Kappel, John J.

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Southern Methodist University

Law and Business Review of the AmericasVolume 20 | Number 1 Article 82014Two Down, Eleven to Go: Creating a CanadianSEC Or Something Like ItJohn J. KappelFollow this and additional works at: https://scholar.smu.edu/lbraThis Update is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in Law and BusinessReview of the Americas by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu.Recommended CitationJohn J. Kappel, Two Down, Eleven to Go: Creating a Canadian SEC Or Something Like It, 20 Law & Bus. Rev. Am. 133 (2014)https://scholar.smu.edu/lbra/vol20/iss1/8Two DowN, ELEVEN TO Go:CREATING A CANADIAN SEC ORSOMETHING LIKE ITJohn J. Kappel*ON September 19, 2013, Canada's Minister of Finance, Jim Fla-herty, Ontario's Minister of Finance, Charles Sousa, and BritishColumbia's Minister of Finance, Mike de Jong, announced thecreation of the Cooperative Capital Markets Regulator (CCMR).1 TheCCMR is being created to serve as a new Canadian securities regulator,2partially unifying Canada's current securities regulation system, which isalmost entirely administered at the provincial and territorial level.3 Thefirst section of this article will outline the current method of Canadiansecurities regulation, the second section will discuss the 2011 attempt bythe Canadian Parliament to create a single federal securities regulatorand the Canadian Supreme Court's advisory opinion against the creationof such a regulator, and the third section will explore the recently pro-posed CCMR and the effects that the creation of the CCMR might haveon Canadian securities regulation.I. THE CURRENT METHOD OF CANADIAN SECURITIESREGULATION: A COMMITMENT TODECENTRALIZATIONCurrently, Canadian securities regulation is done entirely at the re-gional level; there is no national Canadian Securities regulator.4 Securi-ties are regulated by thirteen independent agencies, one for each ofCanada's ten provinces and three territories.5 In this respect, Canadapossesses the unique, although perhaps not positive, distinction of beingthe only major industrialized country in the world to not have a single* John Kappel is a third-year student at SMU Dedman School of Law.1. Gordon Isfeld & Barbara Shecter, Jim Flaherty: Ottawa, B.C. and Ontario Agree toEstablish Co-operative Securities Regulator, FINANCIAL POST (Sept. 19, 2013, 10:22AM), http://business.financialpost.com/2013/09/19/flaherty-announces-historic-cooperative-market-watchdog-with-ontario-b-c/2. Id.3. Who We Are, CANADIAN SECURIIEIFS ASSOCIATION, http://www.securities-administrators.ca/aboutcsa.aspx?id=77 (last visited Mar. 24, 2014).4. See id.5. Id.134 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 20national securities regulator. 6 However, the thirteen regulators haveachieved a certain degree of unity through their membership in the Cana-dian Securities Association (CSA). 7A. THE CANADIAN SECURITIES ASSOCIATIONThe CSA refers to itself as an "umbrella organization" comprising allof the provincial and territorial regulators and created to "improve, coor-dinate and harmonize regulation of the Canadian capital markets."8While the CSA "umbrella" does effectively facilitate cooperation and acertain degree of uniformity between the provincial and territorial regula-tors, the CSA itself is not a true regulatory body. 9Ultimately, the provincial and territorial securities regulators functionindependently of the CSA and each other to investigate complaints andmanage enforcement issues and proceedings within each regulator's re-spective jurisdiction.10 The direct consequence of this fragmented groupof regulators is an increased degree of red tape and paperwork encoun-tered by anyone who works in the securities industry and who wishes tooperate in more than one province or territory.11In an effort to interconnect the regulatory schemes of the thirteen pro-vincial and territorial regulators and alleviate the burden that can comewith having to comply with multiple regulators, the CSA created thePassport System.' 