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Going it alone?

Ontario’s push to modernize capital markets is overdue, but should involve other Canadian regulators.

OSC building and old city hall, Toronto

When the government of Ontario struck the Capital Markets Modernization Taskforce back in February, 17 years had passed since the last policy review of the province’s securities regulatory framework.

Think for a moment about just some of the things that hit international markets over that period: the 2008 global financial crisis, the interminable Brexit process, the renegotiation of NAFTA and a wider re-shuffling of national trade policy driven by the Trump administration, and the granddaddy calamity of them all — the COVID-19 pandemic. World-shifting events have been popping up frequently since 2003, so it should come as no surprise that the taskforce’s consultation report leans heavily toward drawing new investment capital to Ontario and cutting red tape.

Maybe a little too heavily? The report signals its ambitions right out of the gate in the first section on “improving regulatory structure,” which leads with a proposal to “[incorporate] the fostering of capital formation and competitive capital markets to the OSC’s mandate to encourage economic growth.”

Neil Gross spent 30 years as a lawyer litigating loss claims for investors; he now runs his own consulting firm. He says tasking the OSC — a regulatory agency — with fostering “growth” (generally a job for governments, not regulators) risks sowing confusion and suspicion about the OSC’s true purpose.

“It’s not controversial to say that markets must be competitive — that’s what markets are for,” he says. “The question is whether the regulator itself should be pursuing growth, which is something you expect governments to do.

“It would call into question [the OSC’s] priorities. There’s a risk of creating a perception of something fishy going on — a perception that could tend to repel capital rather than attract it. It’s a job that would be best left to a single-issue agency.”

The paper’s remaining proposals don’t rise to that level of controversy. “Many of the proposals are things we’ve been talking about in this province for years, even decades,” says Barbara Hendrickson of BAX Securities Law in Toronto.

There’s a pitch to separate the OSC’s regulatory and adjudicative functions — to put distance between the people making the rules and the ones enforcing them.

It’s overdue, says Gross. “Right now, if you’re hauled before the OSC on an enforcement matter, you quickly get the impression that you’re facing an agency that is the rule-maker, judge, jury and executioner all in one,” he says. “It’s hard to see fairness in that.”

Multiple proposals would cut back on paperwork: “streamlining” the requirement for publicly-listed companies to deliver quarterly reports, limiting the requirement that companies doing public offerings issue prospectuses, giving issuers more leeway to “test the waters” with potential investors before issuing prospectuses, moving to an “access equals delivery” model that would allow companies to post documents online instead of mailing them out to shareholders. The idea behind all of these ideas is to reduce the cost of both doing business and raising capital.

“I very much like the concept of ‘access equals delivery,’” says Rebecca Cowdery, a partner in securities and capital markets law at BLG in Toronto. “Investors are getting massive piles of paper every year that no one reads. It makes no sense.”

There are proposals in the paper meant to enhance competition. One would prohibit “bundling” of capital market and commercial lending services — the practice of commercial lenders requiring clients to hire affiliate investment dealers to help them raise capital. Another would require banks to offer their customers the option of purchasing investment products from independent firms — to expand their “shelf” to include non-proprietary products — unless they can offer a “detailed rationale” for not doing so.

“Now, banks will say they do that already,” says Cowdery. “I think this might be difficult to implement — the situation is more nuanced than the report makes out. But mutual fund managers need someone to sell their products and the idea of opening up financial institutions in this way is certainly worth a look.”

The paper proposes ways to streamline enforcement, such as making the “non-financial elements of orders and settlements” from other Canadian securities regulators automatically reciprocal (“which makes a lot of sense, frankly,” says Gross). It also contemplates giving the OSC more power to “freeze, seize or otherwise preserve property” in cases where monetary sanctions have been ordered — even granting the commission the ability to deny drivers’ licences to people who haven’t paid their penalties.

The task force is suggesting changes to the two capital markets self-regulatory organizations (SROs), the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). It calls for a merger of the two SROs, calling the dual system “outdated and confusing to investors.” It suggests the OSC be given more powers to oversee the SROs.

Gross has been calling for a deeper reform — one that would mandate the appointment to SRO boards of more people with “lived experience” as investors, to ensure the boards act in the “best interest of the investment community as a whole.”

“The IIROC recently moved to have board members with real backgrounds in investor issues on its board — retail, mom-and-pop investors, not institutional ones,” he says. “The MFDA hasn’t done that. What it has done is issue reports on its vision of the future, of a new super-SRO that would include investor representation. It’s a little disappointing they’re not embracing the idea for the present.”

Hendrickson, meanwhile, has a larger question about the timing of the taskforce: why now? Along with B.C., Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island and Yukon, Ontario is a partner in the Cooperative Capital Markets Regulatory System, an effort to streamline capital markets regulation nationwide. Many of the recommendations in the task force’s report only really make sense if they’re implemented nationally, she says — and introducing them regionally would “create even more fragmentation in our Canadian markets.”

“Pursuing these changes at the provincial level is inconsistent with the idea of a national regulator,” she says.

“Currently, even though we have made great strides through the Canadian Securities Administrators process to streamline securities regulation across Canada, we still have different regimes in effect in different provinces — for example, in the crowdfunding and offering memorandum prospectus exemptions for private placements. A go-it-alone approach by Ontario would result in even more fragmented rules.

“Given the size of the Canadian capital markets, it’s not practical for an issuer to have to comply with one prospectus exemption in Ontario and another one in British Columbia. Canada is just too small a marketplace. Similarly, market participants from outside of Canada looking at our markets are put off by the different regulatory regimes in the different provinces. They take their deals and capital elsewhere. That’s why we need harmonization across Canada.”

Gross, meanwhile, says he sees the report as a solid beginning. “Everything has to start somewhere,” he says. “There’s a statutory requirement to review the Securities Act periodically and it hasn’t been done in a long time. So the provincial government deserves credit for undertaking the task.

“And Ontario has an outsized influence on securities law in Canada, so it may be that these recommendations get picked up elsewhere.”