Listen to various pro-vincial authorities talk about their resolve to improve securities regulation and you’ll hear promises of ever-increasing harmonization. But look closely at what they do, and their determination to retain power often becomes evident instead.

As much as the common good would be served by efforts to streamline and harmonize regulation, the various factions within the Canadian regulatory mosaic often prefer to protect their own turf. The instinct colours not just dealings among the provinces, but within them, too.

The fact that regulators have the ability to make rules that have as much force as the laws developed by a legislature marks the former as special within the apparatus of government, and with that special status comes power worth tussling over.

Evidence of internal power struggles is trickling out in a variety of recent regulatory initiatives. Proposals that are supposed to be producing more streamlined, harmonized rules are also being counterintuitively burdened with legislative complications.

Take, for example, a proposed national rule concerning prospectus requirements. Its purported purpose is to harmonize the requirements further, thereby reducing compliance costs for issuers. But in direct contradiction, several of the rule’s proposed provisions will not apply in Ontario, apparently because of uncertainty about the scope of the Ontario Securities Commission’s
rule-making authority.

In other words, the OSC appar-ently doesn’t have the power to make the same rule as the rest of the Canadian Securities Administrators. As such, a rule intended to harmonize requirements seems to instead be introducing more regulatory dissonance.

The adoption of different requirements in Ontario “increases the complexity and cost [of the proposed rule] from a compliance standpoint,” notes the Investment Industry Association of Canada in its comment on the rule. “It also results in a non-level regulatory playing field among jurisdictions. It is misleading to characterize such regulation as a national instrument when key features do not apply to the nation’s largest province.”

Moreover, it’s not exactly clear why the OSC wouldn’t have the power to make the same rule as the rest of the CSA, as it is explicitly permitted to make rules regarding prospectus requirements.

RULE-MAKING AUTHORITY

“We would hope that the members of the CSA will seek to harmonize their rule-making authority to ensure that CSA projects requiring the adoption of harmonized rules can be implemented uniformly across Canada,” says the securities law subcommittee of the business law section of the Ontario Bar Association in its comment on the rule. “We urge the Ontario Securities Commission to move as quickly as possible to obtain the rule-making authority needed to allow it to eliminate the Ontario exceptions.”

The OSC can ask for expanded authority, and it has done so in the past. Former OSC vice chairwoman Susan Wolburgh-Jenah recalls, for example, that it had to seek expanded authority to make rules concerning corporate governance.

Yet, Ontario’s government has proven reluctant to give the OSC the sort of wide-ranging authority that some other commissions enjoy. The Five-Year Review Committee recommended that the OSC be given “basket rule-making authority,” which would give it the power to make rules about things that aren’t specifically set out under its purview. The recommendation was countered by a legislative committee report that recommended against basket authority, citing concerns about the adequacy of legislative oversight.

Still, even if the OSC doesn’t have the necessary authority to make the same rules as the rest of the CSA, Ontario could achieve the same policy result with legislative amendments.

This is essentially what Ontario is doing in the case of a proposed new rule governing takeover bids. A new OSC rule on the matter has just been published for comment, along with several proposed legislative amendments that are designed to bring Ontario in line with a CSA rule harmonizing takeover bid requirements.

The approach allows market players to enjoy substantively similar requirements throughout the country, unlike the prospectus rule.

Ontario’s Ministry of Finance explains that it took the approach of amending the legislation dealing with takeover bids, rather than allowing the OSC to make a rule, because the requirements are already covered by the Securities Act. Other jurisdictions also had takeover bid requirements in their acts before the harmonization rule was proposed, but they agreed to rescind them in favour of the CSA rule.

@page_break@GOVERNMENT INFLUENCE

Finance Ontario says that preserving takeover bid requirements in the act means investors can understand them, and businesses can determine if they are subject to them. But it also admits that using legislative amendments allows “legislators to have an appropriate say in setting the key elements of regulation.”

Safeguarding government influence over regulatory policy appears to be a going concern for Ontario, more so than some other provinces in which the regulators have more latitude to operate.

Consider the registration reform project, which is another recent CSA initiative that highlights the disparate approaches that different jurisdictions are taking to policy development. One of the most significant changes planned as part of the registration reform is the introduction of the concept of a “business trigger” for dealer registration, replacing the traditional “trade trigger.” The new concept is to be introduced as a legislative amendment in most jurisdictions, but British Columbia and Manitoba both plan to implement it as an exemption from the existing trade trigger.

In its notice, the B.C. Securities Commission explains that it chose to take this route because it is easier to correct a rule, if necessary: “We have approximately 70 years of jurisprudence about what it means to ‘trade’ in a ‘security.’ We cannot be certain how courts will interpret the term ‘in the business of dealing in securities.’ It would be easier to amend a rule than to obtain amendments to the act if necessary to deal with an unexpected interpretation or application of this new term.”

One argument in favour of greater rule-making authority for the commissions is that it is much easier to revise a rule than it is to secure a legislative amendment. When the CSA was pushing the uniform securities law project as a way to make regulation more streamlined and efficient, it planned to introduce a relatively slim securities act, with most of the substantive requirements contained in the rules. That way, when the regulators wanted to amend, add or delete a requirement, they could do so relatively quickly, without having to get all the provincial legislatures moving in convoy.

Amending legislation has been made easier because “recent governments have shown more willingness to adjust securities legislation on a regular basis through the use of omnibus amending legislation such as budget bills,” says Richard Lococo, chairman of the Ontario Bar Association’s securities law subcommittee and vice president and deputy general counsel with Manulife Financial Corp. in Toronto. Indeed, Ontario is introducing amendments to implement the takeover bid rule as part of its budget bill this year.

Nevertheless, some jurisdictions, such as B.C., are seemingly able to rely much more on rules and less on legislation, but it doesn’t look like Ontario will be following that path any time soon.

The inaction regarding Ontario may come as a disappointment to those who hope for more effective harmonization in the fragmented Canadian regulatory system, but veteran securities lawyer Phil Anisman says it’s important that governments retain their influence over policy in the face of national rules being pushed by regulators.

“The CSA structure diminishes commission accountability because a government is hard pressed to disapprove a national instrument that all other jurisdictions have agreed to,” he says. “In addition, national instruments like the recent registration proposals must inevitably impose pressure on Ontario to join in the ‘passport’ system — at least, for some purposes — thus weakening Ontario’s position on a national commission.”

If Ontario is feeling that pressure, it’s not showing. When the rest of the CSA published a new rule in late March that would implement the next phase of the passport system, the OSC issued its own notice explaining that it won’t be joining. IE