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Securities reform goes back to the drawing board

York University provost Patrick J. Monahan

Kevin Van Paassen/THE GLOBE AND MAIL

The Supreme Court of Canada has stopped the federal government's initiative for a single national securities regulator in its tracks. While the court suggested that the door remained open to a single national regulator achieved through federal-provincial co-operation, the near-total victory achieved by the provinces gives the scheme's provincial opponents no incentive to participate.

Join Patrick Monahan for a live discussion on the impact of the Supreme Court's ruling.

The question now is whether the federal government can craft its own alternative proposal that works within the restrictive constitutional framework set out by the court, thus permitting Canada to move ahead with much-needed reforms to our fragmented securities regulation regime.

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What was at issue? The provinces have been regulating securities since Confederation. Despite the recommendations of numerous commissions and experts over the past 40 years, previous attempts by the federal government to implement a single regulator foundered on the reefs and shoals of federal-provincial constitutional relations.

The policy case for a single regulator is overwhelming. Public companies nearly always raise capital in multiple provinces; most securities are purchased by large institutional investors 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; and securities are sold to buyers in multiple provinces (and countries).

If those reasons are not convincing enough, 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 not only embarrassing for Canada, but it also undermines the goals of securities regulation and enforcement.

This long-simmering issue has acquired particular urgency in recent years as a result of the increasing integration of global financial markets. As we saw in the global financial crisis that emerged in the aftermath of the collapse of Lehman Brothers in 2008, this integration means that a default by a single market participant can set off a chain reaction that undermines confidence and can bring down the entire global financial system.

In its judgment, the Supreme Court recognized the new reality of systemic risk facing capital markets, and agreed that it can justify federal regulation. But the court insisted that the prevention of systemic risk can't be used to justify a "complete takeover" of the field of security regulation. Yet, systemic risk arises precisely because a single default can have a contagion effect on an entire capital market, thus requiring a comprehensive scheme of regulation.

The court also suggested that the co-operative model developed in the 1970s to regulate the production and marketing of chickens and eggs could be used as a model for the regulation of capital markets. But if this problem could have been solved by voluntary co-operation, it would have been accomplished decades ago.

What next? One possibility is for the federal government to go back to the drawing board and develop a more limited scheme focusing on the regulation of the interprovincial and international capital markets. Such a scheme would capture most market participants, yet could be justified under Ottawa's jurisdiction over interprovincial and international trade.

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The court seemed to leave the door slightly ajar for such a possibility by noting that the constitutional difficulty posed by the current federal proposal was that it sought to impose a "comprehensive" scheme of securities regulation. If a more modest scheme based on the federal government's jurisdiction over interprovincial and international trade could be effective on its own, it would also provide a foundation for provinces to voluntarily opt in over time. That seems the only realistic option left to the federal government in the wake of this major defeat at the hands of the Supreme Court.

Patrick J. Monahan is provost of York University and former dean of Osgoode Hall Law School.

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