Ontario won’t put its stamp on passport system

OTTAWA — The gambit by the Canadian Securities Administrators to get Ontario involved in a new, improved passport system of regulation led to a stalemate when the Ontario Securities Commission said: Nothing doing. The impasse was revealed through a set of dueling press releases March 28. First, the other dozen members of the Montreal-based CSA announced that they were publishing the Proposed National Instrument 11-102 Passport System, which they termed “a major step toward meeting the commitments set out in the memorandum of understanding regarding securities regulation among the governments of all provinces and territories, except Ontario.” The passport would allow someone to clear a prospectus, register as a dealer or adviser, or obtain a discretionary exemption from the home-province regulator and have that clearance, registration or exemption apply in all other provinces and territories. It also ensures that public companies are subject to only one set of harmonized continuous- disclosure requirements. “The passport will give market participants faster and simpler access to Canada’s capital markets by allowing them to deal only with one regulator and one set of harmonized requirements,” said Jean St-Gelais, chairman of the CSA, and president and chief executive of the Autorité des marchés financiers, Quebec’s regulator. “We look forward to discussing the proposed rule with [the] industry and then moving ahead to implement it as soon as we can.” Opting out Then the Toronto-based OSC weighed in. “Although the proposed rule is characterized as a national instrument, the OSC will not be adopting the rule,” said OSC Notice 11-904. “The OSC believes that securities regulatory reform should: strengthen Canada’s capital markets and improve our competitive position by eliminating fees, costs and duplication arising from 13 provincial and territorial securities regulators; promote consistency in regulatory decision making to ensure fairness and a level playing field for all market participants; and lead to better and more effective enforcement across Canada, resulting in greater investor protection. “The passport proposal does not sufficiently address these objectives. Although the proposal may add incremental administrative improvements and efficiencies to our current regulatory processes, it does not resolve the need to modernize Canada’s securities regulatory structure.” Then the investment industry urged the OSC to come on board. “The passport system is a positive first interim step toward making the Canadian markets more efficient and accessible,” Ian Russell, president and chief executive of the Toronto-based Investment Industry Association of Canada, said in a statement. “To maximize the benefits of the passport system, and create the most effective and robust outcome for the Canadian marketplace, we encourage the Ontario Securities Commission to participate in the passport system.” The IIAC, formerly the industry association arm of the Toronto-based Investment Dealers Association of Canada, also supports principles-based regulation. “The next step in this evolution is to reform the contents of the underlying rules,” Mr. Russell said. “To build an effective and globally competitive system, the CSA must create streamlined regulations, underpinned by principles.” The CSA is at pains to point out that it is flexible. “The passport we propose is a pan-Canadian system that will simplify regulation, and benefit businesses and investors, in all provinces and territories,” Mr. St-Gelais said. “Although the Ontario Securities Commission is not participating in the proposal, we have designed it so Ontario can join if it makes the necessary legislative changes.” But the OSC said: No national securities regulator, no passport. “The Ontario government has indicated that it is not prepared to participate in the passport system without a road map — with reasonable timelines — to get to a common securities regulator,” the OSC notice said. “The OSC supports a common securities regulator that would interpret, apply and enforce securities laws consistently for all market participants in Canada. Under the passport proposal, rather than all market participants’ dealing with the same regulator, each market participant would deal with one of 13 securities regulators. For the most part, they would also continue to pay fees to all securities regulators. Each of the 13 regulators would apply the law and make regulatory decisions that have legal effect in other passport jurisdictions. In addition, the passport members would do so without the current safeguards that promote consistency in regulatory decision making within the CSA. The passport proposal would remove this procedural discipline.” However, the provinces proposing the passport model said in their release that the system will be more efficient. “The passport will give market participants faster and simpler access to Canada’s capital markets,” Mr. St-Gelais said. However, the OSC notice in- sisted, “the viability and competitiveness of our Canadian capital markets require a seamless regulatory regime and playing field for market participants.” The CSA said that its proposed passport rule will be finalized by yearend, after consultations, and implemented in stages starting in 2008 as new rules for prospectus requirements and registration requirements are finalized. Good news for Flaherty Ontario’s support for a national securities regulator is good news for federal Finance Minister Jim Flaherty. In a recent budget speech, he called on “provincial and territorial colleagues to come together now to establish a common securities regulator” (InvestmentNews, March 26). “We’re much farther down that road of a common securities regulator, 14 months in, than anyone thought we would be,” Mr. Flaherty told reporters March 22 prior to a speech at a business conference. “I’m reasonably confident that we’re going to be able to accomplish the goal within the next year or two.” Mr. Flaherty needs a national regulator, he said, to “move toward free trade in securities with the United States and ultimately in the entire G7.” Binational regulation meets with the approval of some analysts. “The SEC and the OSC have made great strides in much more far-reaching forms of regulatory cooperation — the disclosure system between Canadian regulators and the SEC concerning stock issuances and takeover bids, for example — so why not with respect to individual enforcement proceedings?” suggested a March 25 op-ed article in the Globe and Mail of Toronto. It was written by former OSC Chairman Edward Waitzer, now a securities specialist with the Toronto law firm Stikeman Elliott LLP, and Philip Anisman, former director of corporate research in Canada’s Department of Consumer and Corporate Affairs.