Five year review committee final report reviewing the Securities Act (Ontario)


The activities of participants in Canada's capital markets may be subject to the jurisdiction of securities regulators in up to 13 jurisdictions in Canada and of securities regulators in other parts of the world. Certain activities may also come within the jurisdiction of federal financial institution regulators. Part I of our report discusses how capital markets regulation in Ontario - and across Canada - should be rationalized to increase efficiency without sacrificing investor protection.

Chapter 1 The Need for a Single Regulator

We add our voice to countless others raised in support of the urgent need for a single Canadian securities regulator. This is the most pressing securities regulation issue in Ontario and across Canada. We urge the Minister to assume a leadership role in working with her colleagues across the country to resolve any remaining barriers to the establishment of a single regulator responsible for Canada's capital markets activity. To this end, we view the recent establishment of the Wise Persons' Committee recommended by Harold MacKay to the Federal Finance Minister as an excellent forum to move this important initiative forward.19

1.1 Capital Market Formation Transcends Borders

  1. Ontario's Place in the Canadian Capital Markets

    Transactions between an issuer and investor who are both resident in Ontario are subject to Ontario securities regulation. However, issuers often do not confine their search for prospective investors to those resident within the issuer's own province or territory and must therefore comply with securities regulatory regimes in more than one jurisdiction. This necessarily increases costs. An issuer must retain the services of registrants and counsel, and pay fees in each jurisdiction in which it proposes to issue securities. It must then hire employees or outside advisers to ensure that it complies with its continuous disclosure obligations in each jurisdiction. From a regulatory perspective, each jurisdiction must maintain the resources necessary to administer and enforce its securities law.20

    Issuers and investors alike are affected when the costs of compliance in Canada are higher than they are elsewhere. Increased compliance costs affect our competitive position as a source of capital. This, in turn, affects investment opportunities available to Canadians. Issuers who are in a position to do so may look outside of Canada for lower cost of capital. Those who are not in a position to look elsewhere must accept a higher cost of capital and the implications this has for their performance and ability to compete. In order for Ontario capital markets to remain competitive, they must operate as an integral part of the broader Canadian capital markets.

    Canada's stock exchanges have already reacted to the inefficiencies inherent in regionalization. In order to remain competitive, they have consolidated and restructured21, with the result that each of the three remaining exchanges - the TSX, TSX Venture Exchange and the Bourse de Montréal - now deals exclusively with one segment of the market. Senior issuers list on the TSX, junior issuers list on TSX Venture Exchange and derivatives trade on the Bourse de Montréal.22

  2. Canada's Place in Global Capital Markets

    Canada represents only two per cent of the world's capital markets. 23 There is literally a whole world of opportunity for both issuers and investors outside our borders. In Chapter 2, we discuss the merits of harmonizing Canadian securities laws with those of other major markets (primarily the U.S.) so that Canadian issuers are not faced with the costs of complying with radically different regimes at home and abroad. Here we note that the challenges of harmonizing our securities laws with those of major world markets are multiplied many times over by our current regime. Canada is the only G-7 industrial country that does not regulate its capital markets through a single regulator. Ensuring that Canadian capital markets remain globally competitive is among the most compelling reasons for consolidating Canadian securities regulation under a single regulator.

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1.2 Thirteen Regulators for One Small Market

  1. Our Structure Today

    Because securities regulation in Canada is a matter of provincial jurisdiction, there are 13 different sets of securities laws administered by 13 provincial and territorial regulatory authorities. Many of the statutes are similar to one another. Some have provisions that are entirely distinctive. None of them is identical. Even where the statutory provisions are identical, they may be interpreted and applied differently from one jurisdiction to the next.

    There is also great variance in the status and function of securities regulators across the country. Some are self-funding agencies. Others are Crown corporations. Still others are agencies of their provincial governments. Some formulate policy, make rules, sit as administrative tribunals and hear appeals from decisions of their executive director or staff. Some perform only certain of these functions. Even where securities regulators perform like functions (such as rulemaking), they typically operate within statutory frameworks that are sufficiently distinctive to make co-ordination of efforts across jurisdictions a major challenge.24

    The advantage of the current multiplicity of regimes is that it allows each legislature and securities regulator to develop and administer securities laws in a manner that best serves its local market. Economic activity differs from region to region across the country and securities laws controlled at the provincial level are best able to respond to specific regional needs. However, the price for this local flexibility is a balkanized approach to securities regulation that makes it more time-consuming and expensive for issuers to raise capital across the country. Investors, market participants and their advisers are consistent in their criticism of this approach. In its submission to the Committee, TSX Venture Exchange articulated the frustration expressed by many others with the existence of 13 securities regulatory regimes:

    The complexity in the current regulatory regime is considerably exacerbated by the differences in regulation between provinces. Slight variations in the regulation between provinces may at first seem to be relatively insignificant but these slight differences act as a trap for issuers, their insiders and advisers. In order for an issuer or its insiders to avoid these pitfalls, they must incur additional legal and advisory costs.

    We strongly encourage the Government of Ontario, and each of the other provincial governments to provide a strong incentive to their respective provincial securities commissions to work together to create a standardized set of securities rules which can be adopted in each province. Although there may occasionally be the need for certain local initiatives, we submit that such differences should be the exception. ... We note that local differences have often been justified on the basis of accommodating small business; however, we believe that challenges in this area are not regional and a more consistent approach nationally will improve the access to capital.25
  2. Failed Attempts to Consolidate

    Over the last four decades, there have been several unsuccessful attempts to create a single securities regulatory authority in Canada. In 1964, the Royal Commission on Banking and Finance (known as the Porter Committee) recommended that the federal government establish a single federal agency which would take over the major responsibility for securities regulation from the provinces. The Porter Committee's recommendations were met with mixed reactions. Many felt that, while greater uniformity was desirable, interprovincial co-operation (an alternative considered by the Porter Commission in less detail) was preferable to the establishment of a federal regulatory body.

    In 1979, the federal government published Proposals for a Securities Market Law for Canada, which also proposed a single securities commission for Canada to regulate international and interprovincial issues of and trading in securities.

    In 1994, the federal government released a draft memorandum of understanding 26 proposing an autonomous Canadian Securities Commission to which both the federal and provincial governments would delegate regulatory power. While this effort came closer than previous initiatives to achieving its goal, jurisdictional and political obstacles resulted in the effort being abandoned.27

  3. Federal and Provincial Initiative

    In October 2002, Harold MacKay was commissioned by the Federal Minister of Finance to recommend an approach to reform Canada's securities regulatory framework. Mr. MacKay delivered his report to the Honourable John Manley in November. The report identified several concerns with the current regulatory structure similar to concerns raised in previous reports, including ours. The report states that the '[c]urrent system, as presently operated, is inadequate to meet the challenges of today and tomorrow. While not broken, it must be improved significantly, and in a prompt manner.28 To this end, Mr. MacKay recommended that a Wise Persons' Committee be established by the federal government and interested provinces to review the current regulatory system with a mandate to recommend an appropriate model for securities regulation in Canada. The federal government recently endorsed this recommendation and appointed a committee. The Wise Persons' Committee will:

    • review and assess the strengths and weaknesses of the existing system of securities regulation in Canada;
    • recommend a regulatory structure for Canada that is achievable and that will best meet Canada's needs;
    • recommend a governance model and describe an accountability framework; and
    • submit its report by November 30, 2003.29

  4. Interprovincial Harmonization through the CSA

    The CSA is an informal body comprised of the 13 provincial and territorial securities regulators. It functions through regular meetings of the chairs, vice-chairs and staff of each of the commissions, through ad-hoc interactions between executive directors and staff of each of the commissions, and through staff committees established to deal with joint regulatory initiatives and issues of shared concern. Funding and support resources are drawn from the operating budgets of each of the commissions on a voluntary basis.

    The CSA has made significant contributions to the harmonization of securities laws and the administration of those laws across Canada. Its accomplishments include the establishment or proposed launch of:

    • 'MRRS' - mutual reliance review systems (discussed below) which cover, for example, applications for discretionary relief and the review of prospectuses, annual information forms and rights offering documents;
    • 'SEDAR' - the System for Electronic Document Analysis and Retrieval, which makes documents filed by reporting issuers available to anyone with access to the Internet.
    • 'SEDI' - the System for Electronic Disclosure by Insiders, a central electronic system for insider reporting; and
    • 'NRD' - the National Registration Database, a web-based system that will permit dealers and advisers to file registration forms electronically.

