Finance Minister Jim Flaherty's plan to create a national securities regulator seems to have encountered fresh provincial resistance, with Alberta Premier Ed Stelmach now floating the idea of a western regional regulator. But in my view, this continuing provincial opposition is misguided in both policy and legal terms, and the Finance Minister should press ahead with the needed reforms.
The policy case for a single national regulator is surely overwhelming. When public companies raise capital by issuing new shares or bonds, they nearly always do so in several provinces, and of course they would pay no attention at all to provincial boundaries if they did not have to. Most of those securities will be purchased by large institutional investors (pension funds and mutual funds, for example) who like to diversify their holdings by owning investments in a variety of industries, from a variety of regions, and indeed from a variety of countries.
Whoever initially buys the securities, whether an institution or an individual, they may decide to sell the shares, and they will do so through a broker who will sell through an exchange, probably located in another province, to a purchaser whose identity and place of residence is unknown, but who is likely to be in another province (or country).
Why would any country choose to regulate these diverse participants in the securities market on anything less than a national basis? That question becomes more difficult to answer when one observes that in the International Organization of Securities Commissions, which includes regulators from 107 countries, only Canada is represented by subnational regulators (Ontario and Quebec), neither of which has the mandate or the power to agree to anything on behalf of Canada. This is embarrassing, obviously, but it is more serious than that, since effective regulation and enforcement often calls for international harmony and co-operation.
Modern securities regulation dates from the 1930s when the SEC was established in the United States in the aftermath of the Great Depression. Since that time, in Canada a series of blue-ribbon studies have all concluded that the country should have a national regulator, and have all concluded that Parliament has the necessary constitutional power. Past failures by Ottawa to act on these repeated recommendations have left the field to the provinces, each of which has established its own regulator. So have the three territories, giving us a total of 13 regulators for our securities market! An observer from another country would be astonished at this structure.
What is less surprising is that some provinces do not want to give up powers that they have become accustomed to exercising. And, despite the studies to the contrary, Alberta and Quebec have launched proceedings in their courts for rulings that Parliament lacks the power to enact the proposed act. Their court filings claim that the goals of securities regulation, which are investor protection, efficiency of markets and the reduction of systemic risk are better achieved in Canada without a national regulator. This is all about protecting provincial turf, and should not be taken too seriously.
The federal government has referred the constitutional issue to the Supreme Court of Canada, which will hold a hearing in April. In the meantime, the same issue is to be argued in the courts of Quebec and Alberta in January. These sideshows, demanded by the two provinces, have little point in light of the reference to the Supreme Court, which alone can decide the issue conclusively. So we will have to wait until the Supreme Court speaks. If, as I expect, the court upholds the constitutionality of the federal initiative, that will settle the legal question. Let us hope that it changes the politics as well, and encourages the provinces to opt in to a new national system that seems certain to better achieve the important goals of securities regulation.
Patrick J. Monahan is provost of York University and former dean of Osgoode Hall Law School.