The federal and ontario governments still dream of a single national securities regulator. But while they dream, the alternative “passport model” is being implemented across Canada in slow but steady fashion.

Many issuers, investors and market players agree that one big regulator is the way to go.
But the provinces and territories, within whose jurisdiction securities regulation falls, have been throwing roadblocks in its way. They have no enthusiasm for losing jurisdiction and, as a result, improvements to the system have come mainly in tiny increments.

But pressure for reform is building and two camps have formed: Ontario and the feds tout the idea of a national regulator; the rest of the provinces are pushing for a passport model.
While the passport model would represent some improvement in efficiency, it promises far less than a nationwide rationalization of regulators would deliver.

In an ideal world, the two options would be judged on their merits, with the best plan triumphing. In reality, there is no competition. Ontario and the feds remain philosophically committed to the idea of a single regulator. In the meantime, it’s the passport model that’s being implemented — proving once again that the virtues of logic and efficiency are often no match for an entrenched bureaucracy.

The passport system may not be a model of efficiency, but the speed with which regulators have moved to adopt it is, if nothing else, testimony to the progress that’s possible when governments are actually committed. The ministers first signed the memorandum of understanding to implement the passport system at the end of September
2004 and, less than a year later, the guts of the model have been adopted.

On Sept. 19, a new national rule took effect in every jurisdiction except Ontario that essentially inaugurates the passport system by streamlining the existing mutual reliance mechanism. The move is designed to address one of the criticisms levelled against the existing system — namely, that mutual reliance works far better in theory than practice.

Earlier this year, the national registration system was put into operation, which allows firms and individuals to register in multiple jurisdictions while dealing with only one regulator. On Sept. 14, the Canadian Securities Administrators adopted a new national rule that largely harmonizes registration and prospectus exemptions.

The next major step for the passport system will be drafting more harmonized rules by the end of 2006 — focusing on harmonizing registration categories, and prospectus and continuous filing requirements. That will surely be the biggest test yet. The provinces were already well on their way to harmonized rules with the uniform securities law project, which died before the rules could be adopted.

While the passport system may be an improvement, it’s not enough for some. “Everybody agrees that [the passport system] is a step forward, and that’s why everybody supports it. But some don’t think it goes far enough — that it’s half a cake. But everybody supports it as a constructive and useful improvement,” says Paul Bourque, senior vice president of member regulation at the Investment Dealers Association of Canada in Toronto.

Both Ontario and the feds appear to want the rest of the cake, and neither seems ready to let go of the idea of a single regulator. On Sept. 8, following a speech to the Vancouver
Board of Trade, federal Finance Minister Ralph Goodale revealed he has invited the provincial ministers responsible for securities regulation to a meeting in late September.
(Finance tried to put together a similar meeting in the spring, following the federal budget. It ended up settling for a conference call.)

“I have invited the ministers to a discussion, the objective being to [see] where we’re all at on the regulatory issues and whether there are ways in which progress can be made,” Goodale says. Most of the discussion that has taken place on the issue, he notes, has been either one by one with individual ministers or among senior departmental officials. “It just seemed to be useful, if progress is to be made here, for the ministers themselves to have an opportunity to get together.”

If progress means a single regulator, Quebec certainly has no interest, as its minister of finance, Michel Audet, reiterated in a speech to the International Finance Club of Montreal in mid-September. Audet suggests Quebec opposes a single regulator because it would be a lengthy, costly and risky undertaking and its benefits have not been demonstrated.

@page_break@Audet also argues in defence of retaining local expertise and suggests that in pursuing a single regulator, Ottawa is bowing to pressure from big business, particularly the banks.
“It is crucial that governments take the public interest into account and consequently be attentive not only to the needs and interests of the largest industry players, but also to those of smaller issuers and investors that make up the bulk of the Canadian financial market,” Audet says.