    Through the CSA, Canada's 13 regulators have also achieved legislative uniformity in many areas by adopting national and multilateral instruments. There are now 25 'National Instruments' - rules and regulations developed through the co-operative efforts of the CSA and subsequently adopted in each of the provinces and territories. National Instruments have harmonized the regulation of prospectus disclosure,30 mutual fund regulation31, matters relating to early warning requirements and take-over bids,32 registration issues33 and marketplace operation and trading rules.34

    Notwithstanding the achievements of Canadian regulators, the limitations of the CSA as a vehicle to co-ordinate Canadian securities regulations are apparent. We note five in particular:

    1. Although the CSA seeks to balance national harmonization with regional flexibility, regulators in each jurisdiction are free to insist on their own approach rather than working with their counterparts in other jurisdictions to craft a common solution. This was evidenced by the revisions made to the exempt distribution rules in Ontario in 2001 and in British Columbia and Alberta shortly thereafter.35 As a result of this process, Ontario, on the one hand, and British Columbia and Alberta, on the other, will continue to have different exempt distribution rules, similar in some respects, different in others. In our view, this represents not only a missed opportunity for harmonization, but also a regrettable step backwards for a more rational securities regime in Canada.

    2. National policies and rules cannot be developed and implemented quickly because 13 different regulatory authorities must agree first on policy directions and then on specific requirements. The initiative must then go through the approval process applicable in each jurisdiction (in Ontario, for example, the comment period and Ministerial approval process for rules, discussed more fully in Chapter 7).

    3. The CSA has no powers of enforcement, and accordingly, a co-ordinated approach to enforcement currently must be undertaken on an ad-hoc basis.36 The consolidation of Canada's capital markets and the integration of our markets with other global markets are accentuating national and international enforcement issues. We believe this is critical to the credibility of the Canadian capital markets.

    4. The CSA is accountable to no one. Whether it succeeds or fails will depend on the commitment of each jurisdiction.

    5. We are seeing more divergent and competing visions from different CSA members on the objectives and structure of securities regulation.37 As one observer noted, we 'are not only getting different interpretations of rules, we are getting different philosophies.38 With no co-ordinated focus to all these initiatives, the risk is that rather than pursuing an ideal system, the country's system of securities regulation grows ever more fragmented and cumbersome.

  5. MRRS - A Step in the Right Direction

    The CSA implemented MRRS in 1999.39 MRRS is based on a decision-maker in one jurisdiction being prepared to rely primarily on the analysis and review of staff in another jurisdiction. For example, if an issuer wishes to issue securities in more than one jurisdiction in Canada, MRRS allows the issuer to deal with one principal regulator (usually the regulator in the jurisdiction where the company's head office is located) rather than the regulators in each of the relevant jurisdictions. Staff of the principal jurisdiction provide comments to the issuer on behalf of all of the Commissions and make recommendations. The issuer then receives a single decision document from the regulator in the principal jurisdiction.

    MRRS is a formalized approach to voluntary co-operation among securities regulatory authorities. None of the regulators surrenders any jurisdiction or discretion. Each jurisdiction retains its statutory discretion with respect to all matters being considered under mutual reliance and can 'opt out' at any time and deal with the market participant directly. No changes have been made to securities laws as a result of MRRS. In fact, harmonization is not an objective of MRRS. The CSA has stated only that harmonization is 'an indirect benefit that may be achieved over time' as a result of MRRS.

    MRRS deals with, or is expected in the future to be extended to, the following areas:

    • exemptive relief applications;

    • prospectuses (including long form, short form and mutual fund prospectuses and amendments, and rights offering circulars);

    • waiver applications40;

    • pre-filing discussions;

    • initial and renewal annual information forms;

    • applications for registration, reinstatement of registration and renewal of registration;

    • continuous disclosure documents;

    • investigations and hearings; and

    • rulemaking and policy-making initiatives.

    MRRS is a significant step forward in achieving interprovincial co-ordination. It has streamlined the regulatory process when more than one jurisdiction is involved. However, we share the reservations expressed in a number of submissions about the limitations of MRRS. For example, the Canadian Association of Insurance and Financial Advisers wrote:

    While we have come to appreciate the ability of a lead regulator to co-ordinate a series of interprovincial applications, we believe that the potential for mutual reliance remains to be realized. For example, there can be little justification for the continuing need to file individual paper applications to each regulator and to pay fees for amounts that vary from $0 to $750 to each regulator when the lead or co-ordinating regulator charges $450 and does most of the work.

    We note the following limitations of MRRS:

    • MRRS does not ensure uniformity in the administration of securities laws across Canada. Each jurisdiction retains the right to interpret and apply national instruments in its own way and to apply its own local requirements to whatever issues come before it. In addition, a regulator can 'opt out' of MRRS when it disagrees with the decision reached by the principal regulator. The possibility that one or more regulators could opt out means that MRRS has created neither a predictable nor a uniform approach to securities regulation.

    • MRRS has not reduced costs to the industry. Staff in the non-principal jurisdictions may undertake an independent review on multi-jurisdictional filings. Market participants must still pay the same fees in each jurisdiction as were payable prior to the adoption of mutual reliance.

    • Securities laws are not uniform across all jurisdictions. Differences exist, for example, with respect to prospectus offerings, exemptions from the prospectus and registration requirements, take-over bids, continuous disclosure and enforcement powers. MRRS does not alleviate the need for market participants to be familiar with, seek advice on, and comply with the different requirements that exist across the country. There is considerable cost associated with this exercise.

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1.3 The Final Push for a National Securities Regulator

  1. What Is the Appropriate Model?

    In order for Canadians to have world-class opportunities both to raise capital and to invest their savings, a dramatic change in the structure of our regulatory regime is required. The ongoing consolidation and internationalization of markets around the world demands that we be less focused on provincial and territorial concerns and more focused on national and international harmonization. We believe that the solution is the establishment of a single securities regulator with responsibility for the capital markets across Canada, but with regional offices so that territorial concerns are taken into consideration. There is an urgent need to assign the highest priority to this issue on the policy agenda of our respective governments and regulators.

    Most of the submissions made to the Committee support the creation of a single Canadian securities regulator41. For example, the Ontario Teachers' Pension Plan, one of Canada's largest institutional investors, endorses a single regulator as a means of establishing and enforcing appropriate regulatory standards across the country:

    We come at the problem of regulatory harmonization in the securities area from a deliberately naïve perspective, and prefer to put political and constitutional issues aside in articulating our position. We recognize that, in fact, coming to the 'sensible' conclusion for Canada is not straightforward. A national system of securities regulation is the desirable end result. No matter how good Ontario gets, if the system is based on harmonization and co-operation, and other jurisdictions have less good standards and enforcement capabilities, there will be a 'race to the bottom.'

    Issuers will earn the right to raise money in the capital markets in less rigorous regulatory environments, get listings in the premium markets, and tarnish the reputation of the entire country. The provinces need to recognize that Canada is suffering as a destination for business and capital because they refuse to give up jurisdiction to a first class regulatory regime that is administered and enforced by a first class regulator. Canada needs to get on one page in securities administration if it hopes to compete globally.42

    Another commenter also supports a single regulator:

    With respect to the efficiency of our regulatory model, we believe that much work needs to be done to reduce the duplicative and costly system of provincial regulation that exists in Canada. While much effort has been expended in making our current system operate more effectively, it is simply not credible to argue that the involvement of multiple regulators that exists within the CSA can achieve the efficiency of a national securities regulator43.

    We also believe that international co-operation and collaboration would be made much easier for Ontario (and Canada) through a single securities regime. Under our current regulatory regime, it is not entirely clear who, if anyone, speaks for Canada.

    The Committee makes no recommendation about how a single Canadian securities regulator should be constituted. Previous proposals for a federal regulator could be revived, with efforts renewed to remove the remaining roadblocks44. Alternatively, a supra-provincial body to which the provinces and territories delegate their authority could be established. Other models may also be proposed as this project moves forward.

  2. A Lesson from Australia

    During the Committee's deliberations, we examined with interest the recent experience in Australia, where securities regulation was rationalized along national lines. From a starting point prior to 1970 when corporate and securities laws were matters of state and territorial jurisdiction, through a number of failed initiatives designed to harmonize their approach to securities regulation, the states and territories of Australia ultimately agreed to the enactment of federal legislation dealing with corporate and securities law which draws on state and territorial powers as well as federal powers. The result was the creation of the Australian Securities Commission (now the Australian Securities and Investment Commission) as the national regulator, with full responsibility for the regulation of companies. The Australian experience is described in Appendix G.

