Is Canada’s plan for a single securities regulator on the ropes?

Prime Minister Justin Trudeau and Finance Minister Bill Morneau (REUTERS/Chris Wattie)
Prime Minister Justin Trudeau and Finance Minister Bill Morneau (REUTERS/Chris Wattie)

Provincial squabbling, Québec’s court challenge and questions about the extent of the new government’s commitment are raising questions

In his mandate letter to his new finance minister late last year, Prime Minister Justin Trudeau outlined over two dozen financial priorities for his new Liberal government.

Market watchers noticed the formation of a co-operative stock market regulator was not among them.

It wasn’t mentioned either in Finance Minister Bill Morneau’s maiden budget speech last week — a sharp departure from the last three Tory budgets which have trumpeted the plan.

Has the proposal been derailed? Two sentences buried in chapter eight of the budget document indicate it has not. Ottawa says it intends to release a revised draft of the proposed Capital Markets Stability Act – the key federal piece of a co-operative regime – by the summer.

But a growing number of people are dubious it’s still on the fast track.

Stephen Halperin, co-chair of the corporate securities group of Goodmans LLP in Toronto, says two sentences in the budget document “doesn’t completely supersede the concern that there was no mention of this in the minister of finance mandate letter,” he says. “It’s an awfully long list of things for the minister to occupy himself with ‎before he gets to re-regulation of securities.

 “The bottom line is I still don’t see any evidence that it is the kind of priority for this government that it was for the predecessor government.”

Canada is the only G7 country that does not have a single securities regulator.

Sources with knowledge of the situation insist the Liberals are no less committed to a single market regulator than the Conservatives were. But they acknowledge there are problems. A big one is Québec.

When the Supreme Court of Canada slapped down Ottawa’s original proposal to legislate a national regulator in 2011, saying it impinged on provincial jurisdiction, the push shape shifted to a co-operative model. The difficulty is, some provinces are not co-operating.

Alberta and Québec – two of the country’s largest financial jurisdictions – have said “no thank you” as have Manitoba, Nova Scotia, Newfoundland and Labrador, Nunavut and Northwest Territories.

That leaves Ontario, British Columbia, New Brunswick, Prince Edward Island, Saskatchewan and the Yukon working with the federal government on the new Co-operative Capital Markets Regulatory System.

They’ve signed a memorandum agreeing to adopt a uniform Capital Markets Act to regulate each of their respective jurisdictions, while Ottawa is reworking the Capital Markets Stability Act, which will cover criminal matters, systemic risk and national data collection for all provinces.

Québec is trying to block the plan, and has referred a constitutional challenge directly to the court of appeal.

The Council of Ministers – a joint body of the federal and provincial finance ministers overseeing the plan – appointed Nova Scotia businessman William Black chairman of the board of directors for the Capital Markets Regulatory Authority last fall.

They also recommended nominees for the board of directors, but dropped the writ and called an election before the board members could be announced or appointed. The council also still needs to form a national tribunal and appoint a chief adjudicator.

The new government appears to be less than enthusiastic about pushing full steam ahead until the Québec court challenge is resolved.

“One of the reasons they haven’t moved, as I understand it, is the council would be unlikely to put this whole structure in place while its constitutionality is being challenged,” says John Campion, a securities litigator at Fasken Martineau DuMoulin LLP.

Another well-placed lawyer, who spoke on condition he not be named, says it would be “legally premature to proceed in the face of the challenge in the Québec courts brought by the Québec government. This matter has already been up to the Supreme Court of Canada once.

“Do I know that that’s forever if they lose in the Québec Court of Appeal and go on to lose in the Supreme Court of Canada? No. Are we waiting another two years or so? As it sits right now it would seem so.”

Heather Zordel, a securities practitioner at Gardiner Roberts LLP, believes Finance Minister Morneau is using the time to “rejig” the list of the proposed board members drawn up when the Tories were in power in Ottawa “based on the current government’s perspective. He’ll likely want to appoint at least some of his own people.”

Zordel says the plan is also bogging down among co-operating provinces over the wording of the uniform Act to be adopted by all.

The problem is that in order to draft a common Act and a set of accompanying regulations, some provinces’ rules will have to be thrown out in favour of others.

Ontario and British Columbia, the two financial heavyweights among the co-operating provinces, are said to be sharply at odds, with drafters modeling the uniform act on the BC Securities Act, not Ontario’s.

“You have to wonder how Ontario lost control of this project at the outset and let BC set the terms,” says a lawyer who asked not to be identified. “The only hope now is that Ontario takes a harder line in the negotiations going forward.”

Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP, says she is among those who find it a curious choice given the Ontario Act governs the largest portion by far of Canada’s capital markets

“The choice to model the draft act on the legislation of British Columbia, where the capital market is comprised of smaller issuers and which has historically faced very different securities regulatory issues than Ontario, is very difficult to defend.”

 One highly contentious area, for example, is extra-territoriality. The new uniform legislation has taken BC’s much more expansive approach to its reach, especially in the offshore offering regime.

Olasker likens BC’s “catch and release” method to fishing with dynamite — casting an unnecessarily broad net and then attempting to address unintended negative consequences through exceptions. “The problem is it is impossible to foresee and properly address all of these consequences.”

Unfortunately, she says, “that train has probably left the station. Still, it’s possible to decouple the cars most likely to produce a train wreck, including those marked ‘extra-territorial reach.’”

If not, Olasker and others see a whole new layer of costs being imposed on Canadian issuers and their shareholders through the disruption of transaction mechanics and compliance practices.

She says it is forcing some market participants to ask the question: “Are we being asked to pay too high a price for co-operative securities legislation?”

Campion is optimistic the problems can be worked through. He says the new Liberal government is committed to lowering inter-provincial trade barriers, and the hope is a better general spirit of co-operation may help reconcile provincial differences.

“This is an important initiative for the benefit of Canadian business and its place in the world. Many of us hope these are just temporary bumps on the road.”

“You have to wonder how Ontario lost control of this project at the outset and let BC set the terms,” says a lawyer who asked not to be identified. “The only hope now is that Ontario takes a harder line in the negotiations going forward.”