Academic

The federal government today released a draft securities act filed in support of its constitutional reference to regulate capital markets activity.  The draft act is largely based on provincial securities legislation: for example, the provisions relating to disclosure of information, prospectus offerings and the public interest power remain generally the same.  However, the act contains a number of new provisions which together appear to be improvements over existing law.

To begin, the act contains a new purposes section. In addition to protecting investors and fostering fair, efficient and competitive capital markets, the new Canadian Securities Regulatory Authority must contribute ?to the integrity and stability of the financial system?.  Expanding the purposes section in this way is sound. The financial meltdown demonstrated that systemic risks can arise from increasingly complex products (such as derivatives) and highly leveraged institutions (such as hedge funds) that distribute these products. Contributing to the stability of the financial system is thus a pertinent goal of securities regulation.

In other words, these are areas of substantive law within securities regulators? purview and the draft act clearly acknowledges this point. In fact, the act contains a whole part on derivatives which provides, for example, that no trading in an exchange traded derivative can occur unless the exchange is recognized. In addition, prescribed disclosure must be filed with the Chief Regulator. Furthermore, cooperation with other agencies is mandated with the Authority required to share information with  other organizations (such as OSFI, CDIC and FCAC) if the disclosure is to contribute to the stability of the financial system.

In terms of structure, the new regulatory body is quite different from current provincial securities commissions. The Authority has a regulatory division run by a ?Chief Regulator? but it also has a division called the ?Canadian Securities Tribunal?. This Tribunal will have a Chief Adjudicator with supervision over and direction of matters related to the performance of the Tribunal?s adjudicative functions. Appeals from the decisions of the Tribunal can be made to the court of appeal in the province in which the ?division is deemed to have been made.?  Thus, a modified bifurcated structure has been created, responding to previous calls for separation among the many functions (e.g. adjudicatory and policy making) of securities regulators.

In addition to the dual structure, a Regulatory Policy Forum will be created to participate in the consideration and development of the Authority?s regulation etc. The Authority is also required to establish an investor advisory panel, consisting of persons with knowledge of and experience with issues relevant to investors in securities. The proposal for an investor advisory panel emerged from the 2009 Report of the Expert Panel and is a proposal that the Ontario Securities Commission has also adopted as a means to be responsive to investor concerns.

            In terms of enforcement, it appears that the draft Act has the potential to be more effective in attacking financial crimes than individual provincial securities acts and commissions.  The public interest power remains (as in section 127 of the Ontario Securities Act) with its list of penalties including cease trade orders and reprimands.  The one million dollar administrative penalty also remains, albeit in a separate section, and there is now a list of factors that need to be taken into account when an administrative penalty is being levied, such as the nature of the conduct, the person?s history and the need to deter similar conduct.

A larger change is with regards to the criminal powers of the regulator. Because this is federal legislation and the federal government has constitutional jurisdiction over the criminal law, there is no need for a quasi-criminal power as in provincial securities acts. Rather, there are full-fledged criminal provisions including sections relating, for example, to deceit and fraud with a maximum penalty of 14 years imprisonment.  The insider trading provision is also modified to allow courts to infer one?s use of his or her knowledge of a material fact or change to trade or enter into a transaction. The wording of the previous quasi-criminal power is retained, however, in the form of a provision relating to general contravention of the act.

            In sum, the full range of new provisions and powers contained in the draft act is an unprecedented development in Canadian securities law. For more than three decades, capital market stakeholders have discussed the possibility of creating a national securities commission. With the release of the draft act, this objective is a step closer. But two hurdles remain. First, the federal government needs a positive ruling from the Supreme Court of Canada on the constitutionality question. Second, assuming a positive ruling, the federal government will need to bring unenthusiastic provinces onside. This latter process will be less about law and more about finessing sometimes tenuous federal-provincial relationships