    We found the Australian experience instructive because of the range of alternatives that were explored before a solution was achieved. The constitutional issues in Australia are similar to those we face in Canada, as are issues of interjurisdictional co-operation. The Canadian solution may well be different from the Australian solution. However, we encourage all levels of government in Canada and securities regulators in every jurisdiction to follow the Australian lead45. We believe that creativity and compromise will result in a system that allows Canadian issuers and investors to function more effectively in the global marketplace.

  3. Moving Forward in the Meantime

    As we move to establish a single Canadian securities regulatory regime, we must also continue to move forward with our harmonization efforts. This will allow Canadian capital markets to benefit from the economies of harmonization on an incremental basis and will smooth the path to a single regulator.

    1. Harmonization of Securities Laws

      If Canada's 13 provinces and territories could harmonize their securities laws, this would go a long way to simplifying capital markets regulation in Canada. It is clearly an enormous endeavour requiring significant resources, time and political will in order to harmonize legislation in the first instance and then to make amendments to each jurisdiction's legislation in a co-ordinated and harmonized way on an ongoing basis. The CSA has embarked on a uniform securities law project, with 'a target of developing a uniform securities act and rules by each jurisdiction of Canada on a fast-tracked basis.46 We applaud these efforts and encourage the CSA to move this important initiative forward on a priority basis. In addition, we encourage the CSA to use the opportunity which the uniform securities law project presents to also consider updating and simplifying the current regulatory system in Canada.47 We stress, however, that we do not view the development of uniform securities law in Canada as a substitute for the ultimate goal of creating a single securities regulator. In this regard, we believe that even if the CSA is able to achieve uniformity, it will be difficult, in practice, to maintain. In particular, our current regulatory structure leaves too many opportunities for individual CSA members to apply and interpret uniform law differently and undertake new local initiatives subsequent to the adoption of the uniform law.

      We also encourage the Commission to take the lead in promoting harmonization and co-operation within the CSA. We note that one commenter stressed that the Commission should be particularly sensitive to the issue of harmonization when exercising its rulemaking authority:

      We believe the goals of increased harmonization and co-operation should be given greater weight in the development of rules and policies by the Commission. We recognize that the Commission must retain the ability to act in the public interest even if the result is to further fragment the Canadian securities regulatory regime, but we would suggest that this should be the exceptional case ... .In the absence of a [single securities] regulator, the Commission should recognize the need for coherent, harmonized Canadian regulation when exercising its rulemaking authority.

      We would propose that when exercising its rulemaking authority the Commission should:

      1. adopt rules that have the effect of increasing the degree of harmonization and co-operation;

      2. make every effort to have the same rule adopted by the other Canadian securities regulatory authorities (to the extent necessary); and

      3. not adopt any rule that has the effect of lessening the degree of harmonization or co-operation, unless such rule is required in the public interest notwithstanding such effect.48

      We agree with the commenter that the foregoing principles are important and should be addressed by the Commission in the rulemaking process (see also the discussion in Chapter 7 on rulemaking and cost-benefit analyses). We note, however, that some commenters expressed concern about placing too much emphasis on harmonization. In particular, some believe that harmonization may result in a 'race to the bottom' in policy development and a 'regulatory time lag' that is not acceptable to address changes in capital markets and to provide useful remedies for the benefit of investors.49 In this regard, one commenter stated:

      We recommend that the focus of the Final Report not distract from the needs to protect the important and extensive capital markets that operate in Ontario because of an undue emphasis to attempt to 'harmonize' Ontario's regulatory regime on a Pan-Canadian provincial basis. Ontario's own securities regulatory initiatives historically have attempted to achieve world class status based on a principle-based investor protection requirements that create confidence in the integrity of the capital markets that operate in Ontario.

      First and foremost, Ontario's objectives should continue to be to provide regulatory leadership for the benefit of the securities industry and capital markets in Ontario and for the protection to investors who trade in Ontario. History has shown that Ontario's leadership in setting capital market standards has also had a positive effect in Canada and on other provincial regulatory regimes.50

      We are very cognizant of the limitations of harmonization as a means for setting policy agendas. As noted previously, however, we view harmonization as a means to an end: the creation of a single securities regulator in Canada.

    2. Delegation and Mutual Recognition

      Even if securities laws across the country were harmonized, this would not eliminate the administrative duplication inherent in having 13 regulators administering and enforcing those laws. In our view, the most efficient interim solution to deal with this issue is for each of the jurisdictions to move expeditiously to amend their legislation in two ways. First, securities regulators should be empowered to delegate authority to a securities regulator in another Canadian jurisdiction - moving from our current system of voluntary mutual reliance to a system of true reliance. This would eliminate the need for staff in each jurisdiction to undertake an independent review of a multi-jurisdictional filing and would eliminate the entitlement of individual jurisdictions to opt out. Some have called for a 'passport system' to be adopted in Canada whereby regulatory approval by one CSA member would be recognized by all CSA members. The statutory power to delegate is vital if a passport system is to function effectively. It must be recognized, however, that the effectiveness of a delegation model will ultimately depend on the willingness of all CSA jurisdictions to enact similar provisions ceding jurisdiction. On a practical level, it will also be imperative that each CSA jurisdiction exercise regulatory restraint and truly rely upon the body to which it has delegated authority.

      Second, securities laws across the country should be amended to provide for 'mutual recognition.' Mutual recognition is based on the principle that the rules of the jurisdiction having the closest connection to a transaction or market participant (the 'home jurisdiction') will govern that transaction or market participant, and other affected jurisdictions (the 'host jurisdictions') will recognize and allow those rules to be applied in place of their own. Mutual recognition could be particularly helpful in a delegation environment where the laws of each jurisdiction are not completely uniform. In particular, it would obviate the need for a commission that is exercising authority that has been delegated by another commission from having to apply several different laws to a registration application, a prospectus, or an application for exemptive relief. The concept of mutual recognition forms the basis of the Canadian - U.S. multi-jurisdictional disclosure system (MJDS). It also implicitly underlies other rules which provide exemptive relief from the need to comply with Canadian law provided the laws of certain foreign jurisdictions are complied with instead.51 If compliance with foreign law is viewed as a satisfactory proxy for compliance with Canadian securities regulatory requirements, we believe that Canadian regulators should be able to put aside historical differences and regional preferences to conclude that where requirements in different provinces are similar (albeit not identical), compliance with the laws of another province will suffice.52

      We recognize that there may be constitutional and other legal issues that will need to be addressed in implementing this proposal. For example, consequential amendments to the Act's immunity provisions may be necessary to extend immunity from liability to other provincial securities regulators and their employees who act as delegatees.53 We encourage the CSA to work on implementing an effective delegation and mutual recognition model and to provide for delegation and mutual recognition as part of its uniform securities law project.54 We also urge the provincial governments across Canada to support these important initiatives.


  1. We recommend that the provinces, territories and federal government work towards the creation of a single securities regulator with responsibility for the capital markets across Canada. To this end, we strongly encourage the Government of Ontario to actively support the Wise Persons' Committee recently established by the Federal Finance Minister.

  2. In the meantime, we recommend that certain steps be undertaken by securities regulators to simplify the current regulatory regime in Canada: (i) We recommend that securities regualtors continue to harmonize securities regulation across Canada; (ii) We recommend that securities regulators be given the authority to delegate any power, duty, function or responsibility conferred on them to another securities regulatory authority within Canada, and that they actively engage in delegation among themselves. We therefore recommend the Act be amended to give the Commission this delegation authority, and that the necessary consequential amendments to the immunity provisions in the Act be made; (iii) We recommend that securities legislation across the country be amended to provide for 'mutual recognition' so that the rules of the jurisdiction having the closest connection to a transaction or market participant will govern that transaction or market participant, and other affected jurisdictions will recognize and allow those rules to be applied in place of their own.

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Chapter 2 Thinking Globally in Securities Regulation

'Globalization' is more than just a catchphrase in the context of capital markets. Increasingly, issuers are able to raise capital in whatever market around the globe offers them the best arrangements while investors are able to trade on a variety of exchanges around the world.

This chapter describes the impact of globalization on the Canadian capital markets and proposes two areas in which Canada should take the steps necessary to be a global participant. It also endorses the Commission's participation in IOSCO.

2.1 Global Harmonization

The globalization of capital markets is evidenced by a number of trends, including:

  • the growth of cross-border securities transactions;

  • an increasing number of additional listings of Canadian companies on foreign exchanges;

  • the emergence of multinational securities firms servicing businesses from offices around the world; and

  • an increasing number of strategic alliances and other connections between regulated financial markets in different parts of the world.55

Canadian issuers have looked to the U.S. market in particular, whether to obtain a listing on NASDAQ or the NYSE, access the investment grade or high yield debt market or simply to broaden their financing prospects. Many Canadian issuers have listings on U.S. stock exchanges. 56 The introduction of MJDS in 1991 facilitated access to the U.S. capital markets by Canadian reporting issuers and vice versa.

