The blue-ribbon panel examining Canada’s securities regulatory system says it wants to see regulatory authorities step up enforcement. But, even if its recommendations were adopted — and that’s a big “if” — Canada would only just be catching up.

The report from the task force commissioned by the Investment Dealers Association of Canada proposes sweeping reforms for Canadian capital markets. Yet, despite the scope of its recommendations and the significant changes these reforms would bring to the marketplace, its proposals are not particularly revolutionary. In many ways, they would just bring Canada up to speed with other major markets.

More than half the task force’s recommendations focus on enforcement, largely because of the perception that Canada lags in that department — particularly when compared with the U.S. Indeed, research for the task force by Utpal Bhattacharya, associate professor of finance at the Kelley School of Business at Indiana University, concludes: “Measured against a U.S. benchmark, enforcement of securities laws is weak in Canada.”

Comparing the Ontario Se-curities Commission with the U.S. Securities and Exchange Commission, Bhattacharya finds the SEC enforces securities laws much more vigorously than the OSC: “When scaled according to the size of the stock market, the SEC prosecutes 10 times more cases for all securities laws violations than the OSC, and 20 times more insider trading violations. An examination of insider trading cases shows the SEC resolves the cases faster than the OSC and fines 17 times more per insider trading case than the OSC does.”

These results are important because Bhattacharya’s review of the academic literature in this area finds “overwhelming global evidence that enforcement of securities laws reduces cost of equity and improves liquidity.” The research also indicates that enforcement of insider trading laws decreases the cost of equity, while merely enacting insider trading laws has no positive effect on capital markets. “There is some evidence that it is better to have no insider trading law at all than to have an insider trading law that is not enforced,” the paper notes.

IS REPUTATION DESERVED?

Against this backdrop, reforming the investigation, prosecution and punishment of regulatory violations and capital markets crimes need not be seen as a dramatic change. In fact, a comprehensive effort to improve enforcement performance and enhance Canada’s reputation for lack of enforcement — deserved or not — should be viewed as a reflection of how much work needs to be done to get Canada’s markets up to snuff.

Similarly, the proposal for introducing the concept of the “well-known seasoned issuer” is clearly an effort to catch up with the U.S. practice of granting established firms easy access to the markets. The WKSI concept was launched in the U.S. along with a series of market reforms enacted in 2005, which, among other things, allow qualified firms to access the markets without undergoing an SEC review of their registration statements.

The task force would grant Canadian WKSI status to issuers that qualify for the existing POP system and have a market capitalization of at least $350 million. This would allow these firms to launch secondary offerings without subjecting their offering documents to a regulatory review. Again, the proposal would bring Canada’s system even with the model already pio-neered in the U.S.

The task force’s report also proposes introducing a continuous disclosure system that would facilitate the use of more dynamic, interactive disclosure documents using technology such as eXtensible business reporting language (XBRL), layering information and integrating elements such as embedded audio and video to make disclosure documents more user-friendly.

Other countries are far ahead of Canada in the use of interactive data. In the U.S., SEC chairman Christopher Cox has been touting the advantages of XBRL and interactive data. The SEC has launched a program to allow issuers to file in XBRL, and it recently issued $54 million in contracts for converting its existing EDGAR database to use interactive data and to build tools that allow investors to extract that data for analysis. Governments and companies in parts of Europe and Asia are even further ahead in their use of XBRL.

XBRL is being studied in the Canadian securities industry. In late June, the Canadian Securities Ad-ministrators initiated a survey to assess the market’s familiarity with XBRL.

BEYOND XBRL

The task force proposal suggests that Canada could become a leader in this area by going beyond the use of XBRL into even more exotic disclosure formats. Although that may be possible, there seems to be some way to go before Canada catches up in the use of interactive data in financial reporting.

@page_break@The report also proposes a rethinking of the role of regulation to ensure that regulatory initiatives are addressing a market failure, that rules are subject to a rigorous cost/benefit analysis and that regulators begin favouring principles over detailed rules.

“How will Canada distinguish itself in this ‘beauty contest’ for capital? Certainly not by inadequate or lax regulation. That is never the answer to attract capital,” the report says. “However, Canada can distinguish itself by focusing its regulation, at every available opportunity, on clearly enunciated regulatory principles that do not need a detailed set of interventionist rules for sound implementation.”

This would be a fundamental philosophical shift for Canada. But efforts to minimize regulatory intervention when possible, to choose principles instead of rules and to require cost/benefit analysis of proposed rules would follow a trail blazed by Britain’s Financial Services Authority. In general, the task force’s recommendations about the basic role of regulation mimic the direction the FSA has taken over the past few years.

It is not a criticism to say many of the task force’s ideas aren’t original. Certainly, some of the recommendations are new ideas for Canada, and there are a couple of novel ideas that aren’t adopted as recommendations. And the voluminous background research contains good ideas that weren’t taken up by the task force. The task force doesn’t suggest that its recommendations are particularly revolutionary. “We don’t think we’ve identified some new issue the rest of the market is unaware of,” Tom Allen, chairman of the task force and senior partner at Ogilvy Renault LLP in Toronto, says.

The fact that many of the suggested reforms are not pioneering reflects the distance Canada has to go to catch up with the rest of the world. IE