There have been many efforts over the last 40 years to create a national securities regulator in Canada. According to the advocates of a national regulator, the current politicized system of provincial securities fiefdoms threatens the long-term future of capital markets and makes those markets less sophisticated and more prone to peculiar political interests. According to the opponents, the current system of provincial securities regulation works well and ensures that provincial interests and innovation are not trumped by narrow national interests, or more specifically, the interests of Central Canada.
As there is typically a lot of inertia in favour of the status quo – and many political interests who remain invested in this status quo – creating a single securities regulator has been, and remains, elusive. Though almost every group or report that has been tasked to analyse the issue concludes that a single securities regulator is beneficial for Canada’s position and reputation in global capital markets, the political obstacles appear to overwhelm those arguments. This persistent political opposition from several provincial governments has led the federal government to pursue a Supreme Court of Canada reference case that asks the Court to explicitly acknowledge the right of the federal government to create a national securities regulator under the trade and commerce power (Constitution Act, 1867, section 91(2)). The case will be heard next April.
Is this opposition to a national securities regulator merely a case of entrenched provincial interests clinging tenaciously to their own powers and interests to the exclusion of Canada’s national interests to improve its position in capital markets? Or is there merit in the provincial government position? Is there any way in which the current regime of provincial regulators with no common framework is preferable to a national securities regulator? Could there, for example, be a benefit of having provincial regulators define their own regulatory rules? Could this system lead to more innovation, closer regulatory scrutiny and overall better corporate governance? Is there any evidence that this is the case?
In other areas of governance, such as health care, overlapping jurisdiction and shared responsibility between the federal and provincial governments has worked relatively well. The power-sharing and overlapping jurisdiction has allowed for and accommodated innovation and local expression of priorities based on nationally agreed upon processes and minimum requirements. But this type of shared responsibility does not appear to function well in the area of securities regulation. First of all, capital markets seem to prefer predictable and common principles rather than variance, even if this variance can be occasionally exploited to a company’s benefit. For most businesses, their interests are not in being able to exploit local regulatory regimes but rather to have rules that will be the same for all companies: relatively consistent and unswerving to political interests. Secondly, other areas of shared governance such as health care rely on the federal government to define minimum standards and policy objectives. But there is no federal regulator or federal government role in creating common policy or minimum standards in securities. Provincial securities commissions work together through the Canadian Securities Administrators (CSA) but without the involvement or resources of the federal government. The CSA is an initiative of the provincial regulators to create some consistency through programs such as the “passport system”; a program which allows investors to access other provincial markets by complying with the rules of their home province.
But is the passport system really enough to ensure consistency and efficiency in Canadian capital markets? This system was clearly inadequate in dealing with Canada’s asset back commercial paper (ABCP) crisis, particularly due to inadequate coordination and policy mechanisms. There must be a better model?
The United States is also a federal state which accords significant constitutionally entrenched rights to state governments. While states do maintain some jurisdiction over securities trading and activity through state-level responsibility for anti-fraud laws (“blue sky laws”), the securities regulatory regime is primarily federal with eight main statutes governing the general trade and administration of capital markets. And despite the recent global financial crisis and the allegations that some of the problems during the crisis were linked to federal regulatory oversight problems and inefficiencies, there is still no compelling voice in the United States insisting that securities regulation would be improved if regulatory responsibilities were transferred to the states. Discussion of regulatory reform in the United States has focused instead on improving the effectiveness and resources of the federal securities regulatory framework, and particularly the Securities and Exchange Commission.
The fact is that most highly industrialized countries, including other federal states such as the United States, have created national securities regulators and this trend offers at least some prima facie argument for having a national securities regulator. The fact is that Canada is routinely targeted for its lax enforcement of securities fraud and abuses and this suggests that the provinces are not doing an adequate job either to enforce their securities laws, or have not created adequate laws to enforce. The fact is that it is much more difficult for even the most willing provinces to enforce their securities regulations since enforcement resources are dispersed among 13 provinces and territories and this suggests that there is a more effective and efficient way to organize securities regulation, and particularly enforcement. The fact is that it is typically easier for individual corporate interests to influence provincial regulators than to influence a national regulator and this influence-game creates undesirable outcomes by submitting the objectives of good corporate governance to pressure group politics. And despite this potential benefit of the status for companies, most companies support having a national regulator and complain that the current system is ineffective and inefficient.
If Canada intends to protect and promote its reputation for providing stable and efficient capital markets, and its reputation for good corporate governance, is it not time for provincial political interests to act in the best collective interest for Canada’s position and reputation in capital and securities markets? Should it really take more than 40 years and a court challenge to the Supreme Court before political interests are forced to move aside in the pursuit of good- or at least better- corporate governance?