Notes for Remarks for Barbara G. Stymiest Chief Executive Officer Toronto Stock Exchange and Canadian Venture Exchange at the Canadian Corporate Counsel Association Annual Meeting
A famous premier of this province - more famous for his story telling than for the affection in which he was held by local business - used to tell this story:
Three students were asked to write about the elephant.
The English student wrote about the elephant as the symbol of empire.
The French student wrote about the love life of the elephant.
And the Canadian chose as his topic:
The elephant: a federal or provincial responsibility.
Tommy Douglas, the premier in question, would appreciate the particular elephant I would like to speak about today.
This is an elephant that has been poked and prodded, patted and pondered more than any pachyderm since Dumbo.
Unfortunately, trunk to tail, we have been following it round and round, year after year, faster and faster, in what has a distressing resemblance to a circle.
What I will do today, in full recognition that I follow in the trodden paths of many others, is to describe the elephant of regulatory reform in terms of its increasing importance to what we all do.
And then later I will set out some thoughts on how we might prod this beast onto a straighter path.
This audience, in any case, knows the regulatory elephant well.
It grew, of course, out of the constitutional arrangements made in 1867.
The British North America Act, now the Constitution Act, decreed that banking power should be federal, and property and civil rights should be provincial.
The effect of this was to make debt federal and equity provincial.
Unfortunately, this neat allocation no longer reflects reality.
Securities regulation is no longer the local or provincial matter it once was. Less and less is it even a national matter.
Increasingly, it is an international matter requiring bilateral, multilateral and global solutions.
But here in Canada we haven't resolved our federal-provincial dilemmas.
So we are hardly in a position to bring a unified national view to bear in a global market where securities can be traded anywhere on a 24/7 basis.
Here in Canada, we now have two national stock exchanges, the TSE with its senior and junior capital markets, and the newest entrant, NASDAQ Canada.
But they are regulated by 13 securities commissions.
The latest is operated by the territory of Nunavut.
Nunavut has 20 per cent of Canada's territory and, with 30,000 people, a tenth of one per cent of the population.
Several of these provincial commissions, by the way, were represented in Stockholm in June at the international securities conference there, along with regulatory elephants from every other land on earth.
But when regulators vastly outnumber the regulated exchanges, the original logic of our constitution requires a critical look.
What made a lot of sense once makes a lot less now.
And in the 19th century, designating banking - debt - as a national responsibility did make a lot of sense. Having a few banks rather than the thousands in the south made even more sense.
We were a small country with few people and limited capital.
We had to be able to maximize what each Canadian could contribute by concentrating small amounts of savings and concentrating them, through a few banks, in a few big pools of capital.
These few banks, by nickels and dimes, would amass, through their national branch systems, the huge amounts of capital needed to develop the largest national territory on earth.
But in our generation bank deposits have ceased to be the investment of choice for most Canadians.
As a result, they have ceased to be the best way for a country like Canada to raise capital.
Equity markets increasingly provide the vehicles small investors prefer, quite aside from the liquidity large issuers require.
As David Brown of the Ontario Securities Commission so elegantly put it, "A nation of savers has become a nation of investors."
And the evolution of banks reflects this shift.
Mainly by mergers and takeovers, five banks - not even as many as the number of Canadian hockey teams - are now the biggest players in the brokerage business, which is in provincial jurisdiction.
So the passage of time has taken a reasonably sensible piece of 19th century constitutional architecture and turned it into a 21st century maze.
In a world of increasingly efficient capital markets, this is becoming an unaffordable burden, which almost everyone recognizes.
One of the things listed companies cannot afford is the cost of multiple listing in 13 jurisdictions, and the subtle but important regulatory and legal differences that arise among the 13.
These differences can lead to regulator shopping. They can lead to issuers registering in some jurisdictions and not others, or simply taking their business south.
Consider, for example, the unnecessary difficulties involving the different treatment of hold periods for privately placed securities.
Imagine a placement made by an issuer in Alberta to a U.S. investor who immediately resells the securities to an Ontario investor.
