With scant evidence of progress toward a more efficient national regulatory structure, Canada’s securities industry is turning its attention to improving the content of regulation. An ambitious task force, struck by the Investment Dealers Association of
Canada for that purpose in late June, is now off and running.

The task force, funded by settlements negotiated in the mutual fund market-timing scandal, is chaired by Tom Allen, senior partner at Toronto-based Ogilvy Renault LLP. The task force is charged with examining issues related to investor protection, access to capital, enforcement, governance and the regulatory burden. It is expected to report by September 2006.

After an inaugural meeting in September, the task force has called for submissions on those issues. In mid-October, it received initial presentations from the B.C. Securities Commission and the Ontario Securities Commission, among others. The group has hired the University of Toronto’s Capital Markets Institute to manage the research side of the initiative, and is scheduling hearings for this month and December.

The first two presentations from regulators looked primarily at the two boldest reform initiatives to be proposed in recent years: the BCSC’s deregulation project and the OSC’s fair-dealing model. Neither effort has been adopted. The BCSC is still waiting for the British Columbia government to pass its new legislation, which was originally scheduled for November 2004. Meanwhile, the FDM has morphed into the more benign-sounding registration reform project, with the goal of implementing incremental reform through the self-regulatory organizations.

Having received the regulatory perspective, the task force is now hearing from the industry. Following a Nov. 17 hearing in Vancouver and a Nov. 18 hearing in Calgary, meetings will shift to Central Canada, with hearings scheduled for Toronto on Dec. 8 and Montreal on Dec. 9. Allen is working on a date for a hearing in Atlantic Canada in early January.

The plan is that the full task force will attend the hearings — no small undertaking, given the size of the group and the competing commitments of its members. As well as Allen, the task force includes Jill Denham, former vice chair in charge of retail markets at CIBC in Toronto; Colleen Moorehead, former CEO of Toronto-based E*Trade Canada Securities; Jacques Ménard, chairman of BMO Nesbitt Burns Inc. in Montreal; Don Black, president and CEO of Greystone Capital Management Inc. in Regina; Columbia University securities law professor John Coffee; Robert Pritchard, president and CEO of Taylor NGL LP in Calgary; Thomas Kierans, former president of the CD Howe Institute in Toronto; Brian Bayley, CEO of Quest Capital Corp. in Vancouver; and former federal finance minister Michael Wilson, chairman and CEO of UBS Asset Management in Toronto.

Deadline for submissions for those appearing at the first round of hearings was the end of October. The task force is posting submissions on its Web site (www.tfmsl.ca). IDA president and CEO Joe Oliver says the association will make its own submission to the task force, probably in January.

Oliver says the IDA doesn’t have any direct involvement with the task force. It receives quarterly updates and pays the bills, but the group otherwise operates independently. “It is delving pretty deeply into some fundamental questions, so I’m hopeful something will emerge … that is useful for decision-makers,” he says.

Apart from the hearings, the major thrust of the task force’s work is commissioning original research into regulatory issues. Allen says at least a dozen such projects are under consideration, and the task force has hired the CMI to find appropriate researchers to carry out the work. Paul Halpern, TSX chair in capital markets at the Rotman School of Management, and Poonam Puri, associate professor of law at York University’s Osgoode Hall Law School, will share the position of research director.

“The task force’s research program will add rigorous and independent evidence to the ongoing debate on the integrity and competitiveness of securities legislation and regulation in Canada,” Halpern said in a statement.

The task force is still firming up the roster of research projects it will undertake.
However, Allen says, it will be looking at “big picture” issues, such as the attributes of a capital market that make it competitive, and the practical consequences of recent major regulatory innovations — whether they achieve their objectives, enhance competition or produce side effects.

@page_break@One example of such an innovation is the recent move in the U.S. to adopt a new category of senior issuer — the well-known “seasoned” issuer — that will enable companies to raise money more easily. Research will look at whether something similar should be adopted in Canada, and what the qualifications for such status should be in our markets.

Another issue up for consideration will be how well regulation has adapted to the world of electronic communication. The group will consider the effectiveness of the bloated paper prospectus in informing investors, and whether there is a way in which such information could be conveyed better and more cost-effectively.

Such innovations are already being considered by other jurisdictions. For example, the U.S. Securities and Exchange Commission recently issued a call for input from the software industry on how to develop interactive online financial disclosure. The SEC says better ways to process financial data could improve disclosure to investors, ease the compliance burden for issuers and make it easier for both regulators and investors to analyse financial data.

It is these kinds of ideas, Allen says, that are worth entertaining. The task force may consider, for example, if the prospectus’ primary function has become simply to establish liability rather than to inform investors. If so, is there a better way to communicate with investors with a shorter document that incorporates the more detailed information by reference?

The danger, he acknowledges, is striking the right balance between adequately alerting investors to risks and providing them with the more optimistic content that so often makes up a prospectus. The issues can become complicated, Allen says: “But they certainly merit discussion.”

The task force has been well received by the investment community, he adds. “It is a fascinating opportunity to look at what could be done [to modernize securities regulation] not, as the expression goes, from 1,000 feet, but from a much higher perspective,” he says.

He stresses that the task force is not aiming to duplicate the work of bodies such as the five-year review committee in Ontario, which took a detailed look at regulation. Instead, the task force intends to take a broader view, both in terms of modernizing regulation and improving the competitiveness of the financial services industry.

So far, Allen says, the reaction from securities regulators has been extremely encouraging. “I think everyone recognizes that there is always room for improvement,” he says. “And if we can contribute some reasonable ideas, I would expect that those ideas would be welcome.”

An industry saddled with archaic regulation can only hope that Allen is correct. But industry veterans probably know better than to bank on innovation and efficiency becoming a regulatory priority, particularly when the new ideas are coming from outside.
IE