2 The goal of the Passport System is to give marketparticipants "automatic access to the capital markets in other jurisdictionsby obtaining a decision only from [the market participant's] principal reg-ulator and meeting the requirements of one set of harmonized laws."'13To this end, each market participant falls within the jurisdiction of one ofthe thirteen regulators, dubbed the market participant's "principal regu-6. Barbie McKenna, Steven Chase, Janet McFarland & Sophie Cousineau, OttawaRenews Push for National Securities Regulator, Tili GLOBE AND MAl., http://www.theglobeandmail.com/report-on-business/flaherty-new-securities-regulator/articlel4407154/ (last updated Sept. 20, 2013).7. The thirteen regulators that are members of the CSA are: the Alberta SecuritiesCommission, the British Columbia Securities Commission, The Manitoba Securi-ties Commission, the Financial and Consumer Services Commission (New Bruns-wick), the Office of the Superintendent of Securities Service Newfoundland andLabrador, the Northwest Territories Securities Office, the Nova Scotia SecuritiesCommission, the Nunavut Securities Office, the Ontario Securities Commission,the Office of the Superintendent of Securities (Prince Edward Island), Autorit6des marchds financiers (Quebec), the Financial and Consumer Affairs Authority ofSaskatchewan, and the Office of the Superintendent of Securities (Yukon). CSAMembers, CANADIAN SEcuIrIs ASSOCIATION, http://www.securities-administrators.ca/aboutcsa.aspx?id=80 (last visited Mar. 34, 2014).8. Overview, CANADIAN SEcuiriEs ASSOCIATION, http://www.securities-administrators.ca/aboutcsa.aspx?id=45 (last visited Mar. 24, 2014).9. See id.10. Id.11. McKenna et al., supra note 6.12. Pan-Canadian Regulatory Cooperation, CANADIAN SECURITIEiS ASSOCIATION,http://www.securities-administrators.ca/aboutcsa.aspx?id=96 (last visited Mar. 24,2014).13. Id.TWO DOWN, ELEVEN TO GOlator.' 1 4 Once a market participant complies with any requirements setforth by its principal regulator, it is deemed to have complied with therequirements of the other regulators.15One rather distinctive flaw with the Passport System is the fact that theOntario Securities Commission does not participate in it.16 Unlike thetwelve other securities regulators, the Ontario Securities Commission in-sists on making its own regulatory decisions.' 7 Fortunately, the twelvePassport-participating regulators do accept regulatory decisions of theOntario Securities Commission, making this only a unilateraldisconnect.1 8II. THE SECURITIES ACT: PARLIAMENT'S THOUGHTEXPERIMENT IN COMPREHENSIVE CENTRALIZATIONAfter decades of considering the creation of a national securities regu-lator and with a certain degree of dissatisfaction with the limited uniform-ity that the CSA was able to bring to Canadian securities regulation, 9 theParliament of Canada proposed the Securities Act with the intent of creat-ing "a single Canadian securities regulator supported by a comprehensivestatutory and regulatory regime that applies across Canada. '20 The Ca-nadian Parliament elected to unify securities regulation by creating a sin-gle national entity to displace the provincial and territorial regulators.21Parliament indicated that the Securities Act was designed to provideimproved protection for investors,22 "foster fair, efficient and competitivecapital markets" in Canada,2 3 and "to contribute.., to the integrity andstability of [Canada's existing] financial system."'24 To meet these goals,Parliament intended to enact: registration requirements for securitiesdealers, 2 5 prospectus filing requirements,26 disclosure requirements,27specific duties for market participants,2 8 a framework for the regulationof derivatives,2 9 private civil remedies,30 and regulatory and criminal of-fenses pertaining to securities. 3114. See id.15. See id.16. Id.17. Id.18. Id.19. Reference re Securities Act, [2011] 3 S.C.R. 837, paras. 11-28 (Can.).20. Proposed Canadian Securities Act, Order in Council P.C. 2010-667, preamble.21. Reference re Securities Act, [2011] 3 S.C.R. para. 2.22. Proposed Canadian Securities Act, Order in Council P.C. 2010-667, § 9(a).23. Id. § 9(b).24. Id. § 9(c).25. Id. pt. 5.26. Id. pt. 6.27. Id. pt. 8.28. Id. pt. 10.29. Id. pt. 7.30. Id. pt. 12.31. Id. pt. 11.2014]136 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 20Likely realizing that not all of the provincial and territorial regulatorswould welcome the creation of a single national regulator, Parliamentdrafted the Securities Act so that its provisions would only apply to prov-inces and territories that opted-in to be under the authority of the na-tional regulator. 32 Nevertheless, on May 26, 2010, 33 the CanadianGovernor in Council petitioned the Supreme Court of Canada to issue anadvisory opinion ruling on whether the Securities Act fell within the scopeof Parliament's legislative authority. 34A. SUPREME COURT OF CANADA'S ADVISORY OPINION ON THESECURITIES ACrOn December 22, 2011, 35 the Supreme Court of Canada released therequested advisory opinion 36 accessing whether Parliament had the legis-lative authority to pass the proposed Securities Act.37 The Attorney Gen-eral of Canada and intervener Attorney General of Ontario argued thatthe Securities Act falls within Parliament's general power to regulatetrade and commerce. 