Regulation: A national overhaul?

REFORMING CANADA’S ANTIquated financial services regulatory structure is the basic goal of every attempt to create a national securities regulator. But if the latest effort comes to fruition, regulators would acquire an array of new powers that could represent the most significant change.

On Sept. 8, Ottawa and the governments of four provinces (British Columbia, Ontario, Saskatchewan and New Brunswick) published their agreement to create a new co-operative securities regulator, along with drafts of the federal and provincial legislation that would be required to bring the new regulator to life. The participants in this agreement aim to have that legislation passed by June 30, 2015, in the hope that the new Capital Markets Regulatory Authority (CMRA) will be up and running by next autumn.

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If that all goes ahead as expected – still a big “if” – not much would change in the day-to-day business of the regulators. For example, the agreement provides that: each regulatory office in the new agency would keep doing the same jobs it is doing now; the existing regulators’ staffing won’t change; and they will continue to have decision-making authority on routine regulatory issues.

The biggest changes envisioned for the regulatory structure are that the adjudicative function would be more formally separated into its own division, and that the new authority would be overseen by a council of ministers from the various provinces, along with the federal finance minister.

Apart from those changes, it largely will be business as usual.

The bigger changes overall may come in the rules. Although introducing some form of national regulation has long been the primary goal of this initiative, the CMRA also aims to improve oversight of systemic risk, and to enhance investor protection – and these goals are reflected in the draft legislation.

The proposed federal legislation focuses largely on systemic risk, giving the CMRA the power to collect data in order to monitor and mitigate systemic risk. The CMRA also will be able to share that data with other authorities. And the new regulator will be empowered to designate certain firms – including trading facilities (such as exchanges), clearing houses, credit-rating agencies, and dealers – as being systemically important, and to impose requirements upon them to address systemic risk. The CMRA will be able to designate benchmarks, certain products and even business practices as being systemically risky – and then impose requirements to address those perceived risks.

In addition to making rules to deal with systemic risk, the new authority also will be empowered to order a dealer that poses an imminent systemic risk to sell assets, increase capital, abandon a merger or to wind up entirely. And the CMRA will be able to issue temporary emergency orders suspending trading or prohibiting a particular practice.

The proposed new provincial securities laws, which will have to be enacted in each participating province, also have a role in dealing with systemic risk on a day-to-day basis. But the new legislation also will overhaul securities laws in certain areas and introduce new regulatory powers. For example, new offences will be created for actions such as the manipulation of financial benchmarks and attempted market manipulation. And the laws regarding insider trading and unfair practices, such as pressuring an investor, will be expanded.

In terms of compliance and enforcement, the draft provincial legislation introduces new whistleblower protections to prevent retaliation against an employee who provides information to the authorities, introduces new evidence-gathering tools and increases the maximum fines for insider trading, tipping, frontrunning, market manipulation, benchmark manipulation and fraud.

The new legislation also will allow the new regulator to order restitution, enabling it to collect unpaid fines from a third party that owes money to a penalized person. Those monetary penalties could be enforced as court orders, improving the regulator’s ability to collect.

In addition to the new powers, the proposed provincial legislation aims to modernize securities legislation by picking and choosing various features of existing laws from the four participating provinces. Although certain elements, such as the basic registration and prospectus regimes, remain largely unchanged, the draft legislation seeks to enhance the law in certain areas, such as derivatives oversight. Most of the specific requirements will be housed within the regulator’s rules rather than in the underlying securities law, which makes modifying those requirements easier.

A draft of those rules is expected to be ready by Dec. 19. In the meantime, the participating governments are seeking comments on the proposed legislation. (The comment period closes Nov. 7.)

At this point, it’s too early to say how the draft laws will be received. Following their release, Investment Industry Association of Canada (IIAC) president and CEO Ian Russell issued a statement indicating that IIAC intends to review the proposed legislation “in the coming weeks” and to consult with federal and provincial authorities.

Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) also says that Fair Canada is reviewing the drafts and that it is too early to provide a definitive verdict. While Gross welcomes some of the provisions, such as new whistleblower protections, he also notes that FAIR Canada was hoping that the new authority would include investor representation on its board and as part of its policy-making structure.

But he wants to see more detail, he adds, which will come when the draft rules are released.