British columbia’s much vaunted securities act, which the B.C. Securities Commission hoped would become the model for securities legislation in other provinces, has been shelved indefinitely.

On Feb. 10, the B.C. government announced that the proposed act, which espouses broad principles of conduct rather than prescriptive rules, has been deferred until at least the end of 2007 to enable the province to focus its efforts on developing the passport system, which calls for regulatory and legal rulings in one jurisdiction to be abided by in the rest of the country.

“It’s not practical to bring in the new act, particularly while all this passport stuff is going on,” says BCSC chairman Doug Hyndman.

Hyndman does not regret the more than four years and $5.5 million that the commission spent developing the legislation, he says: “The work we did on the new legislation is very useful in developing the passport process and in our day-to-day regulatory work. We will come back and take a look in two years, and if the passport system has fizzled out or circumstances have changed so that it makes sense to go ahead with the legislation, it will still be there, ready to go.”

Although the announcement represents a dramatic reversal of policy, it is not a complete surprise. After receiving final reading in the provincial legislature in May 2004, the legislation was scheduled to be proclaimed Nov. 29 of that year. However, just 12 days before the proclamation date, the government announced the legislation would be delayed to give the securities industry more time to prepare.

At the time, John Les, then minister of small business and economic development in Premier Gordon Campbell’s Liberal government, insisted the delay was simply a deferral: “It’s good legislation; it has broad support. We expect in the spring, we will be moving forward with this legislation.”

However, given that more than 14 months had passed with no indication that it would ever be revived, it was becoming obvious that it would never be made law.

Work on the new legislation began in 2001, and was rooted in the commission’s conviction that the securities industry was crippled by excessive regulation.

BCSC vice chairman Brent Aitken, who spearheaded the legislation, noted at the time that the current B.C. Securities Act (and its attendant rules and regulations) weighed two pounds in 1992 and had doubled to 3.6 pounds by 2001. The BCSC, supported by the Liberal B.C. government’s resolve to decrease red tape, managed to reduce the act to 2.6 pounds by early 2002. But, Aitken maintained, the regulatory load was still too heavy.

To address this problem, the commission took a zero-based approach to formulating new legislation. It proposed a code of conduct to replace many detailed rules on conflicts of interest and sales practices for fund managers, portfolio managers, distributors and dealers.

It was expected this would not only reduce red tape but also curtail the ability of industry participants to use loopholes.

Instead of prospectuses, there would be a system of continuous disclosure — through annual information forms, quarterly reports and other disclosure documents — that would ensure investors were provided with all salient information about an issuer on an ongoing basis. Then, if an issuer wanted to sell more stock, all it would have to do is issue a news release.

The legislation also proposed to eliminate the requirement for individual registration of brokers. Instead, there would be “firm only” registration, which would hold employers more clearly accountable for the proficiency and conduct of their representatives. It would still subject representatives to disciplinary action for misconduct.

To ensure adherence to these principles of conduct, the act proposed an array of new enforcement powers, including increasing the maximum penalty to $1 million per offence. (The current maximum is $250,000 for individuals and $500,000 for companies.) And, for the first time, it would allow the commission to order offenders to “disgorge” ill-gotten gains — in other words, relinquish the proceeds of their misdeeds.

The proposed act also gave victims of stock market chicanery new avenues of redress, including a statutory right to sue market participants for misrepresentations made in news releases and in oral statements by company officers, without having to prove that they read or heard the misrepresentations and relied on them when they made their investments.

@page_break@In B.C., the proposed law had received strong industry endorsement. “If it works as well as it should, the B.C. legislation will bring in stronger enforcement, real cost savings and become a template for the rest of Canada,” Ross Sherwood, president and CEO of Vancouver-based investment firm Odlum Brown Ltd. said at the time.

But the Ontario Securities Commission was vehemently opposed to the concept of principles rather than prescriptive rules. In the wake of the Enron Corp. and WorldCom Inc. scandals, the OSC’s then chairman, David Brown, argued that Canada had to follow the lead of the U.S., which was imposing more, not fewer rules.

The Investment Dealers Association of Canada was concerned about the new act’s ability to discharge its regulatory function evenly across Canada. And the Canadian Bankers Association — which represents the banks that own the large securities dealers — was concerned about dealer and issuer liabilities under the act.

The result was that the B.C. government put the new act on hold just days before it was to be proclaimed, a move that surprised industry players and shocked the BCSC. Meanwhile, with the act on hold, the rest of the country has forged ahead.

In September 2004, all provinces and territories — except Ontario — signed a memorandum of understanding to develop the passport system, in which regulators agree that market participants who comply with rules in one jurisdiction are in compliance with all others. To work properly, the system needs a high degree of rule harmonization among provinces and territories.

Ontario, meanwhile, has continued to push for a national securities regulator. At the province’s behest, former Imasco Ltd. chairman (and now Osler Hoskin & Harcourt LLP counsel) Purdy Crawford is leading a committee that, in December, proposed a “Canadian Securities Commission” into which provinces could either opt in or out. This is viewed as a way to kick-start the process without the co-operation of traditional naysayers such as B.C., Alberta and Quebec.

In a commentary in the National Post in January, Joe Oliver, president of the IDA — which is also pushing for national regulation — warned that B.C. “risked being marginalized if it opted out and pressed ahead with its new legislation.”

Hyndman says the BCSC realized it couldn’t do both, and that it had to choose between the passport system and the proposed legislation. With the writing on the wall, he asked the government to “delay” implementation. But the time frame makes it improbable the legislation will ever be revived — at least, not in its current form. IE