38 The Attorneys General of Alberta, Quebec,Manitoba, and New Brunswick intervened and argued that the SecuritiesAct intrudes upon provincial legislative authority.39 The Attorneys Gen-eral for British Colombia and Saskatchewan also opposed the SecuritiesAct, but were not against the concept of a national securities regulator inprincipal, so long as the national regulator was designed to respect thedivision of authority between the federal government and theprovinces.40In support of the Securities Act, the Canadian government argued thatthe Canadian securities markets expanded over time from local marketsto a national market with nationwide implications. 41 The governmentfurther argued that this evolution of the securities market gave the fed-eral government concurrent jurisdiction to regulate the securities marketalongside the provinces and territories. 42 The federal government pos-sesses the broad authority to regulate national trade and commerce and itargued that this power grants Parliament the ability to pass the SecuritiesAct.4 3In conducting its analysis the Supreme Court of Canada took note of32. Id. pmbl.33. Reference re Securities Act, [2011] 3 S.C.R. at 837.34. Id. para. 1.35. Id. at 837.36. The Supreme Court of Canada has authority to issue advisory opinions. SupremeCourt Act, R.S.C 1985, c. S-26, at § 53.37. Reference re Securities Act, [2011] 3 S.C.R. para. 1.38. Id. para. 32.39. Id. para. 34.40. Id. para. 35.41. Id. para. 4.42. Id.43. Id. para. 5.TWO DOWN, ELEVEN TO GOthe decisions of the Quebec Court of Appeal 44 and the Alberta Court ofAppeal45 who both declared the Securities Act unconstitutional.46 TheSupreme Court also examined the legal basis for the provincial securitiesregulation 47 and the nature of national securities regulation in foreigncountries including Germany,48 Australia,49 and most notably, the UnitedStates.50 The Court paid particular attention to the U.S. Constitution'sCommerce Clause and Supremacy Clause which allow U.S. states to regu-late securities at the local level, the federal government to regulate securi-ties between the states, and for federal laws regulating securities to trumpsimilar state laws when the two are in direct conflict with each other.5'The Supreme Court took particular note of the fact that the regulatorysystem with federal preemption crafted in the United States does notforeclose the ability of the states to have a role in the regulatory pro-cess. 52 The Supreme Court also took the time to recount Canada's princi-ples of federalism in general 53 and the particular nature of the SupremeCourt's interpretation of the scope of the federal government's trade andcommerce power. 54After analyzing the proposed Securities Act, the Supreme Court cameto the conclusion that certain provisions within the act were a valid exer-cise of Parliament's trade and commerce power because the Canadiansecurities market is too large and economically important to be fully andproperly regulated by the provinces and territories alone.55 However, theSupreme Court ultimately found that the proposed Securities Act wentwell beyond simply augmenting provincial and territorial securities regu-lation and amounted to a "wholesale takeover of the regulation ofsecurities." '56Finally, the Supreme Court indicated that it believed the primary focusof the proposed act, or the act's "pith and substance," was not regulationof nationwide economic risk, but rather protecting investors and ensuringmarket fairness.57 Unfortunately for the Canadian government, the Su-preme Court found the latter two objectives to fall squarely within thepowers of the provinces and territories, making the Securities Act's pri-mary objectives an unconstitutional intrusion on provincial powers.5844. Id. para. 38.45. Id. para. 37.46. Id. para. 36.47. Id. para. 43.48. Id. para. 49.49. Id. para. 50.50. Id. paras. 51-52.51. Id. para. 51.52. Id. para. 52.53. Id. paras. 54-67.54. Id. paras. 68-90.55. Id. para. 128.56. Id.57. Id.58. Id.2014]138 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 20As a consolation prize, the Supreme Court indicated that a hypotheti-cal cooperative regulatory scheme where the federal government wouldaddress systemic security market risk and national economic concernswhile provincial and territorial regulators would regulate investor protec-tion and market fairness.59 In support of this hypothetical cooperativeapproach, the Supreme Court noted that other countries with nationalsecurities regulators reserve certain aspects of regulation for local regula-tors instead of condensing all regulatory authority in a single nationalregulator. 