Why Alberta Won’t Endorse A National Securities Regulator
Alberta (still) opposes a national securities regulator, while the rest of Canada proceeds apace. We break down the province's abstention
Alberta Venture, February 2016
What is a national securities regulator?
A national securities regulator is a federal body that oversees the trading of financial assets. The U.S. has the Securities Exchange Commission; the U.K. has the Financial Conduct Authority and the Prudential Regulation Authority (and some help from its central bank); Canada has nothing, at least federally. In fact, Canada is the only G7 economy without a national securities regulator. Instead, each of Canada’s provincial and territorial governments has its own securities regulator.
Why doesn’t Canada have one? And should it?
Through a series of reports dating back to the 1960s, the federal government and various provinces have tried to establish a federal regulatory body. Federal finance minister Jim Flaherty tried in 2008, claiming that provincial regulators failed to protect Canadians who suffered in the asset-backed commercial paper crisis in 2007. Flaherty tried again in 2011 but the Supreme Court of Canada struck down the proposed legislation as being beyond the federal government’s constitutional jurisdiction. Most recently, the collapse of TSX-listed Sino-Forest Corp., in which one of the country’s largest forestry companies fraudulently inflated the value of its assets (resulting in a $9 billion class action lawsuit by burned shareholders), caused proponents of a national regulator to once again inveigh against the provincial system.
But Alberta won’t endorse the effort.
Critics of a federal regulator argue that the U.S. Securities and Exchange Commission failed to prevent the worst economic crisis since the Great Depression. But while preventing the next catastrophic market crash may be outside the regulator’s purview, that alone doesn’t necessarily disprove its efficacy. The goal of a national regulator is modest: to protect Canadian investors, attract more investors and guard against systemic risk. In a perfect world, a national regulator could streamline the approval process and increase the competitive value of Canada’s capital markets. Some of its Albertan opponents, however, see it as a Trojan horse with which the federal government can infiltrate the provinces’ legal turf.
How is Canada instating a national securities regulator? And why is Alberta holding out?
Last July, the federal government, B.C., New Brunswick, P.E.I., Saskatchewan, Ontario and the Yukon nominated William Black, a former board member of the Bank of Canada and former CEO of Maritime Life Assurance, as the chairman of the proposed joint regulator (known as the Cooperative Capital Markets Regulatory System). Alberta and Quebec are the two crucial holdouts.
The roots of the conflict run deep. It’s in Alberta’s blood to resist federal intrusion. The province fought vociferously to make securities regulation a provincial matter in 1932. That sentiment scarcely left: In an open letter from 2001, Stephen Harper, then-president of the National Citizens’ Coalition, and then-finance minister Ted Morton, along with other chairmen and professors, encouraged Ralph Klein to “build firewalls around Alberta, to limit the extent to which an aggressive and hostile federal government can encroach upon legitimate provincial jurisdiction.” It was emblematic of the province’s distrust of the feds, which has dissipated but not disappeared.
There’s little evidence to suggest Premier Rachel Notley is bullish about a national regulator. A spokesman for finance minister Joe Ceci told Alberta Venture that once the federal government has drafted the legislation, the NDP will review it and “consult with Alberta industry on its implications.” The draft legislation was completed last August, and the comment period ran until December 23. The regulatory authority hopes to launch by fall of 2016. Its formation doesn’t need Alberta’s assent, and Alberta won’t be forced into it. As Black told Bloomberg in July, “The odds of this going forward are now virtually 100 per cent, even if it might take some time to get Alberta and Quebec in.”
The Case for Holding Out
Bill Rice, former chair and CEO of the Alberta Securities Commission, says the feds should mind their own business
Bill Rice is the recently retired chair and CEO of the Alberta Securities Commission, which he helmed for a decade. During his tenure, Rice was vocal opponent of a Canadian national securities regulator. Instead, he favoured the passport system, which streamlines access to capital markets with a harmonized set of laws that apply across participating jurisdictions. (If that sounds like a national regulator, Rice has some words for you.)
Alberta Venture: What kind of reach into the holdout provinces – Alberta, Manitoba and Quebec – would a national securities regulator have?
Bill Rice: That’s a good question, because securities regulation is a provincial jurisdiction. So to the extent that provinces have retained their jurisdiction and responsibilities, they’re going to conduct regulation in their respective provinces, and whether other provinces have joined together into a single regulator or not should not see that entity imposing its regulatory authority where it doesn’t have any. The question is to what degree the federal government is going to use its legislation to try to work its way into securities regulation. I don’t believe they have jurisdiction, but under the title of governing systemic risk, they seem to be inclined to want to extend their authority into what has otherwise been interpreted by the courts quite clearly as strictly provincial jurisdiction.
AV: How do you think the absence of a national regulator has contributed, if at all, to Alberta’s economic fortitude – especially regarding investment in the capital-intense energy sector – and, conversely, to its current precariousness?
BR: [The oil and gas industry] consumes huge amounts of capital, so the raising of capital and the structuring of an environment in which capital can be raised and traded appropriately is a very significant issue for Alberta. I believe the independence of the regulation of that territory becomes more important when times are tough, because certain adaptations can be made, local imagination can be used and certain changes or differentiations can be undertaken in the province to accommodate difficult circumstances.
AV: One could make the argument that in an economic climate such as we have today, there’d be increased investor confidence in Alberta with the presence of a national regulator.
BR: I can’t contemplate that investors have any more or less inclination to invest in Alberta dependent upon whether securities regulation is centralized in Toronto or Calgary or Ottawa or anywhere else. What they want to know is, Is there a reliable, credible system of regulation they can associate with if they’re from outside of Canada? We could have 112 securities regulators and I don’t think an outside investor – as long as that person is assured that money can be raised and invested without any greater expense or time or a loss of a sense of security or appropriate co-ordination under law – would be interested in our structure or the logistics of how it gets done.
AV: How does a passport system, which still has national co-operation as its objective, differ from a national regulator?
BR: The passport system assures that [the investor] only has to deal with one regulator – the advantage is that it’s the regulator that knows the business environment, understands the players and understands the issues most relevant to participation in the market. They both permit an issuer to deal with only one organization … but [with a passport system] it’s the one that’s in the jurisdiction of the market participant. You don’t lose the advantage of dealing with only one entity, but you gain the advantage of dealing with an entity that’s down the street from you.
Update: As reported by Reuters, on March 29 Finance Minister Joe Ceci said the Alberta government will not join a national securities regulator. He said that Canada’s “unique financial ecosystems are best overseen by local regulators.”
Reprinted with permission from Alberta Venture.