NIN 96/15 - Joint Submission of the Chairs of the Alberta and British Columbia Securities Commissions on the Structure of the Proposed Canadian Securities Commission [NIN - Rescinded]

Published Date:	1996-05-17
Effective Date:	1996-05-16

The Commission is publishing a joint submission prepared by the Chairs of the Alberta and British Columbia Securities Commissions on the structure of the proposed Canadian Securities Commission. A copy of the joint submission is attached.

The federal government proposed in 1994 the establishment of a new "Canadian Securities Commission", which would assume responsibility for administering uniform federal and provincial securities legislation in participating provinces. In the past few months, the federal and Ontario governments have engaged in intensive discussions on the proposal. Very limited discussions have been held with other provinces. The Chairs of the ASC and BCSC expressed concerns in those discussions about the structure of the Canadian Securities Commission proposed by the federal government and the very limited role envisaged for regional offices. The joint submission was prepared to set out the personal views of the Chairs on these key issues.

The Chairs do not take a position on whether the federal proposal should proceed or whether, if it does, Alberta or British Columbia should opt in. These are matters for governments to decide. However, the Chairs take the position that a great many issues must be addressed in developing the proposal to the point where provinces can make an informed decision whether to opt in. For example, Alberta and British Columbia should be seeking assurance that the very significant legislative and administrative reforms developed by our provinces over the past decade would not be lost as a result of a move to federal regulation.

DATED at Vancouver, British Columbia, on May 16, 1996

Douglas M. Hyndman
Chair

May 8, 1996


Introduction

Discussions are currently underway between the federal and provincial governments on the possibility of establishing a new "Canadian Securities Commission", which would assume responsibility for administering uniform federal and provincial securities legislation in those provinces that opt in to the proposed arrangement.

This paper sets out the views of the chairs of the Alberta and British Columbia securities commissions with respect to several key issues in the federal proposal. The views expressed here do not necessarily reflect the views of our respective provincial governments.

A great many issues must be addressed in developing the federal proposal to the point where provinces can make an informed decision whether to opt in. For example, Alberta and British Columbia should be seeking assurance that the very significant legislative and administrative reforms developed by our provinces over the past decade will not be lost as a result of a move to federal regulation.

In the discussion below, we have focused particular attention on one major issue for market participants in our jurisdictions the status and role of regional offices. In short, we consider it essential that the CSC have a significant regional presence in each of our provinces, comparable to that now provided by the provincial securities commissions.

To analyze the federal proposal, it is important to review the nature and purposes of securities regulation and the structure of the securities markets in Canada. These factors affect how a national securities commission should be structured.

Nature and Purpose of Securities Regulation

Securities markets perform the critical economic functions of allocating savings to productive investment opportunities, spreading business and market risks, and permitting the orderly transfer and redeployment of assets. These functions can best be performed by a market that is, and is seen to be, fair and efficient. The purpose of securities regulation is to ensure that securities markets operate fairly and efficiently and command a full measure of public confidence.

Securities legislation was developed by governments to provide some protection for investors from the actions of unscrupulous or incompetent issuers, dealers, advisers and other market participants, while supporting the market in the performance of its economic functions. Securities regulators carry out this mandate by pursuing four broad objectives:

• Mandating disclosure of important information to permit market participants to make informed investment decisions and to prevent those with superior access to information from taking unfair advantage of it.

• Providing rules of fair play in the market.

• Establishing standards of competence and conduct for persons in positions of fiduciary responsibility.

• Enforcing standards to protect the integrity of the market and its underlying systems and to maintain the confidence of all participants in its fairness and efficiency.

These objectives are reflected in the complex system of law and policy that governs the securities markets in Canada.

Canadian Securities Markets

Despite its relatively small population, Canada is a large and diverse country, with several major centres of economic and financial activity. The securities markets, in particular, display considerable depth and diversity. Different stock exchanges are involved in different types of business, having different participants and requiring different market and regulatory expertise. Dealers and advisers range from the large national firms to medium and small sized firms that focus on regional or sectoral niches. Close to 100,000 individuals associated with these firms are registered with securities commissions. Issuers range from large national and multi-national companies to small businesses seeking start-up or expansion financing. There are several thousand reporting issuers in Canada and thousands more that have raised funds under various prospectus and registration exemptions. And there are many millions of investors who rely, in one way or another, on the protections provided by securities regulation.

Securities regulators are called upon to deal with market participants in a myriad of ways on a daily basis. Activities include registration and monitoring of firms and individuals who trade in and advise on securities, processing and reviewing disclosure documents, analyzing and deciding on exemption applications, responding to investor questions and complaints and taking action to enforce compliance with regulatory standards.