60III. THE COOPERATIVE CAPITAL MARKETS REGULATOR:AN ASPIRATION FOR COOPERATION AND AMIDDLE GROUNDLess than two years after the Supreme Court decided Reference re Se-curities Act, the Canadian Minster of Finance, along with the Ministers ofFinance for Ontario and British Columbia, reached an agreement to cre-ate a cooperative securities regulator, the CCMR, 61 very similar to theone contemplated by the Supreme Court in the closing remarks of itsSecurities Act opinion.62 The announcement indicated that the new coop-erative securities regulator will provide increased protection for investors,make improvements to Canada's financial services sector, and "supportefficient capital markets and manage systemic risk."'63 The cooperativesystem has been designed with the goals of preserving the current abilityto weigh and consider local perspectives and achieving "needed reformswithin a national context. '64The CCMR will accomplish these goals by creating a "uniform act" foreach participating jurisdiction that addresses everything currently ad-dressed by provincial and territorial legislation.65 A single complemen-tary federal act that addresses national data collection and problems likesystem risk will also be created. The act will conform to the goals thatfederal securities legislation may properly pursue according to the Su-preme Court's opinion in Reference re Securities Act.66 Both the provin-cial acts and the federal acts will be administered by the CCMR underauthority delegated to the CCMR by the federal government and the par-59. Id. para. 131.60. Id.61. Ministers of Finance of British Columbia, Ontario and Canada Agree to Establish aCooperative Capital Markets Regulator, Di P'r OF FIN. CAN. (Sept. 19, 2013), http://www.fin.gc.ca/nl3/13-119-eng.asp [hereinafter Ministers of Finance].62. Reference re Securities Act, [2011] 3 S.C.R. paras. 128, 131; Ministers of Financesupra note 61.63. Ministers of Finance supra note 61.64. Id.65. Backgrounder: Agreed Elements of a Cooperative Capital Markets Regulatory Sys-tem, DizP'-r OF FIN. CAN. (Sept. 19, 2013), http://www.fin.gc.ca/n]3/data/13-119_1-eng.asp.66. Id.TWO DOWN, ELEVEN TO GOticipating provinces and territories. 67The type of cooperative regulator outlined in the Department of Fi-nance's announcement is very much in line with the type of regulator thatthe government of British Columbia was advocating for when the Securi-ties Act was being challenged. 68 The Minsters of Finance for Canada andOntario have evidently come to agree with British Columbia in this re-spect and have invited the other eight provinces and three territories toparticipate in the new cooperative system.69 It remains to be seen howmany, if any, additional provinces and territories will choose to partici-pate in the CCMR. Alberta and Quebec almost immediately announcedtheir intentions to not participate in the new regulatory system.70With a target implementation date of July 2015,71 there is ample timefor more provinces and territories to elect to participate in the CCMR.The fact that the CCMR's initial draft regulations will not be publisheduntil April 30, 2014 creates a great deal of uncertainty with respect to thedetails of the new regulatory scheme.72 But this has not stopped a consid-erable number of people from expressing support; response to the an-nouncement of the CCMR has been largely positive.73 Evidently, theprospect of having something closer to a national securities regulator isakin to the light at the end of a long tunnel. Canada's Minster of Financeseems particularly proud of the announcement which is not surprisingconsidering he has been trying to reform Canada's system of securitiesregulation since 2006.74 The CCMR is in its infancy, only two provinceshave agreed to participate in it so far. While it will be not as significant achange to Canada's system of securities regulation that some hoped for,even if every province and territory were to participate, it is a significantstep in the right direction that holds significant promise for the future ofCanadian securities regulation.67. Id.68. Reference re Securities Act, [2011] 3 S.C.R. para. 35; Ministers of Finance supranote 61.69. Ministers of Finance supra note 61.70. McKenna, Chase, McFarland & Cousineau, supra note 6.71. Isfeld & Shecter, supra note 1.72. Id. The release date "for the draft provincial capital markets legislation, draft com-plementary federal legislation, and CCMR memorandum of agreement" was ex-tended to April 30, 2014. Statement Regarding Establishment of a CooperativeCapital Markets Regulator, DE P'T OF FIN. CAN. (Jan. 31, 2014), http:/www.fin.gc.ca/nl4/14-015-eng.asp.73. Isfeld & Shecter, supra note 1; McKenna, Chase, McFarland & Cousineau, supranote 6.74. Isfeld & Shecter, supra note 1.2014]140 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 20

Two Down, Eleven to Go: Creating a Canadian SEC Or Something Like It

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Two Down, Eleven to Go: Creating a Canadian SEC Or Something Like It

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