This article appears in the February 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The final report from Ontario’s Capital Markets Modernization Taskforce proposes sweeping reforms to securities regulation in the province, causing some alarm among the rest of Canada’s securities regulators.
On Jan. 21, the Ontario government released the task force’s final report. The 74 proposals include recommendations to restructure the Ontario Securities Commission (OSC) and the self-regulatory framework, spark competition within the investment industry, drive growth and innovation, and improve enforcement.
The Canadian Securities Administrators (CSA) are concerned that some recommendations could threaten harmonization among the provinces and that new marching orders for the OSC could derail the commission’s role as a champion of investor protection. Furthermore, the task force didn’t embrace the CSA’s passport model.
In February, the CSA issued a letter outlining its concerns with the task force report.
“We’re fully supportive of improving the Canadian regulatory system, and there are a lot of interesting ideas and good recommendations [in the task force’s final report],” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers, in an interview. “But many of them will have an impact outside of Ontario, so we need to work together on them to achieve a harmonized result.”
The report’s recommendations were developed with little input from the CSA, Morisset said, and proposals that would have implications beyond Ontario’s borders need to be more fully fleshed out and worked on at the CSA level.
Some of the report’s recommendations are already in the works at the CSA, while others were examined previously and rejected.
For example, the task force recommended that the early-warning reporting threshold for shareholders should be reduced to 5% of a company’s equity from 10%. (The threshold in other major jurisdictions outside Canada is 5%.) Morisset said he used to think this reduction was a good idea until the CSA made the same proposal several years ago and discovered through consultations that a lower threshold doesn’t make sense for the Canadian market overall.
“At the end of the day, there are a lot of great ideas [in the report], but we need to road-test them more fully,” he said. “And I hope that Ontario’s finance minister will look at the recommendations in the context [that] many of them should be brought within the CSA framework.”
Morisset warned that if proposed reforms aren’t handled at the CSA level, this could create further regulatory dysfunction between Ontario and the rest of the country.
Another key concern for other provincial regulators is the task force’s proposal to expand the OSC’s mandate to include the goal of growing Ontario’s capital markets. This mandate would be added to the regulator’s traditional objectives of ensuring investor protection and fostering fairness and efficiency.
At first blush, requiring the OSC to encourage capital formation and competition alongside its traditional priorities doesn’t sound too radical, Morisset said. But expanding the OSC’s mandate, alongside other recommendations, “will lead to institutional and cultural transformation at the OSC” — something that is “very scary” to the rest of the CSA, he said.
“This would be a potentially scary shift toward the OSC becoming disproportionately industry-centric and less focused on investor protection,” Morisset said, adding that this could also upset the regulatory balance across the country.
The prospect of changing the OSC’s mandate raised concerns among investor advocates too. The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) objected to the idea, citing “the lack of details and analysis” in the task force’s final report.
FAIR Canada argued that other regulators that promote competition as part of their mandate, such as the U.K.’s Financial Conduct Authority, are directed to promote competition in consumers’ interests, which ultimately generates growth as a byproduct of that competition.
“Given the importance the task force placed on this recommendation, we believe the proposed wording to be adopted should be published for comment,” FAIR Canada stated.
The task force’s final report doesn’t recommend Ontario join the CSA’s passport system, despite the CSA’s comment on the task force’s interim report. That comment noted that the passport system provides “single window” access to the capital markets for regulatory decisions such as prospectuses, exemptive relief applications and registration. Adopting the passport rule “would increase OSC and CSA efficiency and significantly reduce regulatory burden” for thousands of market participants, the CSA argued at the time.
Morisset said he’s “extremely disappointed” that the task force didn’t recommend Ontario join the passport system: “That was low-hanging fruit — that was something easy to do.”
The CSA will urge Ontario’s finance minister to embrace the passport model, Morisset said, arguing that such a step represents a “huge benefit” in modernizing the Canadian markets.
For now, what the Ontario government intends to do with the task force’s report remains unclear, but the task force hopes to see action on its recommendations.
Walied Soliman, chair of both the task force and Norton Rose Fullbright Canada LLP, acknowledged during a webinar hosted by the Investment Industry Regulatory Organization of Canada (IIROC) in early February that regulatory reform isn’t much of a vote-getter, but said he hopes the report won’t gather dust.
“I’m very confident that we’ll see a lot of these recommendations moving along very quickly,” Soliman said. “And if we’re lucky, [we’ll see action] as early as the [next provincial] budget.”
Whether regulatory reform will capture the government’s imagination in time for a spring budget remains to be seen. The government launched consultations for its next budget on Jan. 15, just two weeks after installing Peter Bethlenfalvy as the new finance minister. Getting the government’s attention on a subject as dry as securities regulation is even harder when Covid-19 remains an overarching challenge.
The government pledged to review the task force’s recommendations, but hasn’t said much publicly about the report or its proposals.
“The government will now carefully consider the task force’s recommendations — including assessing impact on industry stakeholders — prior to determining a path forward,” said Scott Blodgett, senior media relations advisor at Ontario’s Ministry of Finance. “It is our strong belief that the economy will benefit from modernized and vibrant capital markets that will promote capital formation, innovation and job creation.”