Most provincial securities regulators maintain that adopting the passport structure has made for a more efficient regulatory system. Only Ontario continues to insist on the need for a single, national regulator. But the push for registration reform shows how tricky it is in practice to implement a new regime.

The passport system is unique among the efforts to reform the Canadian regulatory structure in that it has actually achieved something. The jurisdictions that have signed on to the passport system have adopted new rules to implement the system, made efforts to harmonize their securities legislation and approved rules to harmonize prospectus requirements and takeover bid rules.

Phase 2 of the passport initiative will be achieved when the jurisdictions adopt registration reform, which is intended to rationalize and standardize all the categories of registration, along with overhauling the registration requirements.

But this is easier said than done.

When the Canadian Securities Administrators announced the registration reform initiative, the plan was to implement it by the end of 2007. That didn’t happen. In fact, the first version was revised significantly enough to require a second publication for comment — which didn’t occur until the end of February 2008 — and the flood of comments received for the first iteration has actually grown for the latest edition of the rule, to just shy of 300.

Indeed, several of those who commented on the latest incarnation of the proposal complain that they haven’t been able to assimilate the implications of this sweeping effort. The chore was compounded by the fact that several related rule proposals were also published for comment at the same time (amounting to almost 1,000 pages of material, according to one estimate).

In its comment, the Investment Funds Institute of Canadanotes: “The sheer volume of materials, combined with all of the consequential amendments and numerous exceptions and exclusions, caused the review process to be slow and tedious, leaving readers doubting whether they have completely captured and understood all elements of the revised proposal.”

Typically, significant rule proposals undergo 90-day comment periods, whereas less substantial efforts get only 30. In recognition of the importance and scope of these current proposals, the CSA opted for a 120-day comment period when the rule was first proposed. For the second go-around, the comment period was just 90 days. But that was enough time to generate a blizzard of comments.

The issues the comments raise are as diverse as those who submitted comments. If there’s a common complaint regarding this latest version, it’s the fact that the effort falls short of complete harmonization.

Notably, two of the reform’s central features will not be implemented in all provinces. Manitoba is not planning to embrace the fundamental move from a “trade trigger” to a “business trigger” in terms of what sets off the obligation to register: nor will British Columbia or Manitoba adopt the “exempt market dealer” category that the rule would create.

As well, Ontario contemplates shifting some of the elements of the registration regime out of the securities rules and into legislation. Such a move would put it further out of step with the other provinces, making it tougher to maintain consistency among jurisdictions in the future.

As a result of the jurisdictions’ differing approaches, industry players are worried that the fundamental aim of creating a uniform, streamlined registration system is being lost. Toronto-based law firm Borden Ladner Gervais LLP says in its comment letter that it is “increasingly concerned [that the] goals of the CSA will not be met.”

BLG’s comment letter points out that several provincial governments are considering different legislation, and that certain provincial regulators are opting out of elements of the rules or proposing local variations: “In fact, in the notice alone, we counted over 10 significant circumstances in which a member or members of the CSA propose to make a rule that is different from the other members of the CSA.”

Moreover, if there’s a good reason for these differences, it’s not explained, BLG’s letter says: “We are left essentially to guess at the reasons why the ‘problems’ that the different rules are designed to solve differ from one province to another. We fundamentally do not agree that any inherently different problems exist in the securities industry in one province from another that would justify differences in rules.” The letter argues that differences in regulatory philosophy aren’t sufficient justification for divergent rules, which increase the costs of doing business in Canada.

@page_break@This concern about enshrining provincial differences is echoed by the Canadian chapter of the Alternative Investment Management Association. Its comment calls on the CSA to implement the new regime the same way in every province, and that staff in each jurisdiction “administer and interpret [the rule] in a uniform and consistent fashion.”

Doug Hyndman, chairman of the B.C. Securities Commission, maintains that there are genuine policy reasons for the differences, such as B.C.’s decision not to implement the planned registration regime in the exempt market: “The differences in the exempt market regime reflect a difference in policy views of the BCSC and [theManitoba Securities Commission] about the risks in the exempt market and the efficacy of a registration regime to deal with the risks. Put simply, we remain very skeptical that there will be benefits from exempt market dealer registration to outweigh the considerable costs it will impose on small issuers and, ultimately, their investors.”

