Once a promising alternative to a national regulator, it appears that the passport model has fallen victim to the grinding reality of actually achieving regulatory reform. Absent a powerful political will to drive the project forward, the passport is just another square in the patchwork tapestry that makes up the Canadian regulatory system.

When a group of provinces got together in 2004 and agreed to a pursue a passport model for securities regulation in Canada, the hope was that it would offer an elegant solution to the decades-long struggle to form a national securities regulator. The passport model promised most of the benefits of a national regulator — streamlined, harmonized rules and simplified access and approvals — without wading into the sticky Constitutional morass of federal vs provincial jurisdiction over securities.

More important, the passport model seemed achievable. Twelve provinces and territories bought in, with Ontario — admittedly, by far, the most important jurisdiction in the Canadian capital markets — the sole exception. The project got off to a promising start, too. The original action plan proposed a deadline for adopting the framework for the passport model about 10 months from the signing of the memorandum of understanding. And it actually achieved its target, in a time frame that is little more than the blink of an eye in terms of regulatory reform. With all of this going for it, the passport model had the potential to deliver a big step forward.

It has become apparent, however, that much of the model’s youthful promise has now faded. While the Provincial-Territorial Council of Ministers of Securities Regulation, which founded and championed the model, is still meeting and positioning the passport as a genuine alternative to a national regulator, actual progress has slowed considerably.

The original action plan promised that highly harmonized securities laws would be drafted and implemented by the end of 2006. Moreover, a review of the fee system was to be completed by the end of the year, too, to ensure that it is consistent with the passport model. After that, the plan imagined that further options for reform — including consolidation — would have been explored by the end of 2007.

These second, third and fourth steps were always going to be the hard part. But with widespread buy-in and plenty of political will on tap, they seemed possible. Yet, as of today, only that first step has been achieved. Highly harmonized laws remain as remote as ever; the fee model review has yet to be started; and further reform appears to be far off in the future, if, indeed, ever.

Mike Berezowsky, public affairs officer for Alberta’s Finance Department, says that the harmonization of securities laws is an ongoing process. “Due in part to the legislative timetable of the various provinces and territories, some aspects of the initiative are behind the initial targets,” he allows.

He notes that a number of jurisdictions, including Alberta, have enacted legislation that will effectively harmonize securities regulation. This includes legislation to implement the passport system, as well as other amendments “that generally harmonize, modernize and streamline securities laws; and civil liability provisions for secondary market disclosure.”

Some other provinces have introduced their own legislative amendments, and all the jurisdictions that have signed onto the passport model have committed to implementing similar provisions in 2007, Berezowsky says. He also points out that the Canadian Securities Administrators will introduce the next phase of the passport system — the registration reform project — in March.

As for the promised fee review, Berezowsky reports that this has been postponed until the full implementation of the passport system is complete. “The passport system is expected to produce operational changes and efficiencies, and a review should be conducted in that context,” he says.

In the meantime, the Council of Ministers considered a draft set of principles on fee structures at their meeting this past June. Regulators are being consulted on that draft.

In other words, individual jurisdictions are proceeding with modest legislative reforms on their individual timetables — and we are a long way from highly harmonized securities laws and a reformed fee structure. The early momentum has slowed, and the conditions that made it possible seem to have evaporated.

Before the passport model was ever proposed, the CSA had spent considerable time and energy working on the uniform securities legislation project, which would have created a single securities act that the provinces could have used to put themselves on the same page, with or without a passport, and with or without a national regulator.

@page_break@However, at about the same time the provincial ministers began touting the passport model, the USL project was allowed to wither and die. Rather than capitalize on the work already done on the USL and turn that into the “highly harmonized” laws the model promised, the provinces rushed ahead to get the first phase of the passport system adopted.

When they did this, critics say, the provinces effectively doomed the passport model to be little more than a modest improvement on the current system rather than a genuine alternative to a national regulator. By going for the quick symbolic success, the provinces squandered what little political will there was for securities regulation reform. Now, with that momentum largely spent, the chore of harmonization has reverted to what the CSA was previously doing — proposing new, harmonized rules one by one.

In the past couple of years, the CSA has adopted harmonized rules in a variety of areas, such as investment fund continuous disclosure, prospectus and registration exemptions, takeover bid rules and, at the end of December, the proposal of a new rule that would harmonize prospectus requirements.

Certainly, harmonized rules are welcome. But they are far from as simple and efficient as the regulatory regime could and should be. For one thing, in the case of the exempt market rule, local exceptions persist; moreover, local authorities have different interpretations of the rules and take variable approaches to approvals. And, rule-by-rule harmonization condemns the regulatory system to making its other efficiency improvements, such as the use of legal delegation to streamline regulatory decision-making, to happen only on a gradual, piecemeal basis.

To some critics, these weaknesses in the passport model were evident from the start. Among the complaints that were heard at the time: the original MOU didn’t make a strong commitment to uniform legislation; it only provided for limited delegation; it wasn’t flexible enough in its decision-making. Moreover, some warned that pursuing a passport model could derail any progress toward a national regulator. That suspicion lingers today.

“Progress on the passport model is an oxymoron,” laments an industry player. “You have to wonder whether there ever was a real intention to implement the plan. You have to wonder about the bona fides of the initiative — were the signatories just kicking sand in the effort to rationalize securities regulation?”

The reality is that, absent a crisis, regulatory reform just isn’t that high on the list of political priorities. When the passport model was proposed, there was effectively a crisis at hand — not a market crisis, but a political one for the provinces. The feds were making noise about taking jurisdiction. (The wise persons’ committee report went so far as to canvass several legal opinions on whether it could claim jurisdiction.) At the same time, the business community was pushing hard for reform.

Faced with that pressure, the provinces leapt into action to avoid a showdown with the feds. Now, however, that pressure has diminished. A succession of minority governments at the federal level has neutered that threat. And the financial services industry has seemingly grown bored with the lack of action and has moved on.

Also, those prime movers of the passport model, the provincial governments, are subject to their own political cycles that hinder momentum. Alberta, which has been at the forefront of the passport initiative, is now on its second premier and third finance minister since it spearheaded the passport model. Facing an election sooner rather than later, it’s unlikely that the securities regulation is going to be a top priority in Alberta anytime soon.

Finally, the major provincial authorities themselves remain on different wavelengths in terms of regulatory philosophies: British Columbia remains enamoured with the idea of principles-based regulation; Ontario is seeking a national regulator; Quebec is perpetually doing its own thing; and there doesn’t seem to be much pressure among the rest for reform. Without that will, nothing gets done.

The one area that has continued to attract some attention is enforcement — specifically, the perception that it simply isn’t tough enough in Canada. This ongoing issue was highlighted in the report released last fall by a task force — commissioned by the Investment Dealers Association of Canada and headed by veteran securities lawyer Tom Allen — that looked at ways to improve the content of securities regulation in Canada. In terms of enforcement, it strayed beyond regulation into criminal and judicial issues, too.

The Council of Ministers addressed this subject at their meeting in late November. At the time, they suggested that they would welcome the opportunity to work with various provincial justice ministers on the creation of a working group, comprising securities regulators, police, prosecutors and policy-makers, to look at capital market fraud. But, here, too, progress is scant. Berezowsky reports that the proposed working group is still being formed, and that it has yet to meet.

Such is the fate of ambitious regulatory reform. As long as no one is challenging the provinces’ authority and nothing, such as a major market failure, threatens their credibility, it appears unlikely they will drive dramatic reform. The feds are unable to do much better. And everyone else seems to have tired of the talk. IE