14 July 2003

 

 

Canadian Provincial Ministers, Securities Regulation in Canada: An Inter-Provincial Securities Framework

 

Opening Remarks

 

Good morning, my name is Thomas A. Bowman, President and Chief Executive Officer of the Association for Investment Management and Research^® (AIMR^®) and a holder of the Chartered Financial Analyst^® designation.

 

I would like to thank the chair, Minister Greg Melchin and other members of the Steering Committee of Ministers for the opportunity to speak on this important issue on behalf of approximately 20,000 current and aspiring investment professionals in Canada who are members of AIMR or are candidates in our CFA^® curriculum and examination program.

 

Background on AIMR and Summary of AIMR's Views
As a non-profit, individual-membership organization, AIMR brings a different perspective from many other organizations. We do not represent the views of public companies seeking to raise capital, nor do we represent the corporate views of investment firms or funds. Rather, our members are individual investment practitioners doing, in most cases, the day-to-day work of analyzing and recommending securities and managing the investment portfolios of institutional and private clients. Our members represent a large cross section of the end-users, or consumers, of financial information.

 

We have 65,000 members in 117 countries, including 8,500 Canadian members, 7,000 of whom hold the CFA charter. The Charter is earned through a combination of a rigorous series of examinations, actual investment experience, and a written commitment to ethical practices.

 

For over 30 years, AIMR has been advocating efficient capital markets that are ethical, transparent, and provide adequate investor protection. In particular, we believe:

 

1. Regulations and rules governing capital markets should be converged to one set of regulations to promote cross-border market listings and transactions.
2. Oversight and enforcement of regulations must be effective and consistent to ensure the integrity of capital markets.
3. There should be one set of global, high-quality standards for reporting financial information of market transactions and activities.
   

 

Our involvement in standard setting and the promulgation of regulations has been a long tradition of AIMR. AIMR members participate voluntarily on standing committees and task forces of AIMR's global advocacy program. Those members and AIMR staff have developed strong liaison relationships with key regulators and standard setters in Asia, Europe, and North America. These committees frequently meet and discuss current issues with these regulators; recent examples include:

 

• A European summit, involving 15 meetings with various European officials.
• A liaison meeting with members of the Canadian Standing Senate Committee on Banking, Trade and Commerce.
• Regular meetings with national and international standard setters of financial reporting and accounting principles.
  

 

Views on the Current Regulatory System
Over the past several years, AIMR, through its Canadian members has been advocating the harmonization and convergence of securities regulations across all Canadian provinces and territories. In a recent letter to the Canadian Securities Administrators, regarding the proposed Uniform Securities Legislation, AIMR's Canadian Advocacy Committee noted the following:

 

"Although harmonization of provincial securities legislation and oversight would improve the current regulatory system in Canada, we have some concerns about proposed exemptions and variances in the enforcement, including remedies for non-compliance with regulations. Therefore, we consider the current USL proposal as a "stop-gap" approach to securities regulation in Canada and not a long-term solution…

We believe strongly that the overarching issue for Canada's capital markets is the disharmony of securities regulation, or the current provincial regulatory system. A regulatory system that consists of multiple jurisdictions is overly burdensome and unnecessarily complex. Moreover, it results in a higher cost of capital for issuers and lower investment returns for investors. Simply put, a regulatory system that is decentralized and lacks uniformity within capital markets interferes with the efficient operation of these capital markets."

 

In other words, the cornerstone principle for an effective regulatory system is that regulation and enforcement must be consistent for similar transactions and activities. We do not support a multi-tiered approach to regulations and standards for governing similar market activities. Such systems allow for regulatory arbitrage within capital markets, or shopping for jurisdictions that have the least stringent requirements and less rigorous enforcement.

 

Views on the Proposed Passport System
To have an effective and operable passport system, a harmonized set of provincial rules and regulations is an essential starting point. It is not clear to us what "substantially harmonized" regulations would represent because it is not defined in the Discussion Paper.

 

Therefore, we believe that under the proposed passport system it would be difficult, if not impossible, to maintain harmonized rules over time given that the provinces have the authority to enact rules and regulations which can vary from one province to another. A recent example of this authority is the mandate in British Columbia to reduce securities regulations by one third. At present, no other province has a similar mandate. Consequently, this directive represents a substantial change in rules governing market activities in British Columbia, thus, impeding a movement towards harmonizing regulations across Canada's provinces and territories.

 

Additionally, the current effort to harmonize provincial regulations has been underway for several years. A proposed uniform securities legislation (USL) is expected by Spring 2004 for the provinces and territories to consider and ratify. However, it is uncertain if all the provinces and territories will ratify this proposed USL given that certain provincial initiatives are not aligned with this proposal.

 

Once this starting point is achieved, it must be maintained. Under the passport system, necessary changes to regulations would require significant resources for coordinating and building consensus among the provincial securities commissions, and in some cases, ratification by provincial legislative bodies. Such a process would be a very time-consuming and costly approach to regulating the capital markets in Canada. As a result, the multi-jurisdiction system would not be agile enough to respond to the dynamic and fast paced environment of today's capital markets.

 

In other words, we believe that the passport system, as proposed in the discussion paper, does not simplify Canada's regulatory system in respect to other national systems. Another level of bureaucracy would be needed to manage the oversight and maintenance of the core regulations to ensure that they remain harmonized.

 

Finally, the passport system focuses more on the access to capital markets and less on the oversight and enforcement of regulations. Although reducing barriers to entry into the capital markets is necessary for efficient markets, we believe that consistent enforcement across Canadian provinces is just as essential. Inconsistent or varied enforcement of the same regulation results in virtually different regulations. Therefore, we believe that both the ease of access and consistent enforcement of regulations are necessary for efficient capital markets to maintain their integrity and, thus, promote investors' confidence.