Quebec’s intransigence on the issue is nothing new. And federal officials have suggested that if a number of the major provinces were willing to adopt a new multi-provincial model, it could go ahead without Quebec. The hope would be that Quebec — or any other province that didn’t participate from the start — would eventually come around.
Audet insists, however, that the policy of Quebec retaining its jurisdiction over securities regulation will persist, regardless of who’s in power in the province.

Nevertheless, Ontario is sticking to its call for a single regulator, both by conspicuously opting out of the passport model and by working on its own alternative model. In February, Ontario’s minister responsible for securities regulation, Gerry Phillips (who was, at the time, chairman of the Management Board Secretariat, a position that evolved into minister of government services) appointed Ron Daniels to lead a panel in devising a single-regulator model. The effort was derailed when Daniels left his post at the University of Toronto for the job of provost at the University of Pennsylvania.

In June, Phillips tapped veteran securities lawyer and corporate executive Purdy Crawford to take charge of the panel. Other panelists include Claude Lamoureux, president and CEO of Ontario Teachers’ Pension Plan Board; John MacNaughton, former president and CEO of the Canada Pension Plan Investment Board; Dawn Russell, dean of law at Dalhousie University; BMO Nesbitt Burns Inc. chairman Jacques Menard; Brian Canfield, chairman of Telus Corp.; and Gwyn Morgan, president and CEO of EnCana Corp.

Most panelists are familiar names on the Street, yet senior industry players — both lawyers and regulators — say precious little has been heard from the panel since it was convened. This is not entirely unwelcome, as there’s a sense of consultation fatigue settling over the seemingly never-ending debate on the issue.

Nonetheless, Crawford says, the panel has had three meetings so far, and has another
scheduled. He adds that it hopes to release its conclusions in a discussion paper by the end of October.

While the single-regulator forces draft discussion papers and try to arrange meetings, proponents of the passport model can claim tangible progress for their initiative. It remains to be seen how much the reforms really improve things on the ground.
Harmonization, streamlining and mutual reliance have all been promised before, and it has always fallen short.

The latest round of changes probably won’t do much better. The national exemption rule, for example, maintains a host of local exceptions, thereby preserving complexity and differences among the laws in the jurisdictions, making compliance unnecessarily difficult and costly. Such local autonomy is preserved in the passport model’s memorandum of understanding, promising that future harmonization efforts will almost certainly not deliver complete uniformity.

Compared with a single regulator, the passport model also preserves inefficient duplication among regulators in areas such as enforcement and investor education. It also does nothing to overcome the fundamental antipathy that exists among provincial regulators; they may make nice in public, but behind closed doors staff of the various regulators often complain about one another. While it’s not clear that a single regulator would flush out the intrajurisdictional jealousies and their negative effects, it almost certainly won’t happen without one.

Ultimately, it’s the Canadian economy and capital markets that suffers as a result of the inherent inefficiencies. “This is a very important national issue, just as it is for many provinces a very important provincial issue,” Goodale said in Vancouver. “It has to do with access to capital and the effective use of capital in Canada. And it’s [an issue] that has some important implications for the future of the economy.”

Goodale has dodged the question of how many jurisdictions have accepted his offer for a meeting, saying only that those he has spoken with have shown “a good level of interest.”

Certainly, the industry isn’t getting too excited about the latest federal overture. “I don’t think that anyone is expecting a breakthrough,” says the IDA’s Bourque.

Goodale did express some hope, however, saying, “Whatever their view might be about jurisdictional matters, I think all ministers recognize that access to capital and the efficient modern world-class regulation of capital markets is something that is in everybody’s interest.

“We need a system that keeps up with the rest of the world or we will have trouble getting access to capital. And you do not want your country to be a backwater when it comes to capital markets,” Goodale adds. “And I think whatever your view might be on who [has] jurisdiction and so forth, the objective of making this a world-class, world-caliber system in Canada is an objective that everybody would share.”

Everyone may well share the objective, but getting them to put aside their own parochial interests for the greater good is still going to take either a determined application of political muscle or a good deal of horse-trading. Until the federal government is ready to take that step, we are unlikely to see real progress. IE