Passport to Progress: How to Improve Canadian Securities Regulation

Transcription

1 Passport to Progress: How to Improve Canadian Securities Regulation Douglas M. Hyndman Chair British Columbia Securities Commission Economic Club of Toronto September 17, 2003 Toronto, Ontario Check against delivery.

2 2 Let me begin by thanking both Mark Adler for inviting me to address the Economic Club of Toronto and all of you for taking time out of your busy schedules to hear what I have to say. It is a measure of the importance of today s topic that, when Canadians have so many difficult challenges to occupy our attention, we are carrying on a lively and intensive discussion on how to improve our system of securities regulation. The national debate The title of my speech Passport to Progress might give you a hint about how I think we can move forward to meet the needs of our capital markets and the economy more generally. Canada needs securities regulation that will protect investors and the integrity of our markets while supporting the efficiency and competitiveness of Canadian businesses. What can we do to put ourselves in that position? Fortunately, we have a great opportunity. Many talented people are working through a variety of processes seeking ways to make securities regulation more effective and efficient. o Provincial regulators are working through the Canadian Securities Administrators, under the leadership of my colleague Steve Sibold of the Alberta Securities Commission, to strengthen cooperation and

3 3 harmonize our rules, most notably through our Uniform Securities Law project. o Provincial ministers for securities are working together, under the leadership of Alberta s Revenue Minister, the Honourable Greg Melchin, to develop a passport system that would simplify dealing with provincial securities regulators while enhancing investor protection. o And the federally appointed Wise Persons Committee, chaired by Michael Phelps, is conducting consultations and academic research with a view to recommending the best structure of regulation to meet Canada s needs. Many of you in this room have contributed your very thoughtful and constructive comments to these formal processes, as well as hosting and participating in meetings, symposiums, seminars, forums, and other types of human gatherings aimed at finding common ground and moving forward on real reform. At the BCSC, we have been inviting people in our province and across Canada to join the discussion so that we can take advantage of this national momentum toward real progress. It would be extremely disappointing to

4 4 emerge from this cycle of debate with nothing to show for it. I am sure you would agree. The opportunity at hand My remarks today focus on the one process currently at play that I believe has the greatest likelihood of delivering meaningful improvements to our system of securities regulation sooner rather than later. The process launched by the provincial ministers seems to have enough momentum, and a sufficient degree of consensus, to produce changes that will make Canadian securities regulation work better. The ministers have chosen to work on developing a regulatory passport system as a way of giving market participants the possibility of operating across Canada while dealing mostly with one regulator and one set of rules. I know from the Honourable Kevin Falcon, the minister responsible for securities in British Columbia, that the spirit of cooperation in the ministerial discussions is very high. This bodes well for reaching agreement. Of course, the Ontario minister has other things on her mind right now, but I m sure that Ontario, of all provinces, will want to capitalize on the rare opportunity to move forward on significantly improving the efficiency of regulation for

5 5 an industry that is so important to so many people here in Toronto and throughout this province. What is a regulatory passport? In their June 2003 discussion paper, the provincial ministers described a regulatory passport like this: The passport system would, through legislation, authorize jurisdictions to enter into agreements that would enable a host jurisdiction s regulator to rely on a primary jurisdiction s regulator to perform its supervisory duties regarding market access rules. This system would be relatively simple to implement and could be adopted in a timely manner as it builds on the existing regulatory structure and mutual reliance review system. A regulatory passport would be very much like the passport you carry when travelling abroad. It would be given to a market participant a public company, say, or an investment dealer by the securities commission in its home province. It would then permit the participant to have its securities traded, or to carry on a securities business, in other provinces. There would likely be some border crossing formalities, mainly handled electronically, so the host jurisdiction regulators would know who is operating in their

6 6 markets, but no approvals would be required. It would end the duplication of applications and paperwork that so many of you are concerned about today. Some have compared a regulatory passport to a driver s license and it s a useful analogy. Basically you become licensed in the province that is your home base and are then free to travel and operate with that same license in other provinces. Each province provides mutual recognition for the other provinces licenses. Do we need the same laws for a passport to work? As this system moves ahead, a key issue to be resolved is what degree of rule harmonization is needed to support a passport system? Some would say that we need identical legislation so regulators can be comfortable relying on each other. Others, including me, say we don t need identical rules at least to get started. The lesson of history is that making unanimous agreement on uniformity a pre-requisite for change impedes progress rather than facilitating it. We don t have to wait for that agreement. The rules and the regulatory infrastructure in the major jurisdictions are close enough now that we could rely on each other without having to agree on the changes to make them

