The fundamental question posed by the WPC is "What is the best securities regulator for Canada?" We believe that the answer to this question depends heavily on the commitment to uniformity of Canada's existing securities regulators.
It seems clear to us that there is general overwhelming support for the proposition that securities regulation in Canada must be uniform. The only caveat to this position would be the extent to which local markets may require local regulation to address local needs. The balance between uniformity and local needs has translated itself into a debate about whether we should have a single federal regulator or remain with provincial and territorial regulators with an emphasis on uniform securities legislation.
We believe this debate puts the emphasis on the wrong point. Uniformity of regulation (and how you achieve that) should be the objective. It matters not at what level regulation is enacted so long as it is uniform but at the same time sympathetic to local needs.
The Current System
The greatest weakness of the current system is the absence of uniform laws which are enforced on a consistent basis. Our experience with the current system is that it results in increased costs and complexity for issuers, both foreign and domestic, who wish to access more than one Canadian jurisdiction.
National initiatives by the Canadian Securities Administrators (the "CSA"), such as the Uniform Securities Legislation Proposal (the "USL"), the introduction of the Mutual Reliance Review System ("MRRS"), the introduction of SEDI and SEDAR and most recently draft National Instrument 51-102: Continuous Disclosure Obligations are clearly moves in the right direction and show the ability of CSA members to agree on the fundamental direction of securities regulation. Notwithstanding this, these systems have inherent shortcomings. They include:
· the ability of CSA members to opt-out of such initiatives on the basis of their sovereign jurisdiction. Examples of this include the revocable delegation and local rule-making authority provided to each commission in the USL and most recently British Columbia's not joining with the other CSA members as an initiating party under either NI 51-102 or the proposed national instruments relating to audit committees and disclosure certification;
· the inability of a lead or principal regulator under MRRS to have complete power to adjudicate a subject matter with the result that MRRS has become an administrative as opposed to a substantive regime;
· the undermining of MRRS due to lack of uniform legislation with the result that exemptive relief sought may vary in each jurisdiction and may result in more than one principal regulator;
· even in the face of uniformity of legislation, the ability of staff in thirteen separate jurisdictions to interpret uniform rules differently with the result that in some instances there are many sets of unwritten rules or administrative practices with respect to a single subject matter;
· the lack of true delegation between commissions under the proposed USL with the result that investors and participants have little certainty of the process.
While the USL purports to establish a uniform set of securities regulation in Canada, it falls far short of its ambitions. As we stated in our April 30, 2003 response to The Concept Proposal for a Uniform Securities Legislation, while the USL is premised upon the co-operation and co-ordination of all thirteen provincial and territorial regulators, it contains no mandated uniformity. In fact the USL clearly acknowledges the concepts of lack of uniformity at the legislative level, the revocable nature of delegation and the ability of local rule making authority; all concepts which operate against uniform and harmonized regulation. This is clearly unacceptable - to the extent Canada's political imperative dictates regulation at the provincial or territorial level, the regulators and their political masters will have to bite the bullet and accept uniformity. Without this commitment Canada is doomed to having a system which does not work unless a national federal system is introduced.
The current system is perceived as sympathetic to local interests in Canada. We acknowledge that this is viewed by many as the political imperative resulting from Canada's federal structure. We do not feel competent to comment on the legitimacy of this political imperative nor on the degree to which it can be compromised, however, we believe that every effort should be made to deal with these political issues so as to adopt a uniform regulatory regime.
International Competitiveness of Canadian Capital Markets
We are of the view that if the Canadian capital markets are to become an integral part of global markets the existence of thirteen securities regulators acting separately and independently is not sustainable. As noted by the WPC, there are many choices available for global investors today. Our experience in providing legal advice in connection with international cross-border issues (whether by public offering or private placement) is that the complexity of the Canadian securities regulatory system operates as a deterrent to extend a foreign offering into Canada and into certain provinces in particular. Legal costs in undertaking offerings into Canada increase exponentially with the number of Canadian jurisdictions one is seeking to access. Therefore, if there are not a significant number of potential investors in a particular province, a decision is often made that compliance is too costly and technical to warrant the offering in those particular provinces. The result is that certain investors are precluded from opportunities that are available to investors in other Canadian provinces. Our anecdotal evidence from operating internationally is that the Canadian securities regulatory system is perceived as too costly, too complicated and generally prohibitive, not permissive. The result is that Canadians are not receiving international investment opportunities available in other jurisdictions. While a truly uniform securities regulatory system may not immediately solve all of these issues, it would in our view, go some way to repairing this negative perception of the Canadian capital markets.
Regional and Local Characteristics and Uniform Securities Regulation
Local laws are perceived to facilitate access to the securities market by, and appropriate regulation of, smaller regional or sectoral issuers. We are of the view that these laws can also be enacted and enforced on a uniform basis. There are smaller market participants in all jurisdictions of Canada who need to access low-cost, innovative financing. Smaller issuers are not well served by having separate non-uniform compliance regimes in thirteen provinces and territories: in fact, their ability to raise capital in more than one jurisdiction is impaired by cost and complexity.
Uniformity of legislation does not mean that all issuers are treated the same. We have already seen examples of this in the Canadian regulatory environment, most recently in respect of the proposed CSA rules on audit committees. Clearly a smaller company in an earlier stage of its development has different corporate governance needs. We believe these different needs can be adequately provided for in a pan-Canadian uniform regulatory regime. Two-tiered approaches have been seen in many pan-Canadian aspects of securities regulation, including the POP system for large issuers and the TSX exempt company concept. We would submit that the needs of smaller companies could be effectively managed through uniform legislation. In addition, we are of the view that particular products that are available to a sector or region can also be dealt with by uniform legislation and this would provide greater flexibility in the event that these products and/or sectors become more national in the future.
Canada has become an increasingly complex and costly jurisdiction in which to undertake securities offerings. Unfortunately, our capital markets are not large enough to warrant this complexity and duplication with the result being that Canada, and, within Canada, investors in particular provinces, have lost out on investment opportunities that are available to other investors. Other countries have been successful in establishing streamlined securities regulation (and even more encompassing omnibus financial services regulation), most notably Australia and United Kingdom.