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Imagine you own a farm and want to fence it in to keep livestock from roaming the countryside.

The local municipality objects, citing an obscure bylaw. But it offers an alternative: convince your dozen or so neighbours to join you in building a patchwork of barriers. Unfortunately, two of them refuse, leaving you with half a fence and a potentially dangerous animal problem.

That’s essentially what the Supreme Court of Canada has done to national securities regulation. Two landmark decisions mean this country is unlikely in the foreseeable future to have a truly national watchdog to police trading in stocks, bonds and other investments – as virtually every other industrialized country does.

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Unless all provinces and territories join, Canada won’t rid itself of the inherent flaws in its fractured regime. It’s not just a political and constitutional problem. It could put investors at risk, let fraudsters exploit enforcement gaps and make it costlier for companies to raise capital.

The Supreme Court ruled in 2011 that the federal government doesn’t have the constitutional authority to impose a single national regulator on the entire country. At the same time, the court opened the door to a watered-down version, in which provinces voluntarily join a regime managed jointly by the participating governments.

Earlier this month, the court gave Ottawa and the provinces the green light to proceed with the Capital Markets Regulatory Authority, which would cover roughly half the country.

The ruling was hailed by some as paving the way for a national securities regulator. Hardly.

So far, just six provinces and one territory have agreed to join – Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island and Yukon. Others may soon join.

But not Quebec and Alberta, which doubled down on their opposition after the latest ruling, insisting on the need for local autonomy. That means two of the four largest regional capital markets will remain outside the regulatory fence, perhaps forever.

Proponents of a national watchdog complain about the redundancy of the existing system. Making regulatory filings in multiple jurisdictions means more red tape, higher costs and needless duplication.

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It also risks exposing investors to unseen dangers. A 2017 Globe and Mail investigation found financial fraudsters rarely pay fines or go to jail in Canada, and authorities seldom recover stolen funds. Even those found guilty often move down the TransCanada Highway in search of new victims, exploiting gaps in the country’s patchwork of securities regulation.

With deterrence weak, one in nine people guilty of financial crimes by securities regulators do it again, according to a year-long Globe investigation. Based on conservative estimates, these repeat offenders have gone on to steal hundreds of millions of dollars from unwitting investors.

The absence of a national regulator is not solely responsible. Weak securities laws, inadequate penalties and a lack of enforcement resources are also part of the problem.

But it’s hard to imagine that a more concerted and co-ordinated national effort to root out white collar crime wouldn’t lead to better enforcement. Regulators could pool resources, harness expertise and eliminate loopholes in market surveillance.

The opposite is also true.

Half a regulator, like half a fence, won’t do the job.

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It’s perhaps not surprising that the political will to push ahead with a limited number of provinces appears to be waning. Unless all provinces and territories join, Canada would be better off to stick with the current system. However imperfect, at least all the players are familiar with how it works. The various provincial regulators work to harmonize securities regulation across the country through the Canadian Securities Administrators, an umbrella group. Companies might not like the system, but they’ve lived with it for a long time.

The proposed Capital Markets Regulatory Authority is a pale imitation of the real thing. It would create a new level of bureaucracy, without delivering the full benefits of a national regime.

It’s also a bit of a leap into the unknown that could add costs, without making it any safer for investors.

The Supreme Court is clearly defending the sometimes messy reality of co-operative federalism, making accommodations when federal and provincial powers overlap. But in doing so, it has left Ottawa and the provinces with no good way forward.

Unfortunately, not all provinces are interested in being co-operative when it comes to policing capital markets.

Editor’s note: An earlier version of this column said Manitoba was among the provinces that have agreed to join the proposed Capital Markets Regulatory Authority. It has not. This version has been corrected.
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