Securities commissions promise a more focused future

Canada’s provincial securities commissions have traditionally held very different views about how to govern investment dealers in their respective jurisdictions. But it would seem several have decided to drop their adversarial ways and present more of a united front.

More and more, the commissions are talking about principles-based regulation to govern the industry — calling it the “modern” approach. And where public discussion can easily turn into nothing more than a broadcast of individual mission statements when securities commission executives are pitted against each other, the discussion and tone adopted by commission representatives in a panel discussion at the Investment Industry Association of Canada (IIAC, formerly the IDA — Industry Association) conference in Whistler, BC this week suggests there’s a new atmosphere of cooperation in regulatory circles.

The discussion shed some light on the incessant laments over regulation in the industry, touched on common enforcement challenges and revealed a definite shift and growing appreciation for principles-based rather than rules-based regulation, as well as a desire to rely more heavily on self-regulation. The panel also briefly discussed progress on the Canadian Securities Administrators (CSA) registration reform project and the passport model for securities regulation.

British Columbia Securities Commission chair Doug Hyndman kicked off the panel presentation by putting the current state of securities regulation in Canada into historical context and discussing the limitations that present themselves when trying to govern using an extensive, overly prescriptive set of rules.

“When securities commissions were given rule making ability, it was like we had a shiny new hammer and we went around hitting everything we could see like it was a nail,” says Hyndman. “We were better able to keep up with the markets, but markets were struggling to keep up with us.”

Since then, he says experience has shown that rules need to be based on principles and developed with a clear definition of potential problems that might arise. He says the BCSC is also trying to make better use of existing rules, rather than reverting to old habits of drafting specific regulations in response to each emerging issue. Kenneth Lay, for example, went to jail, not for violating the Sarbanes-Oxley Act, but instead for violating very basic principles set out in the U.S. Securities Act of 1933.

Writing rules in a generic way helps them to better stand the test of time, but that flexibility also allows firms to adapt and incorporate the rules more effectively. Interestingly though, Hyndman says the demand for detail in the rule making process actually comes from the industry — those making the most noise about regulation and compliance burdens are saying “just tell us what we need to do.”

“We’re not going to give you a cookbook for complying,” says Hyndman. Not only does this lead firms to adopt a loophole mentality, he says it also obscures the underlying principles.

David Wilson, chair of the Ontario Securities Commission, says the Canadian Securities Administrators is looking at ways to use principles-based rules in the registration process as well. The group is currently in the process of streamlining registration requirements and making the system “flexible, modern, harmonized and more efficient.” Wilson says once principles are established the task of enforcement can be delegated to firms and industry SROs.

This new appreciation for a more flexible system seems to stem from the need to keep up with industry changes and technology evolution, but also from the need to address increasingly complex issues. In the area of enforcement, Bill Rice, chair of the Alberta Securities Commission points out that the whole process is becoming more complicated and more heavily lawyered.

Administrative proceedings are still quicker than criminal proceedings, but he says the process still takes too long. Civil remedies are too expensive to pursue in a lot of cases and many times provincial police forces are not sophisticated enough or interested in pursuing securities cases in the first place. Along with this, Rice says commissions are able to take away licences and levy fines, but don’t do a very good job of collecting fines and can’t really make an example of anyone because they need to rely on the lengthy criminal litigation process to send people to jail.

He says securities commissions need to start moving more quickly in making their cases, resist adjournments and start delegating to prosecutors, police and judges who have expertise in the area. As well, he says there is a need for firms to step up and encourage people to provide information and leads to investigators whenever possible. “People generally know where the bad behaviour is,” Rice says. “There is a need for greater marketplace responsibility. Many of the bad players are known [in the industry]. I’m not sure that we react appropriately to that. There seems to be a tolerance for bad behavior in the business community.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com