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2.2 Financial Reporting for Global Accessibility

  1. Current GAAP Requirements

    Ontario securities and corporate laws currently require Canadian reporting issuers to prepare their financial statements in accordance with Canadian GAAP. Foreign reporting issuers may use the accounting principles of their home country, but must provide a reconciliation to Canadian GAAP for financial statements in a prospectus.57

    Canadian issuers who access the U.S. capital markets often consider it desirable to provide financial information to the U.S. marketplace that conforms to U.S. GAAP. This enhances the ability of American investors and analysts to understand the issuer's financial performance and to compare it to the performance of other issuers who report in U.S. GAAP. However, this requires the Canadian issuer to prepare two complete sets of financial statements, one in Canadian GAAP to satisfy Canadian legal requirements and one in U.S. GAAP. Foreign issuers who access the Canadian capital markets have the same problem in reverse, although they more often elect to simply provide a reconciliation to Canadian GAAP. Preparing two sets of financial statements or a reconciliation is both time-consuming and expensive for the issuer.

  2. CSA Discussion Paper

    In March 2001, the CSA issued Discussion Paper 52-401 Financial Reporting in Canada's Capital Markets (the 'Financial Reporting Discussion Paper') for comment.58 It notes that 'the growth of cross-border financing activity has focussed attention on impediments to companies wishing to offer their securities or have them listed in another jurisdiction.' It identifies differences in accounting standards as one such impediment. The CSA sought comment on possible changes to existing requirements dealing with accounting standards used for financial statements filed by issuers. In particular, the CSA was considering whether Canadian and foreign reporting issuers should be permitted to use U.S. GAAP or the international accounting standards (IAS) developed by the International Accounting Standards Committee (IASC), which were recently endorsed by IOSCO, with limited or no reconciliation to Canadian GAAP.59

    The Financial Reporting Discussion Paper identified several issues that would need to be considered in deciding whether to accept IAS or U.S. GAAP for regulatory filings in Canada:

    • Comparability - Having as many as three sets of accounting standards for reporting issuers would make it difficult for Canadian investors and analysts to compare results for different companies. The CSA acknowledged, however, that the peer group for some Canadian companies comprises foreign companies that do not prepare Canadian GAAP statements.

    • Professional Capacity - Canadian accounting professionals have limited knowledge of U.S. GAAP and virtually no experience with IAS. A significant effort would be required for companies, auditors and regulators to build expertise to support a rigorous interpretation and application of such standards.

    • Other Statutory Requirements - Even if the CSA were to permit Canadian companies to prepare their financial statements in accordance with U.S. GAAP, companies may still be required under corporate or tax statutes to file Canadian GAAP financial statements. The potential benefits flowing from a CSA exemption would only be fully realized if these other requirements could also be changed.

  3. Proposed National Instrument 51-102 Continuous Disclosure Obligations

    In June 2002, the CSA published for comment proposed National Instrument 51-102 Continuous Disclosure Obligations.60 The National Instrument seeks to harmonize continuous disclosure requirements across Canada and will apply to all issuers, other than investment funds, that are reporting issuers in one or more Canadian jurisdictions. The National Instrument proposes to permit SEC Issuers 61 to file with the CSA financial statements prepared in accordance with U.S. GAAP, subject to a two-year reconciliation period.

  4. Proposed National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers

    In June 2002, the CSA published for comment proposed National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. The proposed national instrument permits eligible foreign issuers to file financial statements prepared in accordance with IAS, without reconciliation to Canadian GAAP.62

  5. The Time Has Come to Move Away from Canadian GAAP

    We share the concerns expressed in the Financial Reporting Discussion Paper that the current multitude of accounting standards involved in cross-border offerings and listings can make it very difficult to compare financial information from issuers based in different countries. In this regard, NI 71-102 specifically contemplates permitting eligible foreign issuers reporting in Canada to use financial statements prepared in accordance with IAS without reconciliation to Canadian GAAP. We strongly encourage the move by Canadian regulators and standard setters to IAS and hope that Canada will continue to play a role in this area - with the ultimate goal of permitting both domestic and foreign issuers to report under IAS without a reconciliation to Canadian GAAP.

    We note that some commenters on our Draft Report believe that much work remains to be done before Canada should fully embrace IAS. For example, there is no effective structure in place yet for the enforcement of IAS63. Also, IAS are not fully developed in terms of detailed interpretation and practice. We agree that these are legitimate concerns that will need to be considered by Canadian regulators prior to acceptance of IAS. We believe that Canadian and foreign standard setters have evidenced a renewed commitment to achieving the convergence of national standards into a universal set of standards under the leadership of the International Accounting Standards Board (IASB). We view the recent announcement by the U.S. Financial Accounting Standards Board and IASB to bring about convergence between their different standards by 2005 as an extremely positive step toward achieving global accounting harmonization and thus potentially accelerating the time horizon for acceptance of IAS in Canada.64

    While we strongly support the development of robust IAS, we also believe that a more immediate issue for Canada at this time is whether reporting issuers (both Canadian and foreign) should be permitted to prepare their statements in accordance with U.S. GAAP without reconciliation to Canadian GAAP. In this regard, we do not think that we can afford to ignore the vast amount of cross-border activity that exists between Canada and the U.S. When an issuer competes with other issuers who prepare their statements in accordance with U.S. GAAP, investors (and issuers) may be at a disadvantage if financial statements are reported in accordance with Canadian GAAP only.

    There are differences between U.S. and Canadian GAAP. For example, Canadian accounting standards are, generally speaking, less prescriptive and rule oriented than U.S. standards, thereby providing more scope for the application of professional judgement. There are also substantive differences in specific areas, such as accounting for foreign currency transactions and inventory accounting. In some cases, these differences can have very significant effects on the way in which the results of operations are reported. Nevertheless, Canadian standard setters have been working over the years to reduce the number of differences between Canadian and U.S. GAAP.65 Consequently, we question whether the remaining differences between Canadian and U.S. GAAP are so significant that they should preclude the use of U.S. GAAP by Canadian and foreign companies. Moreover, given the familiarity of the Canadian investment community with U.S. GAAP, we are not convinced that investor protection concerns justify the requirement for financial statements to be prepared in accordance with Canadian GAAP in these situations.

    We received a number of submissions supporting the use of U.S. GAAP in financial statements that are required to be filed with the Commission.66 The IDA noted that '[i]ndividual investors would not be disadvantaged if Canadian corporations reported in U.S. GAAP.' Another commenter stated:

    My vision is that any company could raise capital in Canada and satisfy its reporting obligations by preparing its documents in accordance with Canadian GAAP, U.S. GAAP, or International GAAP, without reconciliation to a Canadian benchmark. I believe that U.S. GAAP must be permitted, in spite of a world wide desire for common global standards, until such time as the U.S. embraces International standards as acceptable for primary financial statements within U.S. borders. Although not without its faults, U.S. GAAP is arguably the most comprehensive and sophisticated set of accounting principles in the world. ...

    The driving factor behind acceptance of a set of standards should not be local views as to what is the 'right' accounting, but recognition that the standards have been developed by a competent body with sufficient resources, processes and input from all interested parties that the product can be considered high quality. I think that can now be said of both International and U.S. accounting standard setting.

    ... Although, as I noted earlier, there are differences even in a 'harmonized' world, I don't believe that the nuances in the differences are sufficient to require a reconciliation to aid a user's understanding of the financial statements. (I like Molson's Joe, and like him, I am Canadian, but I don't think that we need to be so 'Canadian' that we won't let people read and interpret International and U.S. GAAP financial statements without a Canadian GAAP interpretation beside it.) There is nothing so unique about Canadian standards that a Canadian user is placed at undue risk by relying on financial statements prepared in accordance with ... U.S. standards (recognizing that a user should be reasonably well-informed to start, and actually read and interpret the financial statements and notes). Moreover, as noted, it is critical that we turn to the processes by which the standards are developed, and not personal or local views on specific outputs.67

    The Committee received no compelling submissions opposing the proposal to allow both foreign and Canadian companies to prepare their financial statements in accordance with U.S. GAAP.68

    We recognize that the acceptance of U.S. GAAP raises some challenging transitional issues, such as the degree of professional capacity which exists in Canada to deal with U.S. standards. However, the benefits that will accrue to issuers and investors eclipse the challenges that these issues present. At the same time, however, it will be appropriate to require that Canadian issuers that choose to prepare only U.S. GAAP financial statements provide a reconciliation to Canadian GAAP for a transitional period. This would maintain a link to the information that Canadian investors have been accustomed to receiving. Whether and when the transitional period would end should be determined by the regulators, who should take into account whether eliminating the requirement for reconciliation would raise significant comparability issues for analysts and investors.

