Joel wiesenfeld’s article (“the Case for Vertical Integration,” Investment Executive, February 2005) is the latest of numerous attempts to address Canada’s uniquely decentralized regulatory structure, this time suggesting integrating the self-regulatory organizations into each of the provincial securities commissions.

The idea may stir up some people who would like to further Ontario’s dominance of the regulatory scene or eliminate self-regulation, an important contributor to pan-Canadian standards. It may be especially attractive to those who are offended by the SROs’ robust market-timing settlements.

But Wiesenfeld’s idea will do little to advance the need for substantive regulatory reform. Rather, if implemented, it would represent a significant step backward. He claims his vision “cannot work any worse than the present configuration.” To the contrary, he has managed to conjure up a minor miracle — a model structurally more inefficient than the current one. Indeed, his recommendation ignores inter-provincial harmonization, a crucial goal of policy-makers, and would exacerbate balkanization, inconsistency, lack of national standards and regulatory risk.

The driver of this dysfunctional approach seems to be Wiesenfeld’s recent experience representing clients in the market-timing cases, whose investigations he characterizes as “regulatory pile-ons.”
They most definitely were not. A pile-on implies that more than one regulator pursued the same respondent for the same offences. In fact, those cases were a textbook example of how the system should work, because each regulator pursued different market participants — the Ontario Securities Commission, the fund companies; the Investment Dealers Association of Canada, the investment dealers; and the Mutual Fund Dealers Association of Canada, a fund distributor.

Motivation aside, the central issue is whether investor protection and market efficiency would be enhanced or eroded by eliminating national self-regulation and entrenching a purely provincial regulatory system.

Self-regulation makes a crucial contribution to policy development through the industry professionals whose expertise and knowledge of markets help achieve regulatory objectives in a manner that is practical, balanced and cost-effective. It also relieves the securities commissions of directly regulating 375 investment dealers and mutual fund distributors and 110,000 individual registrants.

Crucial role

The hundreds of enforcement actions against firms and individuals, including CEOs, CFOs and other officers and directors, attest to the robust nature of the IDA’s enforcement proceedings and, more recently, those of the MFDA and Market Regulation Services Inc. For these same reasons, member and market self-regulation also plays a crucial role in many other countries, including the U.S. and Japan.

But in Canada, the SROs play an additional unique and valuable role. They are the only securities regulatory organizations with a national mandate. IDA capital rules are uniform across the country, thereby safeguarding financial integrity against systemic risk. IDA business conduct rules are also the same everywhere and are applied uniformly, so every investor benefits from the same level of investment protection. Our enforcement actions are based on identical rules and precedents nationally. Our arbitration system and the Ombudsman for Banking Services and Investments provide consumer redress to all Canadians, equally.

The IDA’s contribution to policy development is based on a deep involvement in every region of the country. We reflect the diversity that is Canada and make sure regulatory policy reflects the legitimate interests and perspectives of investors, issuers and intermediaries from St. John’s to Victoria.
That national perspective results in policies that are broadly representative of Canada’s capital markets and better reflect the national interest.

For the moment, regulatory reform is still on the radar screen of our federal and provincial governments, which understand the crucial importance of an efficient regulatory system for Canada’s capital markets. We need ideas that will advance an agenda of regulatory harmonization, investor protection, market integrity and international competitiveness. These are the criteria by which ideas must be judged as effective or counter-productive.

Hopefully, decision-makers will not be diverted by a proposal that would become part of the problem, rather than part of the solution. IE

Joe Oliver is president and CEO of the Investment Dealers Association of Canada.