Thank you for your invitation to contribute to the work of the Wise Persons Committee regarding the structure of securities regulation in Canada.|
TSX Group, as the operator of Canada's two national stock exchanges, is acutely aware of the importance of this work. The consequences of the existing, fragmented regulatory framework affect us and our issuers on a virtually daily basis in terms of unnecessary costs and delays.
Apart from our concerns regarding the effect of regulatory structure on the transparency of markets and the assurances that investors require of strong and consistent compliance and enforcement across the country, we have a special concern for the needs of issuers.
As the market institution most intimately involved in meeting the ongoing individual needs of reporting issuers which are listed on either exchange, we are acutely aware of the diverse effects of the existing regulatory structure on their operations and on our own. We take it as one of our responsibilities, in light of our central place in Canada's capital markets, to ensure that those individual issuer needs are understood and accommodated in whatever changes might be contemplated.
Our initial public offering last November provided us, moreover, with direct experience of what our listed issuers regularly face in going public. Our offering had to be approved by all 13 of Canada's provincial and territorial regulators in order to achieve national distribution.
Now, as an issuer like all other issuers on our exchanges, we are acquainted daily with the ongoing challenges presented by the inefficiencies of Canada's regulatory system. Of growing importance is the adverse effect the existing structure has on the judgments of foreign investors and companies on the efficiency of our market. In broad terms, we now appear to convey an image of unnecessary complexity.
In terms of our comments for your committee, we have been on the record on this
issue on a number of occasions since August of 2001. I have appended two relevant
texts. In addition, the Canadian Foundation for Investor Education - the charitable
body established by TSX Group Inc. to educate investors and the broader public
on securities market issues - sponsored the publication by the Capital Markets
Institute of a discussion paper on securities regulation. This paper, too, is
available at http://www.tsx.com/en/mediaCentre/events/symposiaSeries/index.html#1
Rather than going over this ground again, I believe it might be more useful at this juncture to set out the critical dimensions of this issue as we see them and define for the committee what we believe are the crux issues on which the committee's recommendations would be most valuable.
This issue has been on the public agenda in one way or another since the early 1970s, either as a subset of the "economic union" arguments that accompanied the constitutional debates preceding patriation of the Constitution in 1982 or as a concern in its own right in the 1980s. I think it fair to say, however, that it was a matter of interest mainly to a fairly narrow group of legal and academic specialists.
A number of things have changed. There are more issuers, and more investors now than before. There is more media interest in securities regulation and more public understanding of what is at stake in a world of free trade agreements and 24/7 trading.
In sum, this is no longer an issue confined to specialists. There is a broad constituency for modernizing what is essentially a 19th century system that is increasingly perceived to be weighed down by 20th century burdens and inappropriate to the needs of the 21st.
The broader secular changes that have created this new situation essentially involve
new global imperatives insinuating themselves into a market governed within the
bounds of a regulatory framework that was and is primarily local in its preoccupations.
Even as recently as 10 years ago, the primarily local focus of regulation reflected the realities of Canada's securities industry. The country's capital markets were characterized by several locally based exchanges competing against each other for listings and liquidity, with a matching regulatory structure.
Now, in response to the serious competitive challenges of the late 1990s, that locally focused market structure has been transformed. Canada now has two national exchanges using integrated technology. Our costs are among the lowest in the world, our liquidity among the best, our market among the healthiest in its structure and competitiveness.
The regulatory framework, however, remains, in its fundamentals, what it was and, for the most part, it remains focussed on local priorities rather than national needs and global competition. Local concerns clearly matter, but in the last decade they have clearly been eclipsed by the new importance of national and global securities issues to our future national well-being.
In response to what you define as your most basic question - "What would
be the best securities regulatory system for Canada?" - we would suggest,
in light of this, that we need a regulatory framework that matches in its modernity
the capital market it serves. A framework adapted, in other words, to the growing
importance of relations between and among other markets and to trans-border trading
in securities. That need not diminish local sensitivity. Australia, in modernizing
its system over the last decade, maintained the capacity to respond to local concerns
by establishing a network of regional offices.
The need to meet national and global challenges remains the case notwithstanding the impressive effort of the 13 securities regulators in Canada to harmonize rules across the country, reduce the complexity of the system and cut costs.
There is no question that the Uniform Securities Law project of the Canadian Securities Administrators represents an important and welcome departure from Canada's regulatory tradition.
The question is whether this and other proposals, such as the so-called single passport system, will be sufficient to create the regulatory modernization we need.
There are, of course, a number of alternative approaches that might prove equally effective in terms of our needs for regulatory modernization. Each has strengths and weaknesses. In order to provide a basis for choosing the best approach, I believe it is important to look at our regulatory needs from three perspectives - the local or regional, the national, and the trans-border or global.
As I have noted, the existing Canadian regulatory framework is largely based on the primacy of local needs. There is an argument for maintaining a local dimension to regulation. Indeed, local sensitivity is often advanced as a reason for maintaining the existing framework largely as it is.