    We received some comment letters which suggested that reconciliation should be required on an ongoing basis until such time as Canadian and U.S. GAAP are harmonized or IAS are more formally adopted in Canada.69 In this regard, the commenters believed that requiring an ongoing reconciliation from U.S. GAAP financial statements to Canadian GAAP would not be unduly burdensome from a cost perspective, particularly since the differences between U.S. and Canadian GAAP are decreasing. While we believe that ongoing reconciliation may be appropriate for some Canadian companies because of comparability concerns, we believe that this end can be achieved through good management and pressure from the investing community. We prefer that market forces dictate the 'right' result rather than imposing ongoing reconciliation through regulation.

    Finally, we recognize that the Enron crisis has raised some questions about U.S. GAAP. For example, some observers believe that prescriptive U.S. accounting rules have fostered a 'check the boxes' mentality, whereby people focus on technical compliance. These issues are being studied by various groups in the U.S. and are being followed closely in Canada.70 Notwithstanding these legitimate concerns, we believe that it continues to be important for Canadian issuers to be able to stay in step with requirements imposed by U.S. regulations without duplicating efforts for Canadian reporting purposes. Also, despite recent corporate failures in the U.S. we continue to have faith generally in the robustness of U.S. accounting standards.

  1. We strongly encourage the move by both Canadian regulators and standard setters to IAS and hope that Canada will continue to play a role in this area - with the ultimate goal of permitting both domestic and foreign issuers to report under IAS without a reconciliation to Canadian GAAP.

  2. We recommend that the Commission and the CSA permit both foreign and Canadian companies to prepare their financial statements in accordance with U.S. GAAP. Issuers who prepare their financial statements in accordance with U.S. GAAP should be required to reconcile the statements to Canadian GAAP during a transitional period. The duration of the transitional period should be determined by the regulators taking into account whether significant comparability issues will arise if no reconciliation is provided.

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2.3 Book-Based Settlement and the Indirect Holding System

Legislation in Canada dealing with the holding, transfer and pledging of securities and interests in securities was developed at a time when securities were held under what is referred to as the direct holding system. In such a system, owners of securities had a direct legal relationship with the issuer. That is, owners would either be recorded on the issuer's register or be in physical possession of negotiable security certificates. If a holder of a registered certificate wished to transfer or pledge its interest in securities, it endorsed the certificate, usually in blank, to the purchaser or the pledgee. The purchaser might, in turn, surrender it to the issuer for a new certificate, whereupon the issuer would amend its records to show the purchaser as the registered holder of the certificate. In the case of a pledge of securities, the pledgee either held the certificate to prevent the pledgor from selling or pledging the security to someone else or required that the pledgee be shown as the registered holder on the issuer's register and that a new certificate be issued to it.

Today, securities held by Canadian investors and by investors in other parts of the world are most commonly held through the indirect holding system, sometimes also referred to as the book-based system. Under the indirect holding system, a security is not registered in the name of the person who owns that security. Instead, investors' interests in securities are recorded on the books of an intermediary - typically a securities dealer, bank or custodian. The intermediary, in turn, has its interests recorded on the books of another intermediary, and so on up the chain of intermediaries until some intermediary - usually a central securities depository - is either recorded on the issuer's register or is in physical possession of negotiable security certificates.

Most commercial transactions in the securities markets are effected by book entries in securities accounts maintained by intermediaries for their customers. Issues may arise in those transactions concerning the nature of the property interest acquired or the validity of a transfer or pledge. If a purchaser/pledgee is not certain which laws apply to the transaction, or whether those laws clearly and inarguably recognize its property interest, then the purchaser/pledgee will attribute legal risk to the transaction. This legal risk may increase transaction costs or, if the legal risk is deemed unacceptable, cause market participants to avoid the jurisdiction altogether. Also, lack of harmonization of substantive laws and conflicts-of-law can make the transferring and pledging of indirectly held securities between jurisdictions inconvenient and, in some cases, altogether unmanageable.

There is a need for a nationally harmonized (and ultimately globally harmonized) commercial-property law framework to oversee the holding, transferring and pledging of securities and interests in securities. Action has been taken in this regard in many parts of the world, including the U.S. In the U.S., Article 8 of the Uniform Commercial Code (UCC), which governs transfers and pledges of securities, was revised in 1994 to deal with securities held through the indirect holding system as well as both certificated and uncertificated securities in the direct holding system. No such changes have been made to legislation in Ontario71 or elsewhere in Canada. This creates legal uncertainty particularly for Canadian market participants active in cross-border securities trading and pledging transactions. It places them at a competitive disadvantage vis-à-vis market participants in the U.S., the European Union and certain other jurisdictions that have reformed, or are in the process of reforming, their substantive laws and conflict-of-laws rules in this area.72

After the enactment of revised Article 8 of the UCC, the Uniform Law Conference of Canada established a committee to study the issue of law reform in Canada. It proposed the adoption of a uniform provincial Securities Transfer Act (USTA) in Canada, substantially modelled on UCC revised Article 8. This project has been ongoing for a number of years in Canada. In recent years, a CSA Task Force has become involved in this project, and is overseeing the drafting of the USTA legislation with the help of a consortium of provincial legislative counsel.73 The need to update the legislation in Canada is clear and compelling. Canadian legislation in this area is currently out of step with legislation in the U.S. and certain other countries. The legal foundation for the holding transfer and pledging of securities is of fundamental importance to the clearing and settlement process, and to efficient and safe capital markets.

We strongly encourage the Commission and the CSA to continue developing securities transfer legislation modelled on revised Article 8 of the UCC in the U.S. and we urge governments across Canada to ensure that such legislation is adopted on a uniform basis as soon as possible.

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2.4 Participation in IOSCO

Securities regulators from around the world have sought to harmonize their approach to regulation through IOSCO. 74Established in 1975, IOSCO promotes mutual co-operation among members through discussion of matters such as market regulation policies and the development of international standards in securities regulation. Over the years, the Commission has been an active participant in IOSCO.

IOSCO has completed or has work in progress on a range of matters, including:

  • a multilateral memorandum of understanding for securities regulators regarding information sharing and co-operation in enforcement matters;

  • statements of principles to guide securities regulators in dealing with critical areas necessary for auditor oversight;

  • recommendations for securities settlement systems intended to promote the implementation of measures that can enhance international financial stability, reduce risks, increase efficiency and provide adequate safeguards for investors; and
    disclosure standards for cross-border initial public offerings and listing of equity securities.

IOSCO is not a global securities regulator, nor does it have any authority to adopt and implement binding international regulatory principles. While the establishment of a true global securities regulator has intuitive appeal given the nature of today's capital markets, we believe that the practical approach for dealing with globalization is to increase the degree of collaboration and co-operation between securities regulators in different countries.

We encourage the Commission to continue its ongoing participation in IOSCO initiatives and urge the Commission to adopt, in a timely fashion, changes to its rules to implement the international standards emanating from IOSCO.

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Chapter 3 Securities Regulation - Only Part of the Capital Markets Picture

3.1 History of Regulation of Financial Markets in Canada

Until 1987, regulation of Canadian financial markets was based on the 'four pillars' structure of financial services delivery. Institutions forming each of the four pillars had the exclusive right to provide a core financial service. Banks offered loans and accepted deposits; insurance companies sold insurance; trust companies provided estate and trust services and offered mortgages; and securities firms underwrote public offerings and sold securities to the public.75 There was little overlap between products and services, and each pillar was governed by its own legislation and regulator.

The rules separating the four pillars were eliminated in 198776 and each of the four types of providers began to offer products and services in areas from which they previously had been excluded. Notwithstanding this change, each type of institution (and the products and securities they offer) continues to be regulated by its own statute. As a result, similar activities or products are regulated in a different fashion depending on the nature of the financial institution offering the product or service.

For example, mutual funds and segregated funds are functionally equivalent from the viewpoint of the investor. Each is a managed pool of funds that is invested in a variety of instruments including debt instruments and equity. Mutual fund units or shares are securities and are therefore governed by securities regulation. They are subject to very detailed rules regarding: how they are structured and organized; disclosure with respect to the product, which must be pre-cleared by securities regulators and given to purchasers; conflicts of interest for portfolio managers of mutual funds; and fees which must be disclosed to purchasers. Segregated funds, on the other hand, are structured as contracts of insurance and therefore are not considered 'securities' for purposes of the Act. They are instead governed by the requirements of the Insurance Act77 and are not subject to the same type of regulation with respect to disclosure, conflict of interest, sales practices and fees as are mutual funds. A retail investor may buy an interest in both a mutual fund and a segregated fund and, despite the similarity of the products, receive different types of protection.

