Federal, Ontario and BC Governments Announce New Securities Regulator

Written By William S. Osler, James T. McClary, Usman M. Sheikh and James Bartlett

On September 19, 2013, the finance ministers of Canada, Ontario and British Columbia announced an agreement in principle to create a new securities regulator through a "cooperative capital markets regulatory system".

The cooperative system is open to all provinces and territories to join, and would be implemented by participating jurisdictions enacting uniform securities legislation governing matters within their jurisdiction and the federal government enacting complementary national legislation. The regulator would be headquartered in Toronto with regional offices in participating jurisdictions, and would operate under authority delegated by the participating jurisdictions.

The announcement marks the first concrete step towards a national securities regime after the Supreme Court of Canada's 2011 ruling that the federal government's proposed legislation to create a national securities regulator was unconstitutional. The proposed cooperative system appears to reflect the Supreme Court's suggestion in its 2011 ruling that national securities regulation could be achieved though "cooperative federalism".

Purpose

The September 19 agreement states that the purpose of the cooperative system is to:

• foster more efficient and globally competitive capital markets in Canada and facilitate capital raising through more integrated markets and national regulation;
• provide increased protection for investors;
• strengthen Canada's capacity to manage systemic risk; and
• enable Canada to play a more influential role in international capital market regulatory initiatives.

Principal Components

The principal components of the system include:

• uniform provincial and territorial legislation complemented by federal legislation addressing criminal matters, systemic risk and national data collection;
• a single capital markets regulator consisting of a regulatory division and an adjudicative tribunal, led by an independent board of directors that is representative of the regions of Canada;
• a council of ministers responsible for capital markets regulation in each participating province and territory and including the federal Finance Minister, which would oversee the regulator and be accountable to participating governments;
• provincial offices with staff, expertise and resources proportionate to market activity and enforcement demands in each participating jurisdiction, each providing services similar to current provincial regulators within a national framework;
• a voting system that allows any major capital markets jurisdiction (defined as a province that represents at least 10 percent of the national GDP derived from financial services; currently, this would include Ontario, British Columbia, Alberta and Quebec if all provinces participated) to object to regulation proposed by the regulator, or to propose regulation or amendments to provincial legislation, with the support of at least 50 percent of all members of the council of ministers;
• a fee structure designed to allow the new regulator to be self-funded while not imposing unnecessary or disproportionate costs on market participants; and
• transitional funding to those provinces and territories that would lose net revenue as a result of the cooperative system.

Timetable

The announced goal is to have the regulator in place by July 1, 2015. The proposed timetable is as follows:

• by January 2014, each participating jurisdiction signs a memorandum of agreement, to which draft legislation will be attached;
• by March 2014, initial draft regulations are published for comment;
• by May 2014, each participating jurisdiction signs an agreement regarding the integration of its securities regulatory body into the new regulator;
• by December 2014, legislation by each participating jurisdiction is enacted; and
• by July 1, 2015, the new regulator is operational.

Participation

Minister Flaherty stated that he expects other provinces and territories to join the new system fairly quickly. However, it is unclear which provinces and territories, other than Ontario and British Columbia, will adopt the proposed system. While many of the key elements of the proposal respond to certain issues raised by the provinces in discussions with the federal government, it appears that the provinces (other than Ontario and British Columbia) were not consulted. Alberta and Quebec in particular have advocated against a national regulator and in favour of the continued development of the current passport system, and following the September 19 announcement, the Quebec government has indicated that it may pursue court action against the initiative. Provinces with smaller capital markets may have more incentive to adopt the cooperative system.

Anticipating that certain provinces may not join the new regulator, the September 19 agreement in principle states that the new regulator will use its best efforts to negotiate and implement an interface mechanism with each non-participating province such that the cooperative system effectively has national application.