In order to mitigate the problems of this approach, regulators and governments have worked hard to increase the regulatory harmonization among the 13 jurisdictions, reach agreement on a uniform securities law and/or adopt a passport system that would reduce some of the duplication inherent in such a de-centralized or fragmented system. It would appear, it must be noted, that major differences among jurisdictions remain in terms of the fundamental approach that a uniform securities law should encompass. Nonetheless, huge strides have been made, compared to where we were hardly more than two years ago.
While this work may serve to lighten the burden of duplication, repetition and unnecessary costs - and may result in even further improvements if the existing basic differences are overcome and all the ambitions of securities administrators are realized - it will remain the fact that 13 regulatory bodies and their staff will continue to interpret, administer and enforce the same or broadly similar rules, regulations and guidelines in their own ways. By its very nature this regulatory and judicial interpretive process will restore over time many of the differences regulators have worked so hard to reduce and eliminate.
As well, if the passport system is narrowly conceived so as to deal primarily
with the approval process for prospectuses, it will not lift the costs involved
in issuers being reviewed in multiple jurisdictions or subject to varying degrees
of rigor, depending on jurisdiction, in compliance matters.
We are supportive of the work that has been done on these issues, in other words, but we do not believe that in itself it is sufficient, or that it can be sufficient, to meet the new needs of the Canadian market.
From a national perspective, this is especially clear. TSX Group represents an example of the national problem. We have two national exchanges, Toronto Stock Exchange and TSX Venture Exchange. TSX has a lead regulator, the Ontario Securities Commission, but it is nonetheless subject to all the specific requirements in all 13 jurisdictions. TSX Venture Exchange has two lead regulators, the B.C. Securities Commission and the Alberta Securities Commission, but it, too, must satisfy the needs of all 13.
The interest among all regulators in TSX Venture Exchange will almost certainly increase as we increase the national character of the exchange which, you will recall, was created out of the merger of five small, predominantly local and, for the most part, western Canadian stock exchanges. Since acquiring the consolidated exchanges - Canadian Venture Exchange (CDNX) - in 2001, we have expanded its operations in Ontario and Quebec. We see further expansion ahead, both in Central Canada and in the Atlantic Provinces, both areas that were long under-served in terms of the public venture market.
This evolution of our market structure from having a local focus to having a greater national focus is vital, we believe, to meeting our role as a major source of capital for young and emerging companies throughout Canada. These companies represent the greatest opportunity for economic and employment growth in a future where the capacity for innovation will command the highest premium in terms of national competitiveness.
We need a regulatory framework that facilitates the most efficient access to capital for these emerging companies wherever in Canada it might be found, and that provides the fullest opportunities for equal access to investment opportunities, wherever investors may reside.
The continuation of a system under which issuers and investors can be disadvantaged by their jurisdiction of residence and where the prospect of multiple reviews, differing standards and uneven compliance will not serve to make the national market more open and efficient but, rather, will continue to impede the search for openness and efficiency.
Apart from the impact of regulatory complexity on the national market, the bigger issues may well lie in our relationship to global markets and our ability to remain the most efficient and lowest cost source of capital for Canadian-based issuers.
It goes without saying that the last decade has demonstrated the importance of
global forces on Canadian capital markets. The late 1990's saw an increase, as
your consultation paper noted, in the number of Canadian companies that bypassed
the Canadian exchanges altogether and listed directly on U.S. exchanges, especially
Nasdaq. For example, that number was as high as 49 in 1997 and grew to 53 in 1998.
Furthermore, the number of Canadian-based interlisted companies was at its highest
level ever in 1997 at 213.
Since then, there has actually been a decrease in the number of Canadian issuers solely listed in the U.S. or listed both in Canada and the U.S. Specifically, Canadian-based interlisted's (CBIs) decreased approximately 16.4% from 213 in 1997 to 178 at the end of 2002, and Canadian companies solely listed in the U.S. decreased about 42.9% from 49 in 1997 to 28 at the end of 2002. Nonetheless, it is clear that these cross-border trends will remain an important and continuing source of competition for Canadian exchanges, and a great deal of the consolidation, adaptation and investment over the last three years has been addressed to meeting that competition.
Aside from the obvious importance of events in the U.S. to our markets, we face competition from other sources as well. The junior and senior exchanges in London are especially interested in the listings of Canadian mining issuers, or foreign mining issuers listed on the Toronto Stock Exchange or TSX Venture Exchange, where, between the two exchanges, some 52 per cent of the world's public mining issuers are listed.
But the global influences are not confined to the competition for listings and trading revenues, or for that matter for growth in the data and technology businesses associated with the securities industry.
Nearly a year ago, the scandals besetting U.S. markets resulted in the Sarbanes-Oxley Act, which extended U.S. law to all foreign registrants in U.S. markets as well as U.S. companies and prompted intense negotiations between the U.S. and other countries on the questions of exemptions from the law. As well, of course, Sarbanes-Oxley set off a vigorous debate in Canada as to how we should adapt our own securities regimes to the change in U.S. law.