The regulation of portfolio managers is another example. Portfolio managers buy and sell securities for their clients on a discretionary basis. Their clients are pension funds, estates, mutual funds, segregated funds and private clients. While their function is the same for all types of clients, the standards and requirements imposed on portfolio managers are significantly different, depending on where the portfolio manager works. Portfolio managers licensed by the securities commissions are subject to the highest standards of education and experience of any category of registration under securities legislation. On the other hand, trust company employees making investment decisions for estates and pension administrators investing pension funds are not subject to any proficiency requirements under federal or provincial financial institution or pension legislation. The rules designed to protect clients from conflicts of interest in the portfolio manager's investment decision-making, and those governing the conduct of the portfolio manager in the market (such as prohibitions on 'front-running' client orders) differ substantially depending upon whether the portfolio manager is registered under securities legislation or is governed by trust or pension legislation.78

Finally, considerable regulatory uncertainty exists concerning the regulation of trading in securities by pension plans. In Canada, there has been a move away from defined benefit plans (in which the employer is responsible for operating the plan, investing its assets, and paying a defined monthly benefit to eligible pensioners), toward defined contribution pension plans (DC) or group registered retirement savings plans (RRSP). In some DC plans and in group RRSPs, the employee makes the decision about how to invest his or her portion of the plan assets, choosing from a range of investment options made available by the plan sponsor. It is the employee who bears the risk of the investment decision in terms of what the employee's ultimate pension benefit will be.

Current securities legislation provides that securities can be sold to a pension plan without having to comply with the prospectus and registration requirements of the Act if the securities are sold by a financial intermediary directly to the plan or its sponsor and there is no communication with or disclosure to the employees.79 This exemption may have made sense for defined benefit pension plans, where the plan administrator often retained qualified money managers to manage the investments of the plan and the employee was not making any investment decision, such that the protections of the Act were considered unnecessary. However, the Committee believes that the approach to regulating DC plans and group RRSPs should be revisited to ensure that employees who make their own investment decisions receive adequate disclosure and investor protection.

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3.2 The Current Regulatory Response - Functional Regulation

  1. Background

    On February 24, 1999, the CSA issued a concept paper entitled 'A Framework for Market Regulation in Canada' (the 'Concept Paper').80 The Concept Paper began by reviewing the historical basis for regulation in Canada and noted the regulatory mismatches that have arisen because of the continuing institutional nature of regulation in Canada. The Concept Paper advocated a move toward a 'functional mode of regulation':

    Clearly, the framework [for regulation] should be improved and all levels of government should expand their initiatives to eliminate unnecessary duplication and overlap in the regulatory system. However, the nature and degree of the mismatches in the system lead to the conclusion that there is a need for something more than incremental improvements. It is time for a more comparable regulatory treatment of similar market services and products regardless of the way in which those products and services are packaged or the nature of the institution offering them. In Canada a more effective regulatory framework for the financial services industry would be achieved by moving to a functional mode of regulation. Functional regulation allocates regulatory responsibilities along regulatory objective parameters: usually divided between prudential regulation and market (or consumer protection) regulation.81

    The focus of functional regulation is on activities and particular products rather than on the nature of the institutions that carry on the activities or offer the products or services. Functionally equivalent or similar products and services are given similar regulatory treatment even when they are provided by very different entities.82 The Concept Paper would have vested market regulation for all financial services providers in the provinces and territories. The provincially based market regulators would be responsible for oversight of market conduct, integrity of markets and consumer protection including:

    • consumer protection regimes applicable to all financial institutions;

    • market integrity rules governing market conduct of all participants in securities markets;

    • the regulation of securities, derivatives and futures markets; and

    • oversight of industry SROs.

  2. Provincial Initiatives

    On September 8, 2000, the Ministry of Finance released a discussion paper entitled 'Improving Ontario's Financial Services Regulation: Establishing a Single Financial Services Regulator - a Discussion Paper.83 Among other things, this discussion paper proposed a merger of the Commission and the Financial Services Commission of Ontario. This merger would effect a form of functional regulation similar to that proposed by the CSA in the Concept Paper. The merged entity, the Ontario Financial Services Commission, would regulate securities, pension, insurance and other financial services sectors in Ontario and would provide a level playing field with respect to disclosure, proficiency, market conduct and market integrity for participants in these markets in Ontario.84

    On December 11, 2002, the Quebec government passed Bill 107, which will consolidate financial services regulation in the province under a new super-agency, the Agence d'encadrement du secteur financier du Québec. The new agency will replace five provincial agencies, including the Commission des valueurs mobilières du Québec, that now oversee all areas of the province's financial sector, including insurance products, securities, mutual funds and retirement savings.

    On July 10, 2002, the Saskatchewan government passed the Saskatchewan Financial Services Commission Act. The act created the Saskatchewan Financial Services Commission, effective February 1, 2003, which integrates the three major organizations that regulate financial services in Saskatchewan: the Saskatchewan Securities Commission, the Financial Institution Section of the Consumer Protection Branch and the Pension Benefits Branch of the Saskatchewan Department of Justice.

  3. Joint Forum of Financial Market Regulators

    The CSA, the Canadian Council of Insurance Regulators and the Canadian Association of Pension Supervisory Authorities established the Joint Forum of Financial Market Regulators (the 'Joint Forum'). This is a national forum of pension, securities and insurance regulators established to discuss common issues arising from the growing integration of the financial services sector. In its fall 2000 newsletter, the Joint Forum indicated its intention to focus on regulatory harmonization in the following areas:

    • proficiency requirements for financial planners;

    • individual variable insurance contracts [segregated funds] and mutual funds;

    • investment disclosure in capital accumulation plans [i.e., defined contribution, group RRSP, deferred profit sharing]; and

    • intermediary proficiency and licensing.

    On April 27, 2001, the Joint Forum released for comment a consultation paper on capital accumulation plans, which proposed broad regulatory principles for disclosure and other regulatory protections for capital accumulation plans.

  4. International Trends Toward Functional Regulation

    Finally, on an international level, the Committee notes that in 1999 Australia brought all financial institutions under the supervision of three regulators: the Australian Securities and Investments Commission (which regulates market conduct of members of the securities, banking, insurance and pension industries), the Australian Prudential Regulation Authority and the Reserve Bank of Australia. Meanwhile, in the U.K., the FSA has become the sole regulator of the financial services industry.

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3.3 One Step Further - Harmonized Functional Regulation

In the Committee's view, the ideal regulatory model in Canada would be one of 'harmonized functional regulation.' This combines the harmonization of securities regulation across the country as recommended in Chapter 1 and functional regulation as discussed above. While harmonized national securities regulation will result in a rationalized approach to regulating the securities industry in Canada, it will not eliminate the current inconsistencies discussed above in regulating functionally similar products and services. It is therefore also desirable, in our view, to pursue the harmonization of functional regulation nationally, once a single securities regulator has been established. This would result in all products, services and activities in the financial services sector being regulated identically across the country, regardless of the entity which offers the product or service or engages in the activity.

In our Draft Report we proposed a model of harmonized functional regulation in which regulation would distinguish between market conduct and products, on the one hand, and prudential issues on the other. Market activities would be regulated by one market conduct regulator and by one prudential regulator. All products and services, and the behaviour and conduct of those manufacturing and selling them, would be under the regulatory jurisdiction of the market conduct regulator. This regulator could continue to rely on recognized SROs as appropriate.85 All matters relating to fiscal solvency of the institutions would fall under the auspices of a prudential regulator. This is the model that has been adopted in Australia. This is contrasted with the model adopted in the U.K., which brings market and prudential regulation under the auspices of a single regulator - the FSA.

We received a number of comments on our recommendation that there be a move to adopt a harmonized system of functional regulation.86 Some commenters felt that harmonized functional regulation was a laudable objective but they believed it could only occur after a single securities regulator was in place.

Other commenters discussed our model, which proposed a separate market conduct regulator and a separate prudential regulator. The Ontario Teachers' Pension Plan agreed there must be a distinction between market conduct on the one hand and prudential regulation on the other but noted that 'in both cases there should be a move towards the unification of each of the regulating groups.'