Which jurisdiction is to prevail? The abbreviated four-month hold period available in Alberta? The six, twelve or 18-month hold period under Ontario law? Or the two-year hold period that applies under U.S. law?
This kind of thing can lead, as this audience well knows, to different judicial interpretations, depending on the jurisdiction.
For example, in one case the Newfoundland court allowed an action against a U.S. company to proceed in the province, even though the company had issued no public securities in Canada, made no direct solicitations in Newfoundland and had no contact with investors.
But in a B.C. case the Supreme Court found that merely passive dissemination of information to individuals in another province was insufficient to provide grounds for the court having jurisdiction in a tort action.
How is a corporate counsel to act in face of these different judicial views of the same problem?
If the company has a choice, would not the most logical advice be to avoid Canada's complications until complexities like this are straightened out?
So at each point, regulatory differences, no matter how small, have the potential to be magnified by legal processes.
These are not academic issues. They cost money. They also cost time, which is also money. They hurt the listed companies that are our customers. And they hurt the investors - institutional and individual - who depend on us for protection.
We're less competitive than we need to be, in other words, in an era when trans-border transactions, among provinces, countries and continents, are raising the stakes for everyone, at a time when Canada wants a bigger slice of the equity market.
So anything that impedes more efficient markets - such as regulatory overlap and duplication or a top-heavy regulatory structure - is of concern.
We are not alone in this. Indeed, other jurisdictions have bigger problems than we.
Consider Australia, a federation not unlike ours.
Our problems pale beside theirs.
The Australian High Court has been inundated with cases since 1989.
I need not go into the conflicting decisions that by last year had put that country's securities regulatory system into paralysis.
Let me simply quote what the High Court's chief justice had to say about the capacity of the Australian form of "co-operative federalism" in dealing with the question of legislative intention:
"So complex is the interlocking legislation, with fiction piled upon fiction, that it must be doubted whether any of those presenting and enacting it were truly aware of precisely what they were doing."
To reduce the complexity of that interlocking legislation, the Australian parliament passed into law the Corporations Act, 2001 in June of this year.
The Act was designed to place Australia's system of corporate regulation on a secure constitutional foundation.
On the other side of the world, in Europe, they've been looking at precisely the same problem, how to create an integrated European financial market.
As an important step, a so-called Committee of Wise Men was set up, chaired by Baron Alexandre Lamfalussy. Their report came down in February. The Wise Men did not recommend a single regulator.
But here is what M. Lamfalussy had to say about the problems Europe needs to solve:
"The mosaic of European regulatory structures is well documented - over 40 of them - with different powers and competencies.
"The current regulatory system is simply too slow, too rigid and ill-adapted to the needs of modern financial markets. Even when it does work, which is rare, it often produces texts of legendary ambiguity.
"All these weaknesses are compounded by a plethora of other complexities, such as clearing and settlement systems that fragment liquidity, increase costs and present a real barrier to financial market development.
"Add on top differences in legal systems, taxation, external trade barriers, different cultural approaches and a lack of identified regulatory priorities and you have a remarkable cocktail of Kafkaesque inefficiency that serves no one ..."
Almost makes you want to sing O Canada.
Before you sing too loudly, however, consider the U.K.
Without the constraints of federalism, the U.K has now put in place a single regulator who has set to work to maintain London as a premiere world financial centre.
Those of you who track these things may remember that the U.K. took the lead, under Margaret Thatcher, with the so-called Big Bang that blew apart the four pillars structure of financial regulation.
If that is to be our future on national regulation, as it was on the four pillars, how we are going to get there is not immediately obvious. Nor is the commitment to get there.
More immediately, consider the most important financial market in the world, the one right next door.
The U.S., of course, started with a constitutional system far more decentralized than ours, what with its powerful emphasis on states' rights.
That is reflected in its system of reserve bank districts and its decentralized system of local and state banking.
But it evolved a different federalist modus vivendi than ours, the Australians' - or the Europeans' for that matter.
And consider how the Americans were able to deal with the federal turf wars that have so flummoxed everyone else.
After the crash that preceded the Great Depression they created the Securities and Exchange Commission and put a Kennedy in charge of it.
