Supreme Court of Canada building in Ottawa

A decision from the Supreme Court of Canada (SCC) regarding the constitutional status of the proposed co-operative Capital Markets Regulatory Authority (CMRA) is due any day now. But the long-delayed initiative’s prospects remain uncertain.

The court heard the case in late March and, given that the SCC took about six months to produce a ruling in similar cases, a decision on this latest constitutional question probably is imminent.

This time around, the federal government and the attorney general for British Columbia challenged a ruling from the Quebec Court of Appeal, which found that: a) certain aspects of the proposed CMRA model are unconstitutional in that they would give the new regulator’s oversight body, the Council of Ministers, too much power; and b) certain provinces effectively would have veto power over federal legislation.

Several of the provinces that will participate in the CMRA (Ontario, Saskatchewan, New Brunswick and Prince Edward Island, in addition to B.C.) support the appeal, while provinces that currently won’t be part of the project (Alberta and Manitoba, in addition to Quebec) are opposed to it.

The direction the SCC will take in this case is uncertain. The last time the court weighed in on the federal/provincial division of powers in the securities arena, it surprised many constitutional experts by siding with opponents of national regulation.

Once again, the SCC’s decision will be critical, but not conclusive for the CMRA’s future. Even with the court’s blessing, there’s work to be done.

Already, the proposed launch of a co-operative regulator is well past both its initial target date of July 2015 and its subsequent deadline of this autumn. For now, the launch date is under review, pending both the SCC decision and the emergence of the requisite political will to push the CMRA into existence.

Speaking before the Standing Senate Committee on Banking Trade and Commerce on Nov. 1, Kevan Cowan, CEO of the Capital Markets Authority Implementation Organization, the interim entity charged with managing the implementation of the CMRA, expressed optimism that it will happen, indicating that the goal of co-operative regulation is “closer than we’ve ever been.”

Cowan noted that the required legislation is largely complete, although there are a few issues that have yet to be worked out among the participating provinces and the legislation has yet to be passed. “Now, it’s just about the political will and commitment to get this over the goal line,” he told the committee.

To that end, Cowan noted, Nova Scotia has signalled its intention to join the CMRA, which would mean six provinces and one territory (the Yukon) will participate alongside the federal government. As for getting the rest of the provinces and the two remaining territories on board, Cowan said, the hope is that once the CMRA launches and is proven to work, the remaining holdouts will be compelled to sign on eventually. As the matter stands, he said, “We have more than enough critical mass to get this up and running and prove the efficiencies to both investor protection and capital formation that will be the hallmark of this agency.”

In the meantime, skepticism remains among investor advocates and the investment industry about whether the CMRA will be an improvement on the existing system – if the proposed regulator finally does get off the ground.

Investor advocates, who have long supported the concept of national regulation, have turned against the CMRA in the past year, worrying that it will represent a step backward for investors.

Investor advocates have expressed concern that the CMRA’s proposed structure does not include formal investor representation, as the Ontario Securities Commission’s (OSC) Investor Advisory Panel does. Furthermore, they’re concerned the CMRA won’t advance the ball for investor protection from a policy perspective because the CMRA’s proposed structure doesn’t include a statutory duty to prioritize investors’ interests, wouldn’t ban embedded compensation structures and wouldn’t provide financial incentives for whistleblowers to tip off regulators to suspected investment industry misconduct.

Now, some of the industry’s reservations about the proposed system also are resurfacing. In October, the CMRA published the feedback it received from the latest consultation on its proposed rules, which highlights some of the industry’s concerns: namely, the prospectus and registration exemptions that would be adopted by the new agency.

For example, the Portfolio Management Association of Canada’s (PMAC) submission notes that its members are concerned about the apparent lack of harmonization in the proposed rules on exemptions, along with the fact that just how the CMRA will interact with the jurisdictions that don’t choose to participate in the co-operative regulator hasn’t been made clear.

“PMAC is concerned about the impact of the remaining numerous jurisdictional exemptions … which create a non-harmonized instrument within the [CMRA] system,” PMAC’s submission states, adding that some of PMAC’s members fear the proposals “may represent a repackaging of existing regulations with minimal additional benefit.”

Furthermore, PMAC’s submission expresses concern that the proposals would preserve several jurisdictional exemptions that will add “a layer of definitional and regulatory complexity to the existing capital-raising instruments” and won’t result in more flexible, efficient regulation: “The inclusion of jurisdictional exemptions continues to weaken the momentum and progress toward the end-goal of a national securities regulator that streamlines and simplifies regulatory requirements.”

The Investment Industry Association of Canada’s (IIAC) submission echoes the concerns about continued lack of harmonization under the proposed new exemptions regime. The IIAC’s submission calls on the jurisdictions that will belong to the CMRA to “minimize the number of local exemptions unique to their region.”

The IIAC’s submission also calls for the provinces that won’t be part of the CMRA to adopt the same list of proposed exemptions as the CMRA to “reduce regulatory inefficiency for market participants operating across Canada.”

The lack of clarity regarding how the CMRA will work with the regulators in provinces that don’t intend to join the initiative, such as Quebec and Alberta, represents ongoing uncertainty.

“The spectre of duplicative or overlapping regulation and new, more complex reporting and approvals processes for securities registrations, exemptions and transactions continues to be a material concern for stakeholders,” PMAC’s submission states. “We continue to believe that without full participation from coast to coast, the [CMRA] will face material challenges in effectively establishing a world-class securities regulatory regime.”

Meanwhile, the Canadian Foundation for Advancement of Investor Rights’ (a.k.a. FAIR Canada) submission indicates that the investor advocate continues to be concerned about the CMRA’s impact on investor protection: “FAIR Canada believes that strengthened investor protection and more effective regulatory oversight, including compliance and enforcement … of the exempt market must also be included as a critical element of this overall process.” The submission adds that the CMRA must devote more resources to compliance and enforcement in that market than existing regulators do, noting that reports from the OSC and the Alberta Securities Commission point to pervasive compliance issues in the exempt market: “Currently, it is clear that non-compliance in the exempt market is widespread.”

FAIR Canada’s submission also criticizes the plan to carry on with crowdfunding exemptions under the new rules. Instead, the submission proposes reduced investment limits for crowdfunding and mandating complaint-handling standards for crowdfunding portals.