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opinion

Ian Russell is president and CEO of the Investment Industry Association of Canada

The Canadian Securities Administrators issued an open letter on Feb. 12 in response to the final report of the Ontario Capital Markets Modernization Taskforce. In the letter, the CSA stressed the importance of a highly harmonized securities regulatory regime. It called on Ontario to adopt the passport system – a recommendation that was noticeably absent in the task force’s final report.

The system is a regulatory framework designed to provide market participants with streamlined access to markets in all passport jurisdictions across Canada by dealing only with a participant’s principal regulator and complying with only one set of rules. For example, an issuer filing a prospectus in several jurisdictions would have that document reviewed only by its principal regulator and would get a deemed receipt in all other passport jurisdictions.

All provinces and territories, except Ontario, signed a memorandum of understanding in 2004 under which they agreed to implement a passport system in certain areas of securities regulation. At the time, the Ontario Securities Commission (OSC) agreed that securities regulatory reform would strengthen the competitiveness and cost efficiencies of Canadian capital markets by eliminating fees, expenses and duplication arising from 13 provincial and securities regulators, promote consistency in regulatory decision-making and lead to better and more effective enforcement across Canada.

But the OSC concluded the passport proposal did not sufficiently address these objectives. A modernized regulatory structure – a common securities regulator for all jurisdictions – was viewed as the better solution.

There are now several good reasons for the Ontario government and the Modernization Taskforce to reverse their position and recommend that the OSC join the passport system.

First, participation in the passport system would not weaken or contradict Ontario’s support for a common, co-operative regulator. Back in 2007, the Ontario government was not prepared to join the passport system “without a roadmap with reasonable timelines to get a common securities regulator.” In other words, an effective passport system was viewed as a disincentive for provinces to join a common regulator.

However, that was almost 14 years ago, and much water has passed under the bridge. Several large jurisdictions have deepened objections for a national regulator for many reasons. Even so, it is clear the decision of these entrenched jurisdictions would not be influenced by an incremental improvement to the regulatory process for corporate issuance through the passport system.

Furthermore, Ontario could confirm its commitment to the co-operative securities regulator, and propose to withdraw from the passport system, when the co-operative regulator begins operations with a critical mass of some, but not all, jurisdictions.

Second, it is clear that, with the OSC as part of the passport system, Ontario businesses would benefit from the increased efficiencies and a reduced regulatory burden for distribution of new securities offerings in national markets, avoiding review in multiple jurisdictions. Companies from outside Ontario would similarly find a lower regulatory burden and a more efficient and timelier process to distribute offerings to Ontario institutions and retail investors.

The passport system is congruent with the mandate of the Modernization Taskforce, promoting financings of Ontario companies and capital formation in the province, and encouraging more financings and trading in the Ontario marketplace.

Finally, supporting the passport system could facilitate the implementation of the Modernization Taskforce’s recommendations. Many of them already align with key CSA projects, especially 16 that deal with issues such as introducing an alternative offering model for reporting issuers, developing new rules for well-known seasoned issuers, streamlining continuous disclosure requirements and transitioning toward an access-equals-delivery system for electronic dissemination of regulatory documents.

Success would not just benefit Ontario markets, but deliver harmonized reform across Canada. A bargain between the OSC and the CSA could benefit both parties. The OSC would join the passport system on the condition the CSA agrees to a prioritized and reasonable timeline for implementing the Modernization Taskforce recommendations that are aligned with the CSA’s work.

While it is perhaps difficult to reach consensus on these complex reforms across jurisdictions, a redoubled effort to complete the prioritized list of reforms, on a timely basis, is worth it to achieve the benefit of a full passport system across the country. Most importantly, these harmonized reforms are badly needed for corporate issuers and dealers that depend on national markets to raise capital and to contribute to a strong economic recovery.

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