In the years since, their commendable legislative efficiency has continued, notwithstanding states rights.
In 1996, for example, the U.S. Congress adopted the National Securities Market Improvement Act. This pre-empts - or as one legal opinion describes it - "nullifies the states security laws as they apply to certain transactions."
Now that almost makes you want to sing the Star Spangled Banner.
So with these four examples - the European and Australians, U.S. and U.K. - which way should we prod our elephant?
Frankly, these examples illustrate the common problem.
But they don't point to an obvious common solution.
In 1996, for example, while the U.S. was "nullifying" certain state powers, we were making a stab at national regulation.
The federal government proposed the creation of a Canadian Securities Commission.
One government spokesperson - Sue Barnes - described how it would provide "a regime with one set of rules applied across all participating provinces, a single agency with a number of regional offices capable of providing one-stop service yet at the same time maintaining the strength of our regional markets."
Another Liberal - Andrew Telegdi - provided an impeccable rationale. A securities commission in each province, he said, "requires a company to go through the same procedure numerous times.
"A company wanting to sell shares in several provinces must gain approval from the securities commission in each one. This requires the company to file both its prospectus and disclosure many times. It is tedious and expensive, creating a great deal of uncertainty and duplication."
"This complicated situation has resulted in companies opting for the single filing system in the United States."
For a time, Ottawa seemed to have most of the provinces on side. But Quebec was wary. B.C. and Alberta had their doubts.
And after a lot of to-ing and fro-ing with Ontario, which wanted $200 million to join in, the whole thing vanished in the pet cemetery of co-operative federalism.
But the rationale remains.
The current regulatory framework for securities needs to be restructured to simplify and reduce the cost of our being the only G-7 country without a national securities regulator.
If anything, the need is greater than in 1996.
The Internet, for example, was hardly a factor five years ago compared to what it is now.
It has increased the power of the individual investor, and the opportunities for the rascals of our industry. Most important for regulators, it has increased the pace of change.
In the case of the self-regulating TSE, for example, it forced us to abandon a mutual form of organization dependent on consensus. It simply took too much time to make the decisions the pace of the market demanded.
Now we are a shareholder-owned company capable of responding quickly to market changes.
And that makes clear why we must prod the regulatory elephant out of its endless circling onto a straighter course.
To quote David Brown again: "The industry has been remodelling. Shouldn't the regulatory system be doing the same?"
Indeed, should it not be doing the same?
The need for change is increasingly manifest.
Each jurisdiction, with its different rules and differing capacities to enforce its rules, provides not just a different hiding place for the unscrupulous, but also a snare for the innocent.
Each difference adds to cost. Each difference reduces the efficiency of Canada's capital markets, and reduces our capacity both to raise capital to meet our own needs and to share in prosperity elsewhere.
Each complexity creates what the Investment Dealers Association has termed "regulatory arbitrage" whereby businesses shift to jurisdictions perceived to have more lenient or less costly regulatory frameworks.
If the need for change is manifest, so is it also timely to act - precisely because there has been such a downturn in many stock prices.
Regulatory reform and change are almost impossible when things are roaring ever higher, as they were more than a year ago. Nobody wants to upset a gravy train.
The need is clear and the time is right, but there is no clear consensus as to the direction we should take. Nor is the political will, in either Ottawa or provincial capitals, obvious for yet another run at the regulatory elephant.
But I can tell you this. The problems of Canadian capital markets are not going to be solved by studiously ignoring them.
And they are not something on which we can afford to dither for long.
We need to get off the dime.
To do that, I am announcing today that the TSE will be collaborating with business schools across Canada to sponsor a symposia series fostering national dialogue on issues relevant to the efficiency of our capital markets - issues that ultimately affect Canadian investors. We plan to include representatives from universities, business, and government to discuss these issues.
Our goal is to build the momentum and the sense of direction to rebuild a national regulatory framework capable of competing, surviving, contributing and prospering in the world that is emerging.
And we look forward to working with interested parties to accomplish that goal.
Canadian Corporate Counsel Association