Effective regulation requires a delicate balance between the needs of investor protection and market development. The dynamism and rapid evolution of securities markets continually create new challenges for regulators, necessitating a high degree of flexibility in administration and the constant development of new and amended policies and rules. In this environment, regulators must be close to the markets they serve to permit regular and intense interaction with market participants and professionals.

If a "Canadian Securities Commission" is to be an effective replacement for provincial securities commissions, it must be structured in a way that will meet these requirements of securities regulation in all participating provinces. The following discussion sets out our views as to how the requirements can best be met.

Federal Commission Structure

In our view, there are two major structural issues that must be resolved before the provinces can determine whether the proposed CSC would meet the requirements for effective securities regulation. The first issue is the status and role of regional offices. The second issue concerns the composition and method of selection of Commission members. These issues are closely related.

Regional Offices

We consider it essential that the CSC have strong regional offices that provide a full range of regulatory services to market participants, exercise discretion locally, play a meaningful role in national legislative and policy development and have authority to issue local rules and policies in certain circumstances. An appropriate structure for the CSC would be to have an executive office in a central location, presumably Toronto, and regional offices in Ontario and other regions. The executive office would include the CSC chair, as chief executive officer, the chief operating officer, the chief financial officer and the senior management staff, whose responsibility would be to co-ordinate the work of regional offices. The regional offices would all be equivalent in status, although of differing sizes, and would contain all of the line staff.

Commission Members

The composition and method of selection of CSC commission members must reflect the nature of securities regulation and the Canadian market.

Current provincial securities commissions are structured with one or a few full-time members and a majority of part-time members. Although full-time members have a more intensive involvement, all commission members participate in the three roles of policy formation, adjudication and overseeing the management of the agency. Commission members are generally chosen through processes intended to ensure that they have relevant knowledge and experience. Commissions have been recognized by the Supreme Court of Canada as expert administrative tribunals whose decisions are worthy of considerable judicial deference.

The current federal proposal envisions a very different structure, which appears to have as its only rationale that a majority of the full-time commission members be from Ontario. A very limited role is proposed for part-time commission members. This proposed structure would abandon the strength and market sensitivity currently provided to commissions by part-time members and fails to recognize the experience of both individual commissions and the Canadian Securities Administrators that decisions are made by consensus.

The composition and method of selection reflected in current provincial commissions are based on practices that have earned the confidence of securities market participants. Among other things, part-time commission members bring a continuous infusion of knowledge with respect to current business practices, issues and trends. To ensure that confidence and market sensitivity are maintained, the CSC appointment process should build on and continue from what currently exists.

The CSC should be based on a regional commission structure, with one vice chair and an appropriate number of other full and part-time members in each region. As a transitional step to ensure continued public confidence, the regional commission membership should initially be comprised of existing commission members. They would sit on hearing panels, approve local rules and policies and, through the regional vice-chair, provide input on national legislation, rules and policies, and other matters of national implication. The chair and the vice chairs would be responsible for building consensus on national issues and making decisions based on that consensus. Replacement commission members should be solicited through a public process in each region, nominated by the regional commission members, reviewed by a panel that would include industry and provincial government appointees, and appointed by the federal cabinet.

Regional Office Functions

In order to provide effective investor protection and promote efficient capital markets, it is necessary that each regional office provide a complete range of services to market participants. For both market efficiency and the efficient operation of the commission itself, a market participant should be able to deal only with the regional office. Each regional office must have the capacity to provide a full range of regulatory services, including both regulatory and quasi-criminal enforcement activities, registering and regulating dealers and advisers, reviewing prospectuses and other disclosure documents, handling applications for exemption orders, overseeing self regulatory organizations and developing policies and rules.

Regulatory Services

A market participant and its professional advisors generally want to deal with an office in close proximity. This allows them to deal with the regulator in the most cost and time effective manner and to develop the relationships that assist both the market participants and the regulator. As a result, to promote the efficiency of the Canadian capital markets, issuers and registrants in Calgary and Vancouver should be able to deal exclusively with the regional offices in those cities on financing, exemption applications, registrations, etc.

An efficient market requires local expertise. It would be difficult for small and emerging companies to develop without a choice of experienced local advisors. A centralization of functions in Toronto would result in larger issuers having to go to the time and expense of relying exclusively on Toronto advisors. This would lead to an atrophy of resources in other capital markets and a decline of those markets. A decentralized approach is necessary to prevent this threat to the viability of regional markets and their participants.