The IDA had a very different view on whether the two regulatory functions should be vested in separate regulators:

It is noteworthy that while many of the Committee's recommendations have as their objective more integrated seamless regulatory structures, the Committee recommends the fragmentation of market conduct and fiscal solvency regulation. The IDA as a national securities market conduct and fiscal solvency regulator has a unique perspective on this issue. It has been our experience that market misconduct is sometimes associated with the deteriorating financial health of the firm. The market conduct and fiscal solvency examinations are an important source of risk assessment data which is a prerequisite for preventative, forward looking regulatory intervention. In addition, it is interesting to note that the NASDR and NYSE are both a market conduct and fiscal solvency regulator and indeed they make no organizational distinction between the two areas. It is our belief, supported by our experience that market conduct and fiscal solvency regulation are more effective if done in an integrated fashion.

We acknowledge that in practice there is rarely a clean separation between market conduct regulation and prudential regulation. We also acknowledge the IDA's point that, at least at the SRO level in Canada, both functions are combined within the one SRO and this is desirable given the synergies it creates. We are mindful that our recommendations for restructuring the financial services regulatory framework must be practical. In this Final Report, while we recommend a single securities regulator, we have not proposed a model by which we believe a single securities regulator should be achieved. If it is achieved by a federal body being established, then harmonized functional regulation could occur within one body by bringing the current prudential regulator, OSFI, into the federal securities regulator (or by merging them). If, however, a single securities regulator is achieved by a pan-provincial solution, it would be more difficult to merge this entity with OSFI. Ultimately our vision for harmonized functional regulation is that there is one set of regulation of all financial services market participants. Market conduct and prudential regulation could be undertaken by a single regulator or may, of necessity, be divided between two regulators. If the latter, we would expect the two regulators to work together very closely both to minimize regulatory duplication and to ensure that the benefits of combined market conduct and prudential regulation identified by the IDA in their submission are fully realized.

The Committee is further aware that a move from the current Canadian model of separate provincial regulation of securities laws, on the one hand, and regulation of insurance companies, pension plans, trust companies and financial institutions, on the other hand, to a fully harmonized and integrated model of regulation cannot occur overnight. Incremental steps need to be taken. During the transition from the current regulatory model to a single securities regulator and then to harmonized functional regulation, we urge continued regulatory co-operation and co-ordination in the financial services field through participation in worthwhile endeavours such as the Joint Forum.

We also recognize that if the proposed OSC/FSCO merger is implemented, it could be more of a challenge to achieve harmonized functional regulation, particularly where other provinces have not adopted a merged structure.87 We urge those involved in the Commission/FSCO merger process to ensure that the structure they propose is flexible enough to accommodate the establishment of harmonized functional regulation.

We recommend that the CSA, provincial and territorial governments and the federal government move to adopt a system of harmonized functional regulation across Canada, whereby all Canadian capital market activities, products and conduct are regulated in a similar fashion and are subject to similar standards despite the differences between the various institutions or market participants offering the products or services to the marketplace. In the interim, we encourage continued regulatory co-operation and co-ordination in the financial services area through participation in endeavours such as the Joint Forum of Financial Regulators.

