National regulator faces tough hurdles

The release of the Canadian Securities Transition Office’s plan for a new national regulator on Tuesday led to inevitable press releases and editorials debating where a national headquarters would be located — or even if one should exist.

But such discussions are a bit of a red herring, according to Alfred Page, partner and regional leader, securities and capital markets group, at Borden Ladner Gervais in Toronto. The current decentralized system works fairly well, and the proposed Canadian Securities Regulatory Authority should focus on harmonization across the country, he says.

“The suggestion that the CSRA will sustain regional offices, I don’t think that’s really a surprise. Politically, anything else wouldn’t have been acceptable,” he says. “If you’re taking a team approach, talking about where the head office is doesn’t make any sense.”

One of the first groups to react to CSTO’s transition plan was the Toronto Financial Services Alliance, which insisted that Toronto was the natural choice for a head office. But Page points out that there is little threat that Toronto will see an exodus of securities professionals.

“There’s no reason to think that the role of OSC in the CSA would be any different than the Toronto office of the CSRA,” he says.

Alberta and Quebec are openly hostile to a national regulator, but Page says any holdout provinces may come under pressure to join after the fact, as the efficiencies of a single large regulator become clear.

“I think once people see the efficiencies and how much more smoothly things can work, companies will be demanding [the holdouts join],” he says. “If things are passported, that’s good, but it doesn’t prevent a province from taking the position that their laws are interpreted differently.”

While domestic issuers are already accustomed to the multiple filing regime, foreign-based market participants are more likely to avoid holdout provinces.

In terms of change, Page says most areas of securities regulation are already covered nationwide by various National Instruments, but he points out that there are “a tremendous number of regional exceptions” that will need to be dealt with.

The new model does little to bring these regional exceptions into line.

“This is all going to happen in real time; there are a lot of people out there with discretionary orders, permissions and exemptions, and somehow [CSTO] will have to come up with a comprehensive plan as to how all those things continue,” Page says. “It will be a challenge to fit all of those people into the system, but I’m encouraged by what I saw in the plan.”

The primary focus of CSTO’s transition plan is investor protection, which is all well and good, but Page says an important secondary objective has been left out.

“This really should have been about risk assessment and promoting efficient markets, just as much as it should be about investor protection,” he says. “I don’t see that theme very high on the list of priorities that [CSTO] has established for itself.”

Aside from getting all of the provinces to sign on, CSTO faces far greater challenges, including meeting its own July 2012 deadline for the Canadian Securities Regulatory Authority being up and running. Page says the launch date itself is a little too ambitious.

“They talk about systems standardization after launch, which I think may pose a bit of a challenge for them … Securities work is becoming more and more systems-driven, if only because of the sheer volume of what needs to be done.”

In the U.S., there is a move toward interactive data being made available to the public, essentially recreating the business as a model that allows potential investors to virtually shock-test the company they are researching.

“It would certainly require a continuing investment in systems, and to think all that would just wait doesn’t make a great deal of sense,” he says. “The ideal time to be doing that is when Canadian companies are shifting over to IFRS [at the end of 2010].”

Creating such a system before the July 2012 launch date would be nearly impossible, and there is little incentive for the merging commissions to put any more time or energy into developing systems on their own.

“Pretty well everything going on at commissions in terms of initiatives will stagnate,” he says. “I don’t imagine the work of the CSA toward harmonizing things will stop, but you can see a lengthy gap where new initiatives might be viewed differently.”

Page says he is curious to see what happens in human resources when the shift occurs. Currently, only about 5% of the staff of the country’s securities commissions are unionized. The new CSRA is slated to be a Crown Corporation, which could open the door to unionization.

“I believe at one time the OSC was unionized in its registration area, and I believe that was not producing the results that the commission was looking for. I think the union lost its mandate when the OSC moved to become an independent body.”

(07/14/10)