The BCSC Proposals and the Future of Securities Regulation in Canada

The British Columbia Securities Commission (BCSC) has recently released a paper, New Concepts for Securities Regulation that contains a number of proposals for Canada’s provincial and territorial securities regulators that should give investors reason to stand up and cheer. Most importantly, the paper proposes securities regulators begin shedding their paternalistic attitudes that prevent them from recognizing that other jurisdictions, including the US, offer adequate regulatory regimes.

The paper proposes allowing Canadian investors more freedom to transact with foreign registered investment intermediaries. This could include allowing investors to buy mutual funds in the US, where selection is greater and studies have shown that management expense ratios (MERs) are significantly lower. Canadian investors would also be able to take advantage of lower commissions on discount stock trades.

For market participants, the proposals outline a number of significant changes to the Canadian regulatory framework. Some of the proposals are clearly improvements over the current regulatory regime, such as simplification of the registration regime and permitting a registrant in one Canadian jurisdiction to operate across all of Canada.

However, the paper fails to adequately address some key issues. The proposals do not fully address the issue of multiple oversight of self-regulatory organizations. Oversight consists of approval of rules and policies and can also include a review program. A clear example is the oversight of Regulatory Services Inc. (RS), the recently approved self-regulatory organization for the Toronto Stock Exchange (TSE) and its newly acquired subsidiary, the CDNX.

Prior to the recent restructurings, stock exchanges existed in five provinces: Alberta, BC, Manitoba, Ontario and Quebec. Each exchange was subject only to the oversight of the provincial commission of its province of jurisdiction. In contrast, RS will be subject to oversight by all five of these commissions with the Ontario Securities Commission acting as the lead regulator and coordinating oversight.

Burdening Canada’s one remaining exchange with this byzantine oversight framework cannot be healthy. In an increasingly globally competitive environment, an exchange has to be nimble and responsive to a quickly changing environment in order to survive and prosper. It must use the quality of its self-regulation to differentiate itself from its competitors. This will be a difficult challenge for the TSE if it remains mired in an alphabet soup of securities commissions: even for a simple rule change, approval will be required from the ASC, BCSC, CVMQ, MSC and OSC.

RS Inc. is not the only self-regulated organization under fragmented oversight. In the case of the Investment Dealers Association (IDA), three provincial securities commissions formally approve all their rules. The others either require notice for “non-disapproval” or simply require IDA rules to be consistent with provincial or territorial regulation.

The BSCS paper notes “the important goal of making Canada’s securities laws uniform.” However, too much uniformity might be a bad thing if it means all 13 CSA members will have the same statutory obligations. It would not contribute towards the efficiency of the Canadian regulatory system for the IDA to be required to seek approval of rule changes from all 13 CSA members. The oversight of Canadian self-regulatory organizations needs to be more clearly thought out.

Another key issue the paper fails to address is whether all 13 provincial and territorial securities regulators can be sustained if the proposals are adopted across Canada. In a system of real mutual reliance, it is unlikely that the regulators in smaller provinces and territories will generate enough business to justify their existence. This is not necessarily a bad thing as some provinces have a stronger appetite for securities regulation than others. In other types of financial sector regulation, such as trust companies, even Ontario is exiting the business.

The BCSC paper proposes new enforcement and public interest powers for the commissions. This proposal warrants concern given how extensive the powers of the securities regulators already are. A recent Fraser Institute paper, The Critical Issues Bulletin, Regulators Unbound; The Changing Status of Securities Commissions noted securities legislation blends together the functions of investigation, prosecution, judgment and developing rules all within the commissions, which are normally separate in modern legal systems. A comprehensive review of the existing powers of commissions is needed.

However the debate on the future of Canadian securities regulations unfolds, the BCSC paper rates high marks for flushing out two important themes. The first is that too many rules exist, and many rules are too complex and rigid. Secondly, it is beneficial to both Canadian investors and the competitiveness of Canadian capital markets to take steps that break down regulatory barriers to access between Canada and market participants based in other countries.