The new “passport” system of securities regulation coming into effect on Mar. 17 is designed to streamline the red tape associated with filing a prospectus or requesting a regulatory exemption. But, critics say, it is not an adequate substitute for a national regulator.

The passport system — which is being adopted by all the provinces except Ontario — replaces the so-called “mutual reliance review system.”

Under the new system, companies with headquarters outside Ontario can clear a prospectus review or regulatory exemption with their home commissions and not be subject to further review by other provinces or territories.

However, as Ontario is not participating, companies from outside Ontario wishing to register in that province must still undergo a second review with the Ontario Securities Commission.

The OSC says the new passport system will have little impact on Ontario-headquartered companies, as any prospectus approved by the OSC will be accepted by other provinces with no further review needed. “It’s the status quo for Ontario,” says Michael Balter, a senior lawyer with the OSC.

According to the OSC, there are about 1,200 companies (excluding investment funds) that have their head offices in Ontario and for which the OSC serves as principal regulator. There are about 3,000 additional companies (excluding investment funds) doing business in Ontario.

“We are pleased that Ontario-based reporting issuers will have seamless access to investors outside the province,” says OSC chairman David Wilson. “However, the OSC supports a common securities regulator and, while the passport system represents incremental improvements in some areas of the system, it does not resolve the need to modernize Canada’s securities regulatory structure.”

The passport system for prospectuses takes effect at the same time as the national prospectus requirement from the Canadian Securities Administrators, which aims to harmonize regulations. These streamlined rules will help cut legal fees involved with dealing with multiple regulators and different laws, the CSA says.

But the passport system has its share of critics.

“It’s probably a step in the right direction,” says former Supreme Court justice Peter Cory, who co-authored a report with Marilyn Pilkington, the former dean of Osgoode Hall law school, on Canada’s weak securities enforcement system. “But until you get federal administration of it, it’s going to be insufficient. It will eventually come. In the meantime, it’s too bad that it isn’t there.”

Purdy Crawford, a lawyer with Osler, Hoskin & Harcourt LLP, who chaired the Crawford Panel on a Single Securities Regulator that called for a national securities regulator on June 7, 2006, says the passport system “is a very positive development.

“Ontario would have joined it if there had been commitment to move to a single regulator ultimately,” Crawford says. “That’s the issue.”

Under the new system, companies will still have to pay fees in every province and territory, something Gerry Phillips, Ontario’s former minister of government services and minister responsible for securities regulation, had wanted to eliminate when he established the Crawford panel in May 2005, Crawford says. (Phillips is now Ontario’s minister of energy.)

In some provinces, the fees collected represent three times the actual cost of running the securities commissions.

“It’s a government revenue mechanism. It’s a very inefficient tax, but there it is,” Crawford says. “The papers come in and they stamp them and they charge a fee. They’re jokingly called stamping fees.”

The passport system still leaves a lack of unity of enforcement, he adds, and it remains difficult to build a cohesive group of experts who can co-operate with other enforcement agencies.

Meanwhile, the CSA continues to function as an inefficient decision-making body. “Ontario is still a big participant in the CSA,” Crawford says. “It probably does more than any other province. But because there’s no chain of command, it has to get an agreement from everybody in the CSA. It takes forever to get anything done.” He notes it has taken a long time to get an agreement on what details concerning compensation are disclosed in proxy statements.

All this hurts Canada’s reputation in the international world of finance, in cities such as London and New York, he says. “The perception outside Canada is so negative about our system that it obviously has an impact on the cost of capital and people doing financings here,” Crawford says.

However, as a veteran businessman, he is not surprised by the slow pace of the transformation of Canada’s regulatory landscape.

@page_break@“Wherever we go in the world, change is hard to come by. I’ve seen it in the business world,” Crawford says. “Sometimes, you have to have a catastrophe to get change. I know that’s how they got the securities laws to change in the U.S. in 1933 and 1934, because of the Depression.”

Federal Finance Minister Jim Flaherty has said in the past that the passport system shows the provinces and territories are trying to improve the securities regulatory system. But, in a speech in Montreal on Sept. 24, 2007, he noted that the passport system does not go far enough or fast enough: “With the passport, Canada still has 13 securities regulators with 13 sets of laws, however harmonized, and 13 sets of fees.”

Forensic accountant Al Rosen, of Accountability Research Corp. in Toronto, says the passport system indicates how staff in each provincial commission are “clinging” to their jobs.

“Is this better than what we have now? The answer would be ‘Yes’,” Rosen says. “But how is the investor better off in terms of policing and regulation? In that sense, the passport system is just irrelevant. This has nothing to do with helping investors.”

Investor advocate Diane Urquhart adds that the passport system does not address a fundamental flaw. Canada does not have a securities crime complaints intake system managed by police, but rather the investment industry’s self-regulatory organizations and provincial securities commissions. “The passport system and its announced next phase provide no solutions for improving the enforcement of investor protection laws by Canada’s provincial securities commissions,” she says. IE