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  1. Letter to The Honourable John Manley, P.C., M.P. from Harold MacKay, dated November 15, 2002 ( On March 4, 2003, the Wise Persons' Committee was appointed and will be chaired by Michael Phelps.
  2. The FSA estimates that the total cost of Canadian regulation, including prudential regulation and market regulation of securities, insurance, listing and clearing to be about 218 million pounds ($493 million, at current exchange rates) versus the FSA's own regulatory cost of about 220 million pounds ($497 million) and in Australia at 104 million pounds ($235 million). Approximately 3,780 people are employed in Canada to regulate the financial services sector versus 2,765 in the U.K. and 2,113 in Australia. See FSA Annual Report 2000/01 Appendix 5: Comparison of Costs of Regulation in Different Jurisdictions (
  3. Prior to this restructuring, the Vancouver Stock Exchange, Alberta Stock Exchange, Winnipeg Stock Exchange, TSX, Montreal Exchange and CDN operated independently of one another and, to a large extent, competed with one another for listings.
  4. In August 2001, the TSX acquired the TSX Venture Exchange.
  5. This figure is often used and, while it may have various meanings, in this context we refer to the weight given to Canadian equities in the MSCI World Index. The MSCI World Index is based on the market value of 86 selected equities based on MSCI criteria.
  6. See discussion on Rulemaking in Chapter 7.
  7. See comment letter on the Issues List of TSX Venture Exchange.
  8. Memorandum of Understanding Regarding the Regulation of Securities in Canada (1994), 17 OSCB 4394.
  9. See also the discussion of the history of prior attempts to reform securities regulation in Canada found in A. Douglas Harris, A Symposium on Canadian Securities Regulation: Harmonization or Nationalization? "White Paper" (University of Toronto Capital Markets Institute, October 2002) pp. 5-69.
  10. Supra note 19.
  11. These are applications for relief that are evidenced by the issue of a receipt for a prospectus.
  12. E.g., National Instrument 41-101 Prospectus Disclosure Requirements (2000), 23 OSCB (Supp.) 619.
  13. E.g., National Instrument 81-101 Mutual Fund Prospectus Disclosure (2000), 23 OSCB (Supp.) 3, National Instrument 81-102 Mutual Funds (2000), 23 OSCB (Supp.) 59 and National Instrument 81-105 Mutual Fund Sales Practices (1998), 21 OSCB 2713.
  14. E.g., National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (2000), 23 OSCB 1372, and National Instrument 62-202 Take-Over Bids - Defensive Tactics (1997), 20 OSCB 3525.
  15. E.g., National Instrument 35-101 Conditional Exemption from Registration for United States Broker-Dealers and Agents (2000), 23 OSCB 8511.
  16. E.g., National Instrument 21-101 Marketplace Operation (2001), 24 OSCB 6591 and National Instrument 23-101 Trading Rules (2001), 24 OSCB 6635.
  17. See for Ontario, Rule 45-501 Exempt Distributions (2001), 24 OSCB 7011 and for Alberta and B.C., Multilateral Instrument 45-103 Capital Raising Exemptions (BCN 2002/16).
  18. The discussion of MRRS below makes reference to the CSA's expressed intention to engage in some degree of voluntary co-operation in this area.
  19. For example, the Commission generally supports the idea of a national regulator, the Alberta Securities Commission is leading the CSA's Uniform Securities Law project, and the BCSC is advocating streamlining and simplification before more harmonization (see the BCSC's "New Proposals for Securities Regulation," June 2002). More recently, CSA members appear to be at odds over the appropriate Canadian response to the U.S. Sarbanes-Oxley Act of 2002.
  20. Tom Hockin, "It's time to get practical about a national securities commission," National Post (October 3, 2002).
  21. Memorandum of Understanding - Mutual Reliance Review System (1999), 22 OSCB 6813.
  22. These are applications for relief that are evidenced by the issue of a receipt for a prospectus.
  23. See comment letters of Simon Romano, BMO Nesbitt Burns, Canadian Bankers Association, Gowling Lafleur Henderson LLP, Securities Subcommittee of the Ontario Bar Association, the TSX, Certified General Accountants of Ontario, Association for Investment Management and Research, Canadian Association of Insurance & Financial Advisors, Ontario Teachers' Pension Plan, Canadian Investor Relations Institute, PricewaterhouseCoopers LLP, Investment Counsel Association of Canada, Certified General Accountants Association of Canada, Royal Bank of Canada, and the IDA.
  24. See comment letter on the Issues List of the Ontario Teachers' Pension Plan.
  25. See comment letter on the Issues List of Torys LLP.
  26. To date, the provinces have asserted jurisdiction over securities regulation under their power over property and civil rights in the province. However, over the past few decades securities activity has gradually acquired more of an inter-provincial or national character. The Federal Government therefore may have overlapping jurisdiction in securities regulatory matters under its "trade and commerce power" or under its general power to create legislation for the "Peace, Order, and Good Government of Canada."
  27. Several judicial decisions had cast doubt on the constitutionality of Australia's framework for corporate regulation. See Ian Ramsay, The Unravelling of Australia's Federal Corporate Law, ( Bulletin0031.htm) for a full discussion of the relevant cases. In response to these judicial decisions, legislation was recently introduced in which Australian states referred their constitutional powers with respect to corporate regulation and the regulation of the securities and futures industries to the Australian Commonwealth. See the Australian Securities and Investment Commission Act, 2001 (No. 51, 2001), section 11.
  28. See CSA's Uniform Securities Legislation Project - Blueprint for Uniform Securities Law for Canada (2003), 26 OSCB.
  29. For example, the CSA should consider some of the initiatives of the BCSC's Deregulation Project.
  30. See comment letter of Ogilvy Renault.
  31. See comment letters of Fasken Martineau DuMoulin LLP and the Canadian Bankers Association.
  32. See comment letter of Fasken Martineau DuMoulin LLP
  33. See proposed National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers.
  34. See for example, Alberta Securities Commission Rule 41-501 Use of Prospectus Complying with Ontario Securities Commission Requirements, which permits issuers to satisfy certain of the prospectus requirements under Alberta securities law by complying with OSC Rule 41-501 General Prospectus Requirements.
  35. The Act, subsection 141(1).
  36. We note that the CSA's Uniform Securities Legislation Project - Blueprint for Uniform Securities Laws for Canada includes a proposal that securities regulatory authorities should be allowed to delegate all regulatory functions among themselves, subject to certain restrictions.
  37. Allan Cameron, The Globalization of the Securities Market (Seminar on the Globalization of Securities) (Allen Allen & Hemsely, August 16, 1999).
  38. As of December 31, 2002, 212 TSX-listed companies were interlisted on a U.S. market. For 2002, U.S. markets represented 52.4 per cent of the volume and 45 per cent of the value of stocks interlisted with the TSX.
  39. Foreign reporting issuers are not required to provide a reconciliation for continuous disclosure filings under Ontario securities law. We understand, however, that such a requirement is often imposed as a condition of obtaining a continuous disclosure exemption frequently provided to foreign companies.
  40. (2001), 24 OSCB 1678.
  41. Since the early 1990s, IOSCO has been working with the IASC to develop a set of standards that could be accepted by all regulators for cross-border offerings. In May 2000, IOSCO completed its assessment of the suitability of 30 accounting standards developed by the IASC. IOSCO approved a resolution recommending that its members permit the use of the IASC standards, supplemented by reconciliation, disclosure and interpretation as necessary to address outstanding substantive issues at a national or regional level. The Canadian Accounting Standards Board (the "AcSB") has been working with major foreign standards-setting bodies toward the convergence of accounting standards. The goal of convergence is to develop IAS as a single set of internationally accepted accounting standards. The AcSB has also been working to eliminate the major differences between Canadian and U.S. accounting standards.
  42. (2002), 25 OSCB 3701.
  43. Under NI 51-102, an "SEC Issuer" is an issuer that has a class of securities that is registered under section 12 of the 1934 Act or that is required to file reports under section 15(d) of the 1934 Act, and that is not registered as an investment company under the U.S. Investment Company Act of 1940. Issuers incorporated in Canada and having a majority of shareholders, assets and operations in Canada may qualify as SEC Issuers. Also, SEC Issuers will be permitted to file audit reports in accordance with U.S. generally accepted auditing standards.
  44. An "eligible foreign issuer" is a reporting issuer, other than an investment fund, that is incorporated outside of Canada, unless it has more than 50 per cent of its shares held in Canada and one or more of the following is also true: the majority of its directors and officers are Canadian residents; more than 50 per cent of its assets are in Canada; or the business is principally administered in Canada. (2002), 25 OSCB 3823.
  45. See comment letters of PricewaterhouseCoopers LLP and TSX Venture Exchange.
  46. Joint FASB/IASB press release dated October 29, 2002, "FASB and IASB Agree to Work Together Toward Convergence on Global Accounting Standards" ( Also, the European Commission has issued a draft regulation that will require the use of IAS by 2005 for all EU companies listed on a regulated market: see "Financial reporting: Commission proposes requirement for listed companies to use International Accounting Standards by 2005" ( market/en/company/account/news/ias.htm).
  47. For example, there has been harmonization, or work in progress to achieve harmonization, between U.S. and Canadian GAAP in the following areas: cash flow statements, methods of recording income taxes, segment information, accounting for R&D arrangements, and accounting and reporting of stock based compensation.
  48. See comment letters on the Issues List of KPMG, Michael Tambosso of PricewaterhouseCoopers, the IDA, and Simon Romano of Stikeman Elliot and comment letters on the Draft Report of the Association for Investment Management and Research, Ontario Teachers' Pension Plan, the Investment Counsel Association of Canada, the TSX, the Canadian Bankers Association, PricewaterhouseCoopers LLP, Certified General Accountants of Ontario, Royal Bank of Canada, and the Securities Subcommittee of the Ontario Bar Association.
  49. See comment letter on Issues List of Michael Tambosso of PricewaterhouseCoopers.
  50. Only one commenter was opposed to the idea of permitting non-SEC registrants to use U.S. GAAP. The commenter was concerned that if all junior issuers were permitted to use U.S. GAAP, there would be widespread material financial reporting errors and omissions (see comment letter of TSX Venture Exchange). We do not share this concern and emphasize that our recommendation is intended to give both domestic and foreign issuers (regardless of whether they are SEC registrants) the flexibility to report in U.S. GAAP. We are not recommending that issuers must report in U.S. GAAP and we very much doubt that companies that do not feel competent enough to report in accordance with U.S. standards will choose to do so.
  51. See comment letters of Royal Bank of Canada, Certified General Accountant Association of Canada, Certified General Accountants of Ontario, and The Canadian Institute of Chartered Accountants.
  52. For example, the Sarbanes-Oxley Act of 2002 requires the SEC to conduct a study on the adoption by the U.S. financial reporting system of a principles-based accounting system, including an examination of the feasibility of and proposed methods by which a more principles-based accounting system may be implemented in the U.S.
  53. The relevant legislation is the Business Corporations Act, R.S.O. 1990, c. B-16 and the Personal Property Securities Act, R.S.O. 1990, c. P-10.
  54. The conflicts-of-law problem for the indirect holding system is currently being addressed internationally by the Hague Conference on Private International Law, which is developing a proposed multilateral choice-of-law Convention. The CSA has been involved in the Hague Conference project, through the Federal Department of Justice, as part of the Canadian delegation to the Hague Conference, and through IOSCO, which is an interested observer to the project.
  55. The Committee has been advised that the Task Force released for comment in June 2002 to a limited number of government and other key stakeholders a draft of the USTA and working drafts of conforming amendments to Ontario and Alberta personal property security legislation ("PPSA"). The stakeholders included the Uniform Law Conference of Canada PPSA Working Group and the Canadian Conference on Personal Property Security Law. The Task Force's next step is to publish in provincial securities commission bulletins a consultative draft USTA, together with consequential amendments to PPSA legislation and provincial business corporation acts, extensive explanatory material and a CSA Position Paper. The tentative target date to publish the materials is the middle of 2003.
  56. IOSCO is a worldwide association of regulatory bodies with responsibility for securities regulation and the administration of securities laws. IOSCO aims to foster co-operation among its members, promote high standards of securities regulation, facilitate the exchange of information and encourage the establishment of standards and effective surveillance of international securities transactions. For more information, see the IOSCO website at
  57. David A. Brown, Q.C., After MacKay: Re-aligning Financial Services Regulation. A Framework for Market Regulation in Canada (Remarks given at the Securities Superconference, February 24, 1999).
  58. The Hockin-Kwinter Accord of April 28, 1987 between the Minister of Finance of Canada and the Minister of Financial Institutions for the Province of Ontario introduced a new regime for the regulation of federal financial institutions (banks, federal trust and loan companies, and federal insurance companies) and their subsidiaries and affiliates.
  59. R.S.O. 1990, c. I.8.
  60. A Framework for Market Regulation in Canada - A Concept Paper Prepared for the Canadian Securities Administrators (1999), 22 OSCB 1290.
  61. OSC Rule 32-502 Registration Exemption for Certain Trades by Financial Intermediaries.
  62. Supra note 78 at 1299.
  63. Supra note 78 at 1292.
  64. Supra note 78 at 1301.
  65. Ontario, Ministry of Finance at
  66. In April 2001, the Ministry of Finance released for comment a Consultation Draft of the proposed merger legislation. Comments were due June 29, 2001. At the same time, it should be noted that FSCO is moving away from prudential regulation of insurance companies in Ontario. Effective July 1, 2004, all loan and trust companies wishing to carry on business in Ontario will be required to be federally incorporated and subject to solvency regulation by OSFI, at the federal level (See An Act to implement measures contained in the 2001 Budget and to amend various statutes, S.O. 2001, c. 8, section 75).
  67. To the extent both the prudential branch of the regulator and an SRO were to regulate solvency matters of a participant, we would hope there would be co-ordination between the regulator and the SRO to ensure there is no duplicative or inconsistent regulation.
  68. See comment letters of Ontario Teachers' Pension Plan, Investment Counsel Association of Canada, Bank of Montreal, Canadian Bankers Association, Royal Bank of Canada and the IDA.
  69. We note that this issue will be encountered in any event given the recent initiatives in Saskatchewan and Quebec (discussed above in section 3.2(b).
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