Both Alberta and British Columbia have active and vital stock markets. Many observers believe that these junior markets will continue to be the growth area of Canadian securities market activity. The continued growth and development of these markets requires both local expertise and a significant regulatory presence.

Enforcement

To preserve an adequate level of investor protection, sufficient investigative and prosecution resources must be applied at the regional (and, possibly, local) level. Although an obvious advantage of a national regulatory regime would be the ability to issue "national" orders, it should be recognized that this is for the most part a theoretical advantage given the trend to consider "reciprocal" orders where one jurisdiction has taken enforcement action. Even more significant is the fact that the vast majority of commission complaint and enforcement activity relates to matters of purely local significance.

It must also be recognized that there are a number of different capital markets in Canada and different levels of capital market activity. There is a risk that a national system will establish a threshold of tolerance for improper market activity that does not take into consideration differences in markets. Certainly that is the case in the United States where the SEC has a threshold of tolerance, particularly for first time transgressors, for activities that would be priority enforcement matters for the BCSC and the ASC. Similarly there is a public perception that "minor" illegal distributions are a higher enforcement priority for the BCSC and the ASC than they are for the OSC, which may be appropriate given the different nature of the capital markets in those jurisdictions and an efficient allocation of available resources.

It is therefore imperative that sufficient enforcement resources be available at each regional office. Also, depending on the number and location of the regional offices, it should still be an open question as to whether there should be additional local enforcement offices within each region. It would not be cost efficient to over-centralize the enforcement function. Investigation activity is extremely expensive to conduct in another city. As a result, the level of activity in a locale may dictate at least some local functions. For example, it would probably be more expensive for the ASC to move all its enforcement staff to Calgary given the work in Edmonton and locales in proximity to Edmonton.

The costs to market participants must also be considered. Dealing with a remote office increases costs to both complainants and those being investigated. The more remote an office a complainant has to deal with, the less likely it will be a complaint will be made, with the result that improper activity may continue, causing a loss of investor confidence in the capital markets. Similarly, it would not be appropriate to require a respondent to defend at a remote location.

For both efficiency and fairness reasons, therefore, enforcement matters should be investigated in regional or local offices and heard by regional commission panels. Appeals from those panels should continue to be heard by the provincial appellate courts.

Policy Development

The CSC must be able to accommodate both significant regional input into national legislation and policies and the development of regional rule and policy initiatives.

The current federal proposal would make the development of local market initiatives difficult, if not impossible. This is contrary to the goal of promoting efficient markets, given the diversity of these markets, and would seriously harm the junior markets in Alberta and British Columbia. Any proposal must avoid damaging the ability of these markets to assist emerging and developing companies.

Most existing local market initiatives are currently implemented through commission rules or blanket orders. Under the CSC, local market initiatives, such as the $25,000 sophisticated purchaser exemption in British Columbia and the junior capital pool provisions in Alberta, could be implemented through local rules adopted by the regional commission members. The national commission consultation process would ensure that local rules do not create conflicts within the overall regulatory structure.

Other Major Issues

Several other major issues must be addressed early in the process of developing the federal proposal.

Functional Regulation

Discussions on the CSC proposal cannot continue to avoid the issue of functional regulation. It should be clearly stated that the CSC would regulate the securities activities of federal financial institutions.

Autonomy

The CSC should be given financial and administrative autonomy similar to that provided under Alberta and British Columbia securities legislation.

Fees

The fees charged to market participants should be based on the cost of regulation and should not be used to compensate participating provinces for foregone revenues.

Transition

The process of transition to the proposed federal legislation and the CSC would be complex. It must be well planned and executed to minimize uncertainty and disruption for both regulators and market participants.

Non-participating Jurisdictions

As a final point, the development of federal legislation and the CSC structure must be done in a way that recognizes the importance of harmonization with non-participating jurisdictions. At least Quebec, and possibly other provinces, will not opt in to the federal proposal.

The proposed federal legislation should be developed in full consultation with non-participating provinces to maximize potential efficiencies. The goal would be to develop harmonious legislation that would embrace the principle of mutual recognition with a view to ensuring that capital market participants would generally have to deal with only one designated regional office or provincial commission.

Conclusion

We present this joint submission for the purpose of stimulating a broad discussion among government officials, market participants and the public on the future of securities regulation in Canada. We believe the issues addressed in our submission are of critical importance to the markets and the Canadian economy and we hope that the submission will contribute to an informed debate on the federal securities regulation proposal.

Douglas M. Hyndman                                                                                     William L. Hess, Q.C.
Chair                                                                                                                  Chair
British Columbia Securities Commission                                                 Alberta Securities Commission