 

As a recap, the following are reasons why we believe the proposed passport system would not be a viable and operable regulatory system for governing Canadian, or any national capital market:

 

1. The basis for the passport system of "substantially harmonized regulations" is not defined, which could lead to variances or disharmony in regulations across Canada.
2. A passport system would make it difficult to maintain harmonized rules over time given that each provincial authority has the power to enact rules and regulations.
3. Costs to regulate the system would most likely increase because another level of bureaucracy would be needed to manage the passport system.
4. A multi-jurisdictional system to promulgating new regulations is not agile enough in addressing the needs of today's capital markets.
5. Decentralized and inconsistent enforcement of regulations creates an environment for regulatory arbitrage and fragmented capital markets.

 

AIMR Survey of Canadian Members
Our Canadian members resoundingly agree with this perspective, as evidenced by a member survey on the subject that we concluded just last week. We distributed the web-based survey by email to over 6,700 of our Canadian members and received responses from more than 600 of those members.

 

We asked members:

 

• About the strengths and weaknesses of the current regulatory system.
  
• Whether the system should be reformed.
  
• If so, who should lead this reform?
  
• And, more specifically, thoughts and attitudes on possible solutions to reforming the current system.

 

AIMR members who responded to the survey overwhelmingly agreed with the statement: "Canada should reform its current provincial securities regulatory system." Ninety percent agreed - most of them strongly. Only 10% disagreed with the statement or had no opinion. This attitude is consistent across the provinces.

 

Why the need for reform?

 

• First, almost 9 out of 10 AIMR members cite the amount of duplication in the current system, in terms of regulatory requirements - registration, reporting, et cetera. Half of the respondents said the amount of duplication is very high, and another third said it is fairly high.
• Second, they cite the high cost of compliance in terms of time, money, complexity and effort required. Only 1% of respondents said the cost of compliance is low, compared to 80% who said it is fairly high or very high.
• Third, more than two-thirds said the ability and flexibility of securities regulators to identify and adopt uniform reforms on a timely basis is weak or very weak.
• Fourth, approximately half said the fairness, consistency and strength of enforcement is poor or very poor, compared to 16% who said it is good or very good.
• Fifth, approximately half said the ability of Canadian capital markets to compete internationally is poor or very poor, compared to 17% who said it is good or very good.

 

Given these concerns, what type of reform would AIMR members like to see?

 

• Sixty percent said the current system should be replaced with a single federal regulator; that is, all or most regulatory authority should be transferred to the federal government. In every province, this is the solution most frequently favored by investment professionals.
• Nationally, another 16% said Canada should create a single, inter-provincial regulator that would be jointly overseen by provincial authorities and have uniform regulations. This solution rated highest in Quebec -- where 28% of respondents preferred it.
• Taking the federal solution and the inter-provincial solution together, three quarters surveyed clearly want a single national regulator.
• Compared to these two centralized options, the proposed "passport system" is ranked a weak third choice. Nationwide, only 11% said a "passport" system is the best solution for reform, even with regulatory harmonization. This solution rated highest in British Columbia, with 21% of respondents preferring it, and lowest in Ontario, with 8% preferring it.
• In any case, what is very clear from the survey is that the status quo is not a viable option. Only 6% said the best solution was to "maintain the current provincial system (but continue recent cooperative efforts to harmonize laws, regulations and administrative procedures)."
• Although there are mixed views about who should lead this reform, only 10% said it should be led primarily by the provinces and territories. Most prefer reform to be led by a federal-provincial partnership, by the national SROs or by the federal government. Whichever the case, our members clearly prefer nationally coordinated leadership.

 

The New Model for Regulatory System

 

So, what would AIMR like to see in a reformed regulatory system in Canada?
The fundamental objective of any market regulatory system is to provide an environment for markets that promotes and enhances investor confidence and protection. Our ideal model for a securities regulatory system in Canada would promote financial markets that are:

 

1. Liquid and Efficient. Capital must flow unhindered and must be allocated properly given the underlying risks and expected returns;
2. Transparent and Fair. Information must be reliable and relevant and must flow in a timely and fair-handed manner to all market participants; and
3. Ethical and Sound. Market participants must act with integrity and in accordance with principles of unassailable conduct as they make capital transactions and other related activities.

 

So, what are the elements or characteristics of a regulatory system that cultivates such markets?

 

We believe that the following key elements are necessary for an effective regulatory system in Canada:

 

1. Underlying principles for regulation and enforcement must be consistent for similar transactions and activities;
2. Regulators must possess the requisite expertise and in-depth knowledge of capital markets, including the roles and activities of market participants;
3. The market system must have sufficient flexibility to respond rapidly to changes in the capital markets;
4. The central market system must have sufficient regional representation to ensure sensitivity to emerging niche markets and small -to- medium sized businesses;
5. The system must be cost-effective in terms of fees, compliance costs and other burdens imposed on registrants, issuers, and investors; and
6. Adequate governance must be in place to assure objectivity, appropriate independence and accountability to the government.

 

Closing Remarks

 

In summary, AIMR strongly advocates creation of a single, national securities regulatory authority. This would not necessarily require a transfer of power to the federal government, but it would require a very high level of inter-provincial convergence and cooperation.

 

While this may be challenging, similar efforts are underway by the European Union to move rapidly toward international convergence of regulatory powers. Such a transition should be, in our opinion, the highest priority of the provincial ministers.

 

Harmonization is not enough. Convergence and standardization must be the guiding principles.

 

AIMR appreciates the opportunity to express the views of our members in Canada and commends your Committee on its efforts to seek the best solution for the Canadian market and its participants.

 

Thank you. And now I would be happy to answer any of your questions.