OTTAWA – The federal government will find out on Thursday if the Supreme Court of Canada deems its controversial plan to create a national securities regulator legal.
The decision could set in motion major changes in the way Canadians’ investments are protected from fraud and market risk as well as decrease the costs for businesses issuing securities.
Together Canadians hold trillions of dollars in stocks, bonds, mutual funds and other types of securities, currently regulated by the provinces.
For nearly 100 years, the provinces have been responsible for making and enforcing the rules about who can issue securities, what information they need to provide shareholders, who can trade stocks and what constitutes fair and legal behaviour.
The evolution of the regulation means Canada has 13 different, but increasingly harmonized, regulatory regimes, the only such system among its G20 peers.
With global markets now reaching well beyond the confines of provincial borders, the federal government has answered renewed calls to establish a national securities regulator. It went so far as to draft legislation called the Canadian Securities Act in 2010, which gives provinces the option of opting-in to a national regulator.
It was a plan supported by Ontario, but opposed by six provinces led by Quebec and Alberta. Quebec and Alberta both launched court challenges at the provincial level, which were decided in their favour.
The federal government meanwhile has asked the Supreme Court’s legal opinion on this question: is the proposed act within the legislative authority of the federal government?
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More protection, fewer costs: supporters
The federal government is intent on establishing a nation regulator arguing the current system is economically inefficient and doesn’t do enough to protect investors.
It’s a view shared by many investment heavyweights including the Investment Industry Association, the Ontario Teachers’ Pension Plan board, and the Canadian Bankers Association.
“It will, we think, strengthen enforcement, reduce duplication and make for more timely policy decisions. And we think it will give Canada a much stronger voice on the financial stage,” said Terry Campbell, president of the Canadian Bankers Association.
Campbell points to enhanced enforcement as the biggest potential benefit for Canadian investors, citing concerns that the current system is limited when it comes to enforcing the laws meant to protect investors from fraud and other financial offences.
“Right now if a securities broker is deregistered in one province they can go to another province and set up shop and that’s not good for consumers,” says Campbell.
A national regulator would be able to enforce rules and investigate infractions nationwide.
“If you have a stronger compliance capacity that will make it better for consumers and investors because they will have greater satisfaction that the rules will be enforced,” says Campbell.
Ottawa believes the plan also has the potential to attract greater investment by cutting down on costs. Market participants will only have to deal with one regulator and set of fees instead of thirteen bodies.
Analysis by the bankers association suggests costs related to regulation doubles for small and medium-sized business when they make security offerings in all 13 provinces instead of just one.
Enhanced financial stability is another key enticement offered by the federal government, which argues it is better equipped to respond to national and international financial shocks.
“As we saw during the financial crisis the ability to respond, quickly, credibly and right on point is really critical,” says Campbell, adding that just isn’t possible when you need to get 13 jurisdictions to agree.
No evidence of benefits: officials
Opponents say there is little evidence a national securities regulator would be able to do anything better, pointing to the failure of the United States’ federal regulator to prevent the 2008 market crisis.
Critics also point to the high level of harmonization within the system as proof the provinces can work together effectively, while still maintaining the ability to respond quickly to local or sector-specific issues.
With the exception of Ontario, the provinces participate in a so-called passport arrangement which allows companies to be approved in all provinces by being certified by one provincial regulator. For example, a company can clear a prospectus in one province and have it apply in all other jurisdictions.
Legal turf war
Ultimately the Supreme Court of Canada will rule on the legality of a national securities regulator, not whether it is a good public policy idea.
The court has to take stock of both federal and provincial jurisdictions outlined in the Constitution and decide where securities lie.
The provinces have jurisdiction over property and civil law and securities are essentially contracts, but the federal government has a general power over trade and commerce.
While the federal power may seem like a catch-all, it has been interpreted narrowly.
In making its opinion, the Supreme Court will look at the scope of the proposed regulatory scheme, whether provinces acting together can achieve the same goals and whether exclusion of one or more provinces would jeopardize the effectiveness of regulation in the rest of the country.
The Supreme Court will issue its judgment at 9:45 a.m. on Thursday.
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