Regulatory system

Russell, who argued for a single securities regulator, said supporters of the Passport System, like Lortie, think that if things aren’t broken they don’t need to be fixed. “But, the system is broken and badly in need of repair,” he said, arguing that the country needs a regulatory body with a national perspective to carry out proactive surveillance of market activity and make timely regulatory adjustments in response to new products.

Canada’s “poor record” of securities enforcement is another reason for one regulatory overseer, said Russell. He points to the multi-jurisdictional system to explain why white-collar crime is rarely prosecuted. “The provinces can enforce criminal statutes in their legislation and have done so effectively from time to time…but why not more frequently, particularity with the shortcomings of federal enforcement? This can be traced to limited resources and expertise.”

Without a national regulator, said Russell, the industry lacks a single voice that would be useful at various international meetings. He points to the SEC picking Australia for a mutual recognition pilot project as proof that other countries won’t deal with Canada as long as it has a multi-jurisdictional system.

Specifically addressing the Passport System, Russell said that while it’s supposed to achieve harmonization among the provinces, it can’t, as Ontario is not participating in the project.

As well, brokers need to register in local jurisdictions; the exempt market dealer registration category doesn’t apply in B.C. or Manitoba, and the “business trigger” determining firm registration hasn’t been implemented in Manitoba.

Russell adds that the regional oversight has hindered self-regulatory organizations’ ability to operate their efficiencies on a national scale. “A Passport concept that delegated SRO audit authority to a single jurisdiction… would bring a national perspective to the SRO audit and give operational flexibility to the self-regulatory organization,” he said.

Pierre Lortie opened his remarks by explaining to Russell the purpose of regulation. “It’s not about controlling system risk in the economy; it’s about protection of investors from unfair and improper fraudulent practices. That’s the real responsibility of the securities commission.”

Lortie didn’t argue for Passport as much as he rifled off stats and figures to prove the current system is working. He said almost 90% of issuers on the TSX venture have a market cap of less than $50 million, adding that national securities regulation wouldn’t have allowed the flexibility small businesses enjoy today.

One of his main points is that centralization doesn’t equal efficiency. “Centralization is not proof that it’s going to work,” he said. “There’s evidence that the monopoly the SEC enjoys in the U.S. is undermining competitiveness of the U.S. market.”

He also said that every country is critical of enforcement, not just ones that don’t have a single regulator, and that you cannot judge the efficiency of law enforcement based on how many people are in jail. Lortie added that there are restrictions preventing the exchange of information between U.S. and Canadian authorities that make prosecution that much more difficult.

Another concern of Lortie’s is that a national securities regulator will add another layer of regulation. “If you move toward centralization we’re going to end up with 14 securities commissions, another layer of bureaucracy and we’ll reverse the spirit of harmonization and co-operation that’s existed over years. We’ll waste a lot of time on skirmishes and conflicts when we should be looking forward.”

During the question-and-answer period that followed the opening statements, Lortie was forced to clarify these comments. “People are not arguing we should have 14, but in this country investor protection and property rights are the domain of the provinces and they’re not going to run away from it.”

But Russell argues that the main reason provinces will keep pushing for Passport over centralization is because of the fees the individual securities commissions collect. “Most of the 13 jurisdictions charge fees, not because they’re doing anything with them — it’s used as a revenue generator.”

If a single regulator is in place, fees will come down, said Russell, because right now everyone has to pay each jurisdiction they register in.

Lortie countered that fees will increase if one regulator is in charge. “The experience of every government that has done something like this [is that it] has not reduced costs. It’s increased a layer of bureaucracy.”

“Logic would indicate that if you consolidate legislation into a single regulator, even with regional offices, I can’t believe you couldn’t squeeze any infrastructure savings,” Russell responded. “Those fees will certainly come down, which are really an unrepresentative tax, and that will be eliminated.”

In the end, no one predicted when this debate will finally get resolved. Lortie said it’s time to move on and focus on opening up foreign markets to Canadian investors, while Russell will likely continue to fight for centralized regulation for as long as he can.

“I am convinced the single regulator concept is the right answer for Canada,” he said. “The arguments for the status quo are like so many straw men that fall down under scrutiny.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(09/18/08)