7 7 identical. In reality, the building blocks for streamlining Canada s regulatory system are in place across the country today. Our view in British Columbia is that we should commence with a flexible passport system on a flexible foundation mutual recognition. TSX Group president Barbara Stymiest, who is here today, has been talking about mutual recognition of exchanges as a way of facilitating cross border or overseas access to trading listed securities. She has said in that context that we don t need to have the same rules for a passport system and, indeed, that the whole point of a passport system is to bridge differences, not to eliminate them as a pre-requisite to progress. When faced with this analysis, many of the people I have been talking to in the past two months agree that we should have a flexible passport system that accommodates unique innovations in different parts of the country that it would be an important and valuable step in the right direction. A flexible passport would let individual provinces move ahead with reforms but without putting market participants in the awkward position of having to comply with multiple sets of different requirements. A flexible regulatory passport would also recognize and build on the way we have made progress in Canadian securities regulation over the years. Reform

8 8 has resulted from two forces that seem contradictory but are actually complementary. We have had a strong drive for harmonization, coordination, and cooperation among provincial regulators. This has given us a set of national electronic filing and disclosure systems, a mutual reliance review system that provides virtual one-stop shopping for many regulatory applications, and an extensive body of harmonized and uniform regulatory standards. At the same time we have seen individual commissions (or groups of commissions) move ahead of the pack in making innovative changes and reforms to regulation. This is sometimes criticized as hurting harmonization and cooperation but it has been the source of important leaps forward both in stronger investor protection and in streamlining and simplifying rules. New ideas get tested and proven up in one or a few jurisdictions and then spread to others, ultimately becoming the focus of harmonization. Let me give you a few examples: o A few years ago, the British Columbia and Alberta commissions adopted new rules to provide a shorter hold period for investors in privately placed securities of companies that provide upgraded

9 9 continuous disclosure of material information. The experiment proved successful and this rule has now been adopted nationally. o Two years ago, the Ontario Securities Commission created a new exemption for so-called accredited investors, to allow private placements to be sold to institutions and wealthy individuals without artificial restrictions like a minimum investment threshold. That exemption has now been adopted in most other jurisdictions. o Last year the Alberta and British Columbia commissions adopted a new set of private placement exemptions, in addition to the accredited investor rule, to provide clearer and simpler methods for companies to raise capital while ensuring that investors get disclosure, a clear risk warning, and enhanced legal remedies. The new exemptions have now been adopted everywhere but Ontario and Québec. o Alberta pioneered the concept of the capital pool financing vehicle in the 1980s. There were a lot of abuses in the early days, and other jurisdictions looked down their noses at this policy aberration. The Alberta Securities Commission, though, persisted with the policy, working with the former Alberta Stock Exchange to control the abuses. As the capital pool became a successful financing technique

10 10 for start up companies, similar policies were adopted about five years ago in British Columbia and Manitoba and now, more recently, capital pools are accepted in Ontario. o In the late 1980s, the British Columbia government responded to persistent abuses in the junior capital markets by adopting new statutory prohibitions on market fraud and by giving our Commission broader and more effective enforcement powers. Similar legislation has now been adopted in other provinces, most recently in Ontario last year. These have all been significant reforms to our regulatory system. Reform of this type could continue under a flexible passport system, while still providing a single window for regulatory compliance for participants in our capital markets. As Jack Mintz of the CD Howe Institute said in his article in Canadian Business magazine a couple of weeks ago, A flexible passport model could make the Canadian economy more competitive over time. What are the objections? While support for taking this step toward streamlining and reform is growing, I have heard two standard objections to a flexible passport system. One is that competitors from different provinces would be operating under

11 11 different laws, creating confusion for investors and an un-level playing field. The other is that there would be a race to the bottom as jurisdictions cut their standards and compromise investor protection to attract business. The best way to assess these concerns is to look at places where a mutual recognition approach has been tried. And, in case you re wondering, this type of approach has been tried elsewhere. Proponents of a passport system often point to the European Union for inspiration, and mutual recognition certainly has been used there in a variety of fields of regulation, not just securities. But we also have another example much closer to home. In 1991, Canadian and U.S. securities regulators agreed on a cross-border arrangement called the Multijurisdictional Disclosure System, or MJDS, which lets public companies that trade in both markets comply with home country requirements for many purposes. The best-known part of MJDS gives large Canadian issuers a simplified process for offering securities in the U.S. That really is a partial passport system because an issuer still has to obtain formal approval for the offering from the securities regulator in the other country. Nevertheless it is a working example.

