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Your mission, Mr. Phelps: Reform the regulatory system

Advertisement In a major effort to reform Canada’s byzantine securities regulatory system once and for all, Finance Minister John Manley has assembled a team that is surely wise enough to find a solution. The hard part will be screwing up the political courage to make the changes. After months of dithering, Manley has come up with his so-called “wise persons’ committee,” which is charged with the unenviable task of reviewing the current regulatory system and recommending the ideal system for Canada, including a governance model and accountability framework. It is scheduled to report its findings by the end of November. As Investment Executive went to press, the committee had not yet met but had touched base in an initial conference call. The committee was created in response to a recommendation by Harold MacKay, currently an advisor to the federal Finance Department and the Clifford Clark Visiting Economist. Last fall, he was asked to tackle industry reform. He will serve as vice chairman of this committee. For the most part, the committee’s mandate follows the one prescribed by MacKay when he delivered his recommendations to Manley in November. It is charged with developing a system that will protect investors, foster innovative and efficient capital markets, and present foreign investors and regulators with a “positive image” of securities regulation in Canada. However, a few key terms were omitted. MacKay suggested outsiders should have the impression that Canadian regulators speak with one voice, and that the system offers equal protection to investors and market players across the country. The exclusion of these two elements from the mandate suggests Finance is going to great pains to show it is not biased in favour of the solution many suspect it is — a single, national regulator. Finance’s effort to appear neutral on the issue of a national regulator is also reflected in Manley’s letter to provincial finance ministers, in which he says: “The committee is not confined to a narrow range of options or, indeed, to a single option.” The minister emphasizes he also supports provincial initiatives to improve the current system, including the regulators’ efforts to produce a uniform securities law, and the committee of provincial finance ministers, which has also pledged to work toward an improved system. The finance ministers of the four big provinces — Alberta, British Columbia, Ontario and Quebec — launched a pre-emptive strike against the wise persons’ committee when they convened their own committee at the behest of Alberta Revenue Minister Greg Melchin. Joe Oliver, president and CEO of the Investment Dealers Association of Canada, says that he expects something concrete to come out of the ministerial committee. He is also encouraged that the wise persons’ committee expects to consult with the provincial committee. Although he is not convinced the process will deliver the long-awaited solution many market players would dearly love to see, he says, formation of the federal committee should encourage the provincial ministers to take action. “The overall environment looks messy, but the result will probably be a good one for the Canadian capital markets,” Oliver says. As an organization, the IDA is straddling the issue: it advocates a two-track approach of studying a federal alternative while encouraging harmonization among provinces that have jurisdiction. It’s not clear whether Manley’s message of federal neutrality is being heard. Many see the wise persons’ committee as yet another exercise in pursuit of a national regulator. It is only natural provincial authorities would view a federal effort to reform an element of provincial jurisdiction as a nod toward a national model. Of all provincial finance ministers, only Ontario’s Janet Ecker came out with a public statement in favour of the federal committee. Without broader support, the provinces are seen as the major stumbling block to a satisfactory resolution. “I’m sure [the federal committee] can figure out what is best for the country, but will the provinces listen? I doubt it,” says a senior regulator who has seen numerous reform efforts come and go, with the status quo prevailing. This skeptical initial reaction can only be disappointing to Finance, which has scrupulously given the committee a politically correct mix of geography and experience in its effort to be impartial. None of the committee members are seen as ideologues on the issue of the best model for securities regulation. If any members harbour preconceptions, they are keeping them quiet as the committee gets underway. Doug Harris, director of the University of Toronto’s Capital Markets Institute, says the wise persons’ group is a balanced one. The absence of lawyers who have worked on the issue before, such as Jim Baillie or Phil Anisman, was a bit of a surprise, he says, but he suspects anyone who had ever expressed an opinion on reform was probably disqualified for that very reason. The committee is being chaired by Michael Phelps, who is best known as the former chairman and CEO of Westcoast Energy Inc. Phelps currently chairs his own private investment company, Vancouver-based Dornoch Capital Inc., and sits on the boards of CIBC, Duke Energy Corp. (which bought out Westcoast), CP Rail and Canfor Corp. Opposition in Western Canada to a national commission makes Phelps’ status as chairman all the more notable. He brings to the table a legal background and extensive experience as a large national issuer, and comes across as a dove on the national regulator issue. “I don’t see the provinces being animated by turf protection,” he says. “I do see some expression of a legitimate view — a belief in local regulation. There are reasons to support local regulation — better awareness of the players, being closer to the players — but the other reality is capital moves at great speed and respects