Because of our fragmented regulatory authority, Canada was not well placed to respond quickly either within Canada or vis-à-vis the United States. The negotiations on behalf of all the provincial and territorial regulators were conducted by the Ontario Securities Commission (OSC), and in fact the OSC, under new legislation from the Ontario government, will determine what, for the most part, the Canadian response will be. The strong capabilities of the OSC notwithstanding, it is not clear that the concerns of other provinces, or the overall needs of the national market, can be adequately taken into account by one province negotiating with the national agency of a foreign government.
As for the efficacy of this process in ensuring a common national response to the initiatives of a foreign government, the B.C. Securities Commission, of course, is proposing an entirely different approach from that of the OSC through its proposed "B.C. Model" for securities regulation.
Similar problems arise in relation to our new initiative based on the stock exchanges
of Canada and Europe recognizing each other's standards and requirements so as
to facilitate free trade in securities between our markets. This will depend on
European and Canadian regulators facilitating the mutual recognition process.
The question posed by European officials on my recent trip to Europe to advance this idea - for which there was broad support, I might add - was who would speak for Canada on the issue. The answer, of course, is that no one speaks for the Canadian market in terms of regulatory approvals - only for a part of the Canadian market. Should the U.S. eventually prove to be interested, as we hope, in joining a system based on mutual respect for different approaches to securities regulation, then the question would arise again in that context.
This global dimension, even more than the national requirement for regulatory coherence, is something that I do not believe can be addressed adequately through either a uniform securities law, harmonization, a single passport or even a pan-Canadian commission established by agreement of the provinces.
The fact is that securities regulation is just one of many economic issues that have come to assume global importance and, often, international progress on securities will depend on what is happening on other issues such as, for example, safety standards or food inspection. Only the federal government has the constitutional authority to negotiate with foreign governments to make the essential tradeoffs among issues that can lead to progress on securities matters.
That leads to the crux issue, which is where the constitutional basis for securities regulation lies in a world where the concerns are often global and the response that is most often required is national. The Wise Persons Committee will do a signal service to Canadian capital markets if it provides some clarity on this issue and a solid basis for all of Canada's government's assuming appropriate roles in a modernized system.
As we understand that basis, the traditional exercise by provincial securities commissions of the securities industry is based on their jurisdiction over "property and civil rights in the province." That is, there is no question as to the provincial authority over securities transactions within a province.
Provincial authority over securities beyond the boundaries of a province is more problematic, especially in determining the basis for broader authority to deal with the national issues that might arise. The difficulties encountered by the OSC in the insider trading case involving former B.C. premier William Bennett suggests how problematic.
It seems clear, on the other hand, that the federal government, should it choose to exercise power over securities-related matters extending beyond provincial boundaries, would have ample basis for doing so using its powers over inter-provincial and international trade and commerce, the criminal law, foreign affairs, and federal corporate law.
Indeed, the recent federal announcement that it intends to criminalize insider
trading is an assertion of its constitutional jurisdiction in this area. As well,
the federal government's legislation involves concurrent jurisdiction in detecting
and prosecuting capital markets fraud. While it is unlikely, therefore, that its
use of these powers in direct regulation of the securities industry would go without
challenge, it nonetheless seems clear that the federal government has the authority
to act in area of securities because it is already doing so.
The possibility of a constitutionally sound federal role in national securities regulation should certainly be one of the options the committee explores in designing the modern framework for securities regulation that would most effectively solve some of the national and international problems associated with our existing system. In this regard, the use of concurrent jurisdiction would seem to offer important and interesting possibilities.
Notwithstanding its new measures in the securities area, it may well be that the possibility of federal reluctance to assume a greater role in regulation of the national market rests more on issues related to the political willingness of the federal government to act in this area, not the perceived constitutional impediments - the willingness to expend political capital, as you have described it.
In light of these considerations, the Wise Persons Committee would do a signal service if it were to prepare, as part of its examination of the alternatives, an authoritative constitutional opinion on which governments could proceed with reasonable certainty as to which government could act in what areas.
Such a view, as well, would provide an essential foundation for considering the alternative approaches to responding to local needs, a particular concern in the western provinces, as well as the national and global dimensions of securities regulation, where provincial authority seems less certain and the need for national rules and a single voice for Canada in dealing with international securities bodies is increasing.
As to the question of whether governments should be prepared to expend political capital on this area, that will ultimately be for those governments to decide, on the basis of what your committee judges is needed. However, we believe the issues are of sufficiently broad concern - to the 46 per cent of adult Canadians who own shares directly or indirectly, for example - that few projects are more deserving of using political capital than creating a competitive, 21st century regulatory framework for Canada's capital markets.
With every hope for the success of your work, I remain,
Remarks by Barbara Stymiest at the Canadian Club of Toronto
Remarks by Barbara Stymiest at the Canadian Corporate Counsel Association