulator to be called the “Capital Markets Regulatory Authority” (CMRA). Each participating province will adopt a common statute (the “Provincial Capital Markets Act”) and delegate its authority to administer the statute to the CMRA. The federal government will adopt the “Capital Markets Stability Act” (CMSA) and also delegate its authority to administer that statute to the CMRA. In theory, this is supposed to reduce the burden on capital market actors by replacing five distinct regulatory authorities with one. The reality is far different. As discussed Wednesday in this space, business is going to be hit with a category 5 blizzard of red tape that will make Hurricane Katrina look like a zephyr.
When securities laws are changed in material ways, a wide variety of market actors are potentially affected. Under current legislation, to guard against precipitous, ill-considered, or wrong-headed new laws, members of the public must be given at least 90 days to comment on proposed changes to rules promulgated by the regulators. Remarkably, despite the epic changes embodied in the CCMRA proposal, the public was initially given only 60 days in which to comment.This was increased to 90 days only after earnest representations from the business and legal communities. But in any case, the CCMRA would make such numerous and radical changes to existing laws that, for all intents and purposes, the notice and comment procedure is inadequate to the point of futility. Here are some of the reasons why.
In a move that is utterly without precedent, draft legislation has been published for comment with key provisions missing. These include the sections dealing with how the new cooperative regulator will interface with non-participant provinces. These go to the core of how Canada’s regulatory system, consisting both of participants in the cooperative scheme and non-participants, will function. Even more incredibly, the extent of the regulator’s rule-making authority under the provincial legislation and the draft regulations themselves – the real meat and potatoes of the regulatory scheme – remain under wraps. Thus, the public has been asked to comment on a set of rules that is woefully incomplete.
The legislation seeks to put in place an extraordinarily long menu of fundamental changes to securities laws. Simply documenting these changes is itself a labour of Hercules, not to mention coming to grips with the legal and practical ramifications of the changes.
Insider trading laws, for example, will now apply to any public company, and not just one that is a reporting issuer in Canada. They will also apply not merely to a purchase or sale of securities, but to any act in furtherance of a trade, a change with completely unknown ramifications. While under current rules, certain insiders are liable to the company in whose securities they trade for any “benefit or advantage” they receive, the new legislation extends the liability to include any benefit or advantage received by “all other persons as a result of the contravention.” Similarly, under current legislation only persons who actually trade with an insider have a right of action. Under the proposal, all persons trading on the opposite side of the market when an insider trades will have a cause of action, with no limitation on the aggregate damages that may be claimed. In a large public company, an insider trading profit of $100 could lead to an aggregate liability in the millions.
Further complicating a comparison of old and new is that there are a myriad of unexplained changes in statutory wording. Thus, for example, the trigger for the all-important and wide-ranging public interest powers changes from “if in [the Commission’s] opinion it is in the public interest” to if “[the Commission] considers that it is in the public interest to do so.” In one of the most critical definitions in the statute (that of “misrepresentation”), “an untrue statement of material fact” morphs into “a false or misleading statement of a material fact.” These and many other new formulations have never been tested in any court or tribunal. They therefore introduce an unnecessary (not to mention bewildering) wildcard into the scope and application of the securities laws.
The Sisyphusian task of commenting on the proposed legislation is exacerbated by a number of other factors. One is figuring out how the federal and provincial statutes will work together, as little attempt has been made to consolidate them into a seamless whole. Rather, there are innumerable overlaps with inexplicable differences in wording. In some cases, there are express contradictions. The insider trading provisions are an example. There are, in material respects, differences in the substantive triggers for liability, defences, onuses of proof, and penalties. Lucky CMRA. It gets to pick whichever statute is more likely to result in a congenial result for the regulator. Not an enviable situation, however, for a hapless defendant.
In addition, comments on features of the proposals covered by the Memorandum of Understanding between the provinces and the feds (such as the CCMRA’s governance structure) are likely to have little or no impact. Re-negotiating the MOU will require complex political manoeuvring. It is very unlikely that there is any political appetite to do so.
In the past, major overhauls of corporate or securities laws have invariably been effected by appointing a blue ribbon panel of experts to consult widely with stakeholders, ruminate at length, and publish a detailed report indicating not only the panel’s recommendations for change but the whys and wherefores of the proposed changes. Not in this case. A massive overhaul, replete with an enormous expansion of regulatory powers, has been proposed with nary an explanatory peep. For an association of authorities that earnestly and piously sing at the altar of good corporate governance, impressing upon us daily the indispensable importance of fulsome disclosure, well-crafted decision-making procedures, and accountability, this is a truly astonishing feat of legerdemain.
All of these changes reek of unabashed opportunism. The proponents of the scheme have apparently decided that they can trade on the strong support of the Canadian business and financial communities for a multi-jurisdictional regulator to make whatever changes they want to the regulatory regime. Perhaps the hugely expanded array of regulatory powers is designed as a strategic inducement to get non-participating jurisdictions to sign up. Needless to say, neither of these is a legitimate motive for effecting such an expansionistic sea change in the legislation.
B.C.’s support is particularly curious. For some years, B.C. has been on the warpath to reduce, and not enhance regulatory red tape, even publishing for comment a slimmed-down statute that was a bit too radical for the other provinces. Is Michael de Jong, the B.C. Finance Minister, completely asleep at the switch? What about his Ministerial counterparts in the other provinces? Is this proposal okay with Joe Oliver, a Conservative (not to mention conservative) who, at least nominally, is a business-oriented politician? Is this symptomatic of the degree of political oversight that we can expect once the cooperative system is adopted?
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.