Hyndman says opting out of that section “will not disrupt inter-provincial business.”

Indeed, the flexibility to allow local variation is a strength of the Canadian regulatory system, he says: “Our decentralized structure allows us to tailor a response to the market that suits our local requirements within a broader, highly harmonized system. Firms can operate freely across Canada in the exempt market regime under common rules, but B.C. will have a less costly regime for small-business capital raising that suits our economy.”

A bigger worry is Ontario’s plan to move many of the regime’s provisions out of the securities rules and into its securities legislation. AIMA’s comment warns that this will “create a fragmented securities regulatory regime substantially similar to the status quo, lessening the intended reduction in the regulatory burden and cost to market participants.”

BLG’s letter adds that Ontario’s approach increases the risk that the provinces will drift further from a uniform structure, as other regulators will be able to amend their rules much more easily than Ontario, which will have to go to the legislature to make changes.

Moreover, BLG worries that the legislation needlessly uses different terminology than the proposed rules. “In our view, there is no justification for the Ontario legislation to duplicate securities rules or to rephrase the securities rules using different language,” BLG’s comment letter says. “We do not view this as a positive step forward.”

Indeed, Ontario’s approach may be considered a step backward in winning over the other provinces to the idea of a single regulator, which Ontario has long maintained it wants. BLG’s letter notes that Ontario is taking the same tack with the takeover bid rules and certain aspects of the prospectus rules. The BLG letter calls on Ontario to rethink this strategy, saying: “The inference is that Ontario has to do things in its own way, which in turn leads other provinces to believe that Ontario would seek to dictate the terms of any national securities commission and any national securities laws.”

While Hyndman defends the provinces’ prerogative to take their own policy directions, he concedes that the move by Ontario to put many of its provisions into legislation is a very different situation. “Unfortunately, this approach, if taken to its logical conclusion,” he warns, “could undermine the effort to harmonize Canadian regulatory requirements and undo the progress of the past dozen years.”

Hyndman admits he doesn’t understand the motivation for this step. “It’s more than a little ironic that the B.C. government decided not to proceed with the 2004 Securities Act, in part because Ontario and others argued we should work with them on harmonization,” he says, “only to see the Ontario government now veering off in a legislative direction different from the other provinces.”

The U.S. securities industry lobbyist organization, the Securities Industry Financial Markets Association, worries that Canadian registration reform could represent an impediment to recently announced plans for mutual recognition talks between the CSA and the U.S. Securities and Exchange Commission. SIFMA calls the proposal “a burdensome reregulation of certain existing activities because it removes important exemptions and implements significant new registration requirements [that] will probably only be an interim rule until such time as the CSA negotiates a mutual recognition agreement with the SEC.”

SIFMA encourages the CSA to ensure that the reform doesn’t do anything to impede those talks.

Beyond these very fundamental complaints with the proposed new regime, the industry remains disappointed that other basic issues haven’t been resolved, including the ability to serve clients in other provinces, the issue of personal incorporation and the different regimes firms and reps face if they are subject to a self-regulatory organization rather than a non-SRO.

Moreover, areas of the industry that will face new registration obligations (exempt market dealers and investment fund managers) — and the accompanying capital, proficiency, and insurance requirements — have complaints about the details of these proposals.

Toronto-based asset manager Resolute Funds Ltd. argues that the rules favour large firms that can afford these regulatory obligations. Resolute’s comment letter also suggests that the expected benefits of the new regime do not justify the costs or the resulting barriers to entry for smaller players: “The Canadian asset-management business is increasingly dominated by large firms and the proposed instrument … will ultimately discourage competition in the form of new entrants.”

Any regulatory reform effort will have its critics. But this initiative highlights how hard it is to achieve comprehensive reform in the fragmented Canadian system, despite recent progress. IE