Although debate over whether Canada is finally ready to adopt a national securities regulator is far from over — Quebec and Alberta are loudly objecting to the latest federal effort — the probable shape of regulation this national entity would deliver is starting to emerge.

It has been about 12 months since the Canadian Securities Transition Office was established, and in that time the CSTO has drafted legislation to establish the new authority. The act that the CSTO proposed at the end of May sketches out how the national regulator would be structured and, by implication, how securities regulation could change if this process does move ahead.

The CSTO’s model echoes the vision set out by the Expert Panel on Securities Regulation. For example, the proposed Canadian Securities Regulatory Authoritywould separate the adjudication function from the policy-making and enforcement functions, thereby addressing the perceived bias that dogs the current system. The proposed model also imagines the inclusion of an investor advisory committee, designed to give investors a greater voice in policy-making at the new regulator.

But there’s also plenty that wouldn’t change all that much — in particular, the faces at the regulator and the rules they administer. The expectation is that the employees of existing provincial regulators will also staff the new CSRA. Moreover, the regulations that set out the detailed obligations of firms and individual market players will be largely derived from the existing national rules. Talk of shifting toward a more principles-based system has seemingly faded away; instead, the current rules will persist.

The new regulator will be something of a new animal for Ottawa, in that the model imagines an uncommon degree of independence from the government. The draft act stipulates that the CSRA would be organized as a Crown corporation but would be exempt from various provisions of legislation that govern other Crown corporations, giving the CSRA more latitude to pay staff as it sees fit, direct control over its budgets and the ability to retain surplus revenue rather than handing it over to the federal coffers.

Heather Zordel, partner with Cassels Brock & Blackwell LLP in Toronto and a member of the original expert panel, says she’s pleased that the CSTO is proposing a Crown corporation model and a governance structure that’s similar to what prevails in the corporate world. Zordel says this will ensure the regulator is more flexible, responsive and independent than if it is simply a government department. This proposed structure is similar to the Ontario Securities Commission’s current configuration, she adds, but it is quite a novelty for the feds.

Although the proposed national regulator’s basic structure may be familiar, those industry players hoping that the current system’s regional diversity will be maintained may be disappointed.

“I do not think that there is much in the legislation to preserve regional influence,” notes Steve Sibold, formerly head of the Alberta Securities Commission and now general counsel at Bennett Jones LLP in Calgary. He suggests that the model could have prescribed regional representation on the CSRA board or required the creation of an office responsible for the venture market.

More disappointing, some of the flaws in the current system may also be preserved in the proposed regulator. In particular, the counterintuitive distinction between securities and products that walk and talk like securities (such as segregated funds and principal-protected notes) is maintained.
@page_break@Also, one of the chief failings with the current system — a lack of meaningful public accountability — may persist in the proposed regulator. The CSRA would be accountable to Parliament through the minister of finance; and a council of ministers from the provinces would also have a role in overseeing the CSRA’s work and a hand in important appointments.

But it’s not clear that this will improve accountability. On one hand, the council of ministers may add unnecessary complexity. On the other, securities regulation has a hard enough time getting proper political attention at the provincial level; it may prove even tougher to find an ear on the federal stage.

But Zordel suggests that the higher profile of a national regulator that must answer to the federal finance minister will translate into more public attention for regulation and greater accountability.

On paper, securities regulators are already accountable to their respective governments and legislatures. But, in practice, the subject rarely resonates with politicians or the public, and these mechanisms don’t work all that well.

There’s no easy, obvious answer for this dilemma. But there could be mechanisms created to try to improve regulatory accountability — and this would be the time to do it. Arguably, if you’re willing to endure a constitutional fight to remake regulation, the goal should be to create the optimal system.

There are a couple of reasons not to be more ambitious. One is political expediency. The struggle to create a national regulator has been going on for decades, and Ottawa’s reluctance to impose it on the provinces lends itself to a cautious, incremental approach. Another reason is institutional inertia. There is little incentive for regulators to design tough new oversight mechanisms for their own organizations.

That said, there are areas in which the proposed CSRA would see regulators’ turf expand, which also may raise questions. In addition to protecting investors and fostering fair and efficient markets, a role in ensuring the stability of the financial system is being added to proposed regulator’s mandate.

In the wake of the recent financial crisis, that sounds like a good idea, and it represents a direction that the International Organization of Securities Commissions is pursuing in response to the crisis. At IOSCO’s annual conference in Montreal in mid-June, regulators agreed to adopt eight new principles of securities regulation — including two that oblige them to curb systemic risk.

But it’s not clear what this will mean in practice. An expanded mandate could foreshadow a further diminishing of regulators’ attention to investor protection.

It also remains to be seen whether ensuring stability can be distinguished from protecting the status quo — meaningful regulatory reform, industry innovation and emerging competition theoretically could all be opposed in the name of preserving stability.

IE