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This article appears in the April 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

The latest bid to create a national securities regulator is dead, leaving behind a regulatory system in danger of further fragmentation.

At the end of March, the Capital Markets Authority Implementation Organization (CMAIO) — the agency charged with implementing a co-operative national regulator comprising a majority of the provinces — ceased operations. The announcement came amid lack of political momentum for the project and dwindling funding.

From a practical perspective, the shuttering of the CMAIO is essentially meaningless. While the organization laid the groundwork for the possible introduction of the co-operative Capital Markets Regulatory Authority (a.k.a. the CMRA) envisioned by policy-makers, that work never passed the theoretical stage. So, the agency’s demise will have little direct impact on the investment industry.

However, without a looming national authority — however hypothetical — to replace the prevailing fragmented provincial system, there may be less incentive for the existing regulators to find common ground. Even before the CMAIO was taken off life support, signs of persistent division among the provincial regulators had emerged.

For example, the regulators in Alberta and Saskatchewan have been going it alone with recently proposed registration and prospectus exemptions designed to support the flow of capital to start-ups and other small firms in those provinces.

When the Canadian Securities Administrators (CSA) revealed its planned approach to crypto-trading platforms, the reactions from provincial regulators were mixed. The Ontario Securities Commission (OSC) issued a stern warning to crypto-trading firms, giving them three weeks to contact the regulator to detail their plans to get registered and join the Investment Industry Regulatory Organization of Canada or face enforcement action. Regulators in Western Canada, meanwhile, indicated they would consider interim alternatives for crypto platforms.

Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers, said the recent signs of divergence among the provinces reflect the fact that the CSA “allows for regional flexibility and innovation, which is appropriate.”

The bigger threat to national regulatory harmonization may come from the recent work of Ontario’s Capital Markets Modernization Taskforce, which proposed a sweeping series of reforms that would distance the OSC from the rest of the provincial regulators in several areas.

In Ontario’s latest budget, the province pledged to pursue several of the task force’s proposals, including restructuring the OSC and expanding the regulator’s mandate to include a focus on promoting growth and competition in the financial markets. The provincial government also said that it would table new legislation — the Capital Markets Act (CMA) — to replace the existing securities and derivatives legislation, pending a consultation with industry stakeholders.

This is not the first time the CMA has reared its head; similar legislation had been proposed by the provinces participating in the CMRA as a uniform provincial securities law. But the CMA that Ontario is considering will be a different animal.

Scott Blodgett, senior media relations advisor for Ontario’s Ministry of Finance, said the CMA is “intended to modernize the capital markets legislative framework while maintaining strong investor protection.”

According to Naizam Kanji, general counsel with the OSC, the CMA that Ontario plans to propose has been revised to reflect the province’s desire for modern, platform-based legislation while also building in some of the task force’s recommendations.

Notably, Ontario’s CMA will do away with some features of the legislation that were negotiated among the provinces involved in the CMRA effort, Kanji said. Consequently, Ontario’s new CMA won’t necessarily represent a foundation for a future national regulator or for uniform provincial legislation.

However, the Ontario initiative is already raising red flags for some in the investment industry.

Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), said he foresees a troubling shift away from investor protection priorities — such as best interest standards and banning embedded fund fees — in favour of measures to reduce regulatory burdens and promote market growth in Ontario.

“Given the speed that some want to push some of these proposals through, I also question whether we will have a robust public consultation to ensure we strike the right balance,” Bureaud said.

Whether Ontario’s new CMA will be embraced by investor advocates — or, indeed, by the Street — and become law remains to be seen. In the meantime, with the demise of the CMRA, there is now even less incentive for the provinces to seek genuine harmonization, at least in the short term.

The shuttering of the CMAIO does, however, remove one of the chief obstacles to Ontario joining the CSA’s passport system. The Ontario government has long resisted that step, citing a preference for a national regulator. With that latter option now off the table, joining passport may make more sense.

The CSA hopes Ontario will sign on to the system.

“Our view is that this move would significantly reduce the regulatory burden for all Canadian market participants by introducing speed in regulatory decision-making and eliminating the additional costs of dealing with multiple regulators,” Morisset said. “Ultimately, the decision to join passport belongs with the Ontario government.”

In the meantime, Morisset said, the CSA remains focused on “delivering on more than 40 ongoing initiatives in our business plan, and addressing new issues and challenges presented by evolving capital market conditions.”

Veteran securities lawyer Phil Anisman said he expects the demand from industry for greater regulatory harmonization to persist, despite the demise of the CMAIO. That demand may eventually spur the next effort to create some form of national regulation. “The only question is when that will come about,” Anisman said.

That question has bedevilled Canadian policy-makers for well over 50 years. In 1964, the Porter Report — which cited concerns that the securities industry was “a field in which hanky-panky at the fringes is temptingly easy” — called on the federal government to encourage uniform provincial standards and consider creating a federal agency to help raise industry standards and improve regulatory efficiency.

More than half a century later, the Supreme Court of Canada confirmed the constitutionality of the CMRA, noting that systemic risk and data collection are genuine national issues. Oversight of systemic risk appears destined to remain an unresolved policy problem with the CMAIO shuttered.

“To me, a bigger question now is whether the work to create a national systemic risk and financial stability framework will be completed,” Bureaud said. “Given the current economic situation, stakeholders deserve to know.”