One of our challenges [at
the B.C. Securities Commission] in making regulation effective is that the complexity of our rules has become an impediment to compliance. Securities regulators in Canada and abroad have responded to every problem that arises by creating a rule. The result is a rule book of mind-numbing detail and complexity.

This might be justifiable if it contributed to better protection of investors and market integrity, but it doesn’t. We mandate mountains of disclosure irrelevant to investors’ needs. Our detailed, prescriptive requirements often undermine our goals, as market participants follow the letter but not the spirit of the rules.

Why did we do this? I can assure you the adoption of all of these rules was a well-intentioned effort to make our markets work better.

Securities regulation tries to circumscribe the conduct of people who manage, in one way or another, the savings of others in a business loaded with potential conflicts of interest. When we provide guidance through principles or standards, those on the front lines ask for more detailed rules so they won’t have to exercise judgment in interpreting the principles.

Unfortunately, that approach puts us on a treadmill, on which we have to keep adopting more rules to deal with the myriad circumstances devised by the creative minds in the capital markets. For example, we have lots of detailed requirements on financial and technical disclosure, but we regularly discover important information for which disclosure is not prescribed. This discovery is usually followed by establishing a committee, which issues a report recommending more rules.

In British Columbia, we are getting off that treadmill and moving to a higher plane by establishing clear, fundamental standards of conduct that apply to everyone in the securities markets. We want to get market participants to think about what is right and wrong, not what they can or can’t do under the rules.

Obviously, we can’t move completely away from prescriptive rules and detailed guidance. The Ten Commandments provide a good guide to ethical behaviour, but society has found some elaboration helpful; in some places, things such as stop signs help traffic move more smoothly. But the balance in Canadian securities regulation has shifted too far toward prescriptive rules.
We have too easily decided that a rule was the answer to every problem. And we made new rules because people weren’t complying with old rules — as if they’d take the new ones seriously.

In B.C., we are reversing the tide.
Four years ago, we launched a project to simplify our rules. Between June 2000 and June 2001, we reviewed our notices, blanket orders and local policies, eliminating more than 140 instruments and streamlining those we kept.

Three years ago, we ramped up the process by establishing a team to review all legislation and rules, and to recommend changes. The objective was to make regulation less burdensome and more effective.

The team reviewed each of our regulatory requirements, asking:

> What problem was it was meant to address?

> Is that still a problem needing attention?

> If so, is a regulatory requirement the best way to address the problem?

> If so, can it be simplified or improved?
At a higher level, the team looked at key elements of the regulatory system and considered whether fundamental changes were needed to bring regulation into the 21st century.

We consulted broadly on the ideas and proposals, and on the resulting draft legislation through publications and focus groups across Canada. The outcome was a new Securities Act, passed last May, and new rules, forms and guidance published in October.

We’ll be ready to bring this [new regime] into force next year, and we have a comprehensive education program to make sure market participants will also be ready. I want to emphasize, though, that developing the new legislation has contributed to the evolution of our thinking about how to regulate effectively, and we’re incorporating that change of thinking into our day-to-day regulatory activities.

It’s important to remember regulation imposes costs. Every time we impose a rule on a public company or a securities firm, that company or firm incurs costs to comply with the rule, and those costs are paid for by investors. Investors pay in the form of lower returns on their investments, and higher fees to advisors and dealers. So regulators had better be sure, before they impose rules, that they’ll deliver value to investors that exceeds the cost.

@page_break@That’s not a concept regulators have spent much thought on. Maybe it’s because I’m an economist and not a lawyer, but I see a securities commission as an agency that delivers something of value to the public using practical tools and resources in economical and effective ways. We can spend the money we get from fees, which [ultimately] come from investors, on compliance and enforcement. We can impose rules, penalties, restrictions and conditions, which create costs that hit investors. If we’re going to be successful, we have to deliver value to investors — our clients.

We need to get that perspective into the national debate. Let’s focus on how we regulate, what the rules say, what burdens they impose and what benefits we’re delivering to investors.

If we move forward at the national level with a new approach to regulation — rules that are less detailed and prescriptive; regulatory administration that attacks threats to investors — we’ll see real reform in Canadian securities regulation. If we stick with the old approach — the thick rule book and excessive market intervention — we won’t deliver real value to the investors who ultimately pay for the system. IE

Douglas Hyndman is chairman of the B.C. Securities Commission. This is excerpted from a Dec. 3 speech in Vancouver to a conference on corporate governance.