no borders.” The challenge is reconciling those realities. As to whether regional issues can be handled in a national model, Phelps says: “We’re going to find out. I wouldn’t prejudge that.” As chairman, his job will be to build consensus on the issues. “This is my thing,” he says. “It’s the intersection of commerce and public policy, and that’s what the chief executive of an energy business does. It’s intellectually appealing subject matter because there’s a lot of desire for change. There are the questions of ‘what form do the changes take’ and ‘how do you bring it about’.” At this point, the committee is finding its footing, finalizing its budget and dealing with staffing issues. Once the logistics are in place, it will dole out research assignments and start a public consultation process that has yet to be determined but could begin, at least informally, in April. Phelps says research into issues such as cost of the current system and alternative models, limitations of legal delegation and the constitutional issues involved is needed. The committee will also look at parallels with other jurisdictions, especially federal ones. He hopes the committee’s work will avert constitutional concerns: “The issue is to find the best model; then we’ll find the law is pretty clear.” Phelps may have some past legal experience, but the real legal firepower on the committee comes from MacKay and Tom Allen, senior partner at Ogilvy Renault LLP in Toronto. MacKay is senior partner with Regina-based MacPherson Leslie & Tyerman LLP and is best known for chairing the Task Force on the Future of the Canadian Financial Services Sector. Many recommendations of the 1998 MacKay report were adopted, reshaping the face of Canadian financial services and proving his efficacy on this sort of committee. Allen is also a highly regarded lawyer who is used to having his name attached to critical industry task forces. He is best known for his work on the Allen report on stock exchange reform. He also put in 10 years as a public director of the IDA, and is now chairman of independent dealer Westwind Capital Corp. of Toronto. Such credentials give him an understanding of the costs and inefficiencies of the current system. Allen isn’t the only committee member with ties to the IDA. The committee includes two former IDA chairmen: Mike Tims, chairman of Calgary-based Peters & Co. Ltd.; and Pierre Brunet, former co-chairman and co-CEO of National Bank Financial Inc. At the IDA, the trio were intimately involved with regulatory issues. Allen was on the association’s audit committee and its regulatory oversight committee, and Tims and Brunet have served on the chairman’s advisory council. Tims and Brunet also bring a couple of important demographical qualities to the committee. Tims represents the oilpatch in Calgary and boutique investment firms in general. Brunet is obviously a key inclusion as a Québécois, albeit one who holds the Order of Canada and hails from the bank-owned brokerage world. Tims, like Phelps, says the committee won’t reach any conclusions until it has taken a fresh look at the issues. However, in the past, Tims has suggested to IE that a pragmatic approach to a national regulator could accommodate the “regional issues” — both the West’s and Quebec’s — that are often cited against the national approach. The two committee members who are least well-known in the investment community also fill in a couple of other areas of expertise and demographics. Wendy Dobson is the only woman on the wise persons’ committee and brings expertise in international business. She is currently a professor at the University of Toronto’s Rotman School of Management and director of the Institute for International Business. Harris, Dobson’s U of T colleague, considers her inclusion very important: “One of the key issues the committee will have to address is: what is Canada’s place in the global capital market, and how will regulatory structure promote our ability to take a meaningful place in it?” A sensitivity to the international perception of the Canadian regulatory scene is generally seen as an argument in favour of a national regulator. If foreign firms can deal with one regulator in the U.S., it makes little sense to navigate the mosaic of 13 regulators in Canada. The experience of Allen and MacKay on previous landmark committees also is important in getting the work done, says Harris. Likewise, Allen’s, Tims’ and Brunet’s understanding of the industry will help them explain in which situations the market works and in which it falls down, so the opportunity costs of the existing system can be measured. The surprise selection for the committee is Edwin Harris, a tax lawyer with Halifax-based Patterson Palmer LLP. He not only brings tax expertise but also represents the Atlantic region. Apart from running a successful legal practice, he has known MacKay for years, having taught him at Dalhousie Law School in the 1960s. Harris concedes he is not an expert in securities law, but says he was selected for his general business knowledge and experience. He doesn’t see any major tax implications to the committee’s work but recognizes the problems of the current system, such as overlapping jurisdictions, gaps in current rules, lack of uniformity and whether it provides Canada with proper representation at the international level. “I hope I’m not going in with any bias. There’s a problem that needs to be addressed and we are going to look at it,” he says. The problem has been looked at for years, and solutions have been offered but never adopted. MacKay believes it will be different this time. “It’s up to us to see the best evidence and options are on the table. Then it’s up to the policymakers to make judgments,” he says. Adds Phelps: “I can guarantee an intellectually stimulating exercise. The result will await the decision of the gods … my hope is that we come up with a solution and that the governments will adopt it 100%.” IE Read other news from our News Section