12 12 Another part of MJDS does provide a full mutual recognition passport system. Insiders of Canadian companies that are registered in the U.S. do not have to report their trades to the Securities and Exchange Commission as long as they comply with Canadian reporting requirements. Similarly, insiders of U.S. issuers that are reporting issuers in Canada do not have to report their trades to any securities commission in Canada as long as they comply with U.S. reporting requirements. This mutual recognition arrangement has lasted through a dozen years of profound change. At the time MJDS was adopted, reporting requirements were not uniform within Canada. Ontario and British Columbia required reports ten days after month end, the same as the U.S. requirement. Alberta and Québec required earlier reporting, ten days after each trade. As of about two years ago, Canadian jurisdictions had mostly moved to ten days after the trade, while the U.S. still required only monthly reporting. Last year, as part of Sarbanes-Oxley, the U.S. leapfrogged us and required reporting two days after the trade. I expect that, with our electronic filing and disclosure system now up and running, we in Canada will also move to two day reporting before too long.

13 13 This example provides two important lessons. First, a mutual recognition passport system can work smoothly with different requirements in each jurisdiction. Despite the fairly significant differences that have arisen, Canadian and U.S. regulators have been able to accept each other s systems as being credible and effective. Second, this example shows that, over time, a mutual recognition passport system encourages not a race to the bottom no one lowered standards here but a race to the top. Finally let me add an important point: acceptance of the flexible passport model would not mean an end to reform or streamlining. Under this approach, provinces would continue to work toward uniform securities laws and other regulatory harmonization projects. For example, the Ontario government has indicated a willingness to move ahead on the passport approach if acceptance does not come at the expense of further reforms and other solutions. Market pressure and the desire of regulators to follow best practices would continue to provide a strong motivation toward uniformity. No one wants to fall behind and get a reputation as a jurisdiction with lax regulation. A bad reputation is too hard to lose. Nevertheless, to provide assurance that all jurisdictions will maintain high standards of regulation, we should adopt as part of the passport system a set

14 14 of mutually agreed standards and then evaluate the rules and regulatory infrastructure of each jurisdiction against those standards on a regular basis. We actually have a ready-made set of international standards, and a rigorous evaluation methodology, that have been developed by the International Organization of Securities Commissions. We could require that any province wanting to be a home jurisdiction for the passport system must demonstrate that it is in substantial compliance with the IOSCO standards. The way forward You might be thinking that we could do better than this. Why wouldn t we put all of our efforts into creating a national commission? I would respond that it makes sense to take the progress that can be achieved now. As I said earlier, this approach certainly does not preclude in fact it encourages ongoing innovation, more movement towards harmonization, more streamlining. We think it is in the interest of all stakeholders that we take the first major step towards streamlining now and keep the process moving forward on further reforms as we move ahead. What will it take to get moving on this approach? Just the stroke of a pen, forming the basis of an agreement among provinces and territories.

15 15 While there is merit in a number of the reform proposals on the table, a key benefit of the flexible passport system is that it will actually work in the real world of Canada today. It would address concerns about duplication and overlapping securities regimes each market participant would be regulated, for most purposes, by a single regulator and a single set of rules. It would accommodate regulatory innovation harnessing the creative tension between national harmonization and local innovation to make our system of regulation more responsive and more dynamic. And it would not foreclose any further evolution of our system that governments might wish to pursue. I don t profess to be an expert in national politics or federal provincial relations, but some who are have told me that a national commission is a real longshot in the near term. Of course, longshots do sometimes come through. Who knows, the Leafs might win the cup this year, but do you want to bet the farm on it? Remember that we have been debating the national securities commission issue since before the Leafs last won the cup. In fact, it s been an issue almost since the Vancouver Millionaires won the cup, 85 years ago. I m not suggesting that anyone give up the dream of a national regulator. But if we can make progress now, in the typical Canadian way of

16 16 compromise, we might well be able to reach agreement later on what my colleague David Brown has called the real prize. What I am suggesting is that we move forward with a workable passport system now, and not take the risk that no progress at all will come out of the current discussions. Several people who have more experience than I in these things have told me that no progress is the most likely outcome. We in British Columbia want to work with others to prevent this from becoming a self-fulfilling prophecy. That is why I am here today, seeking your support for progress now. Thank you for joining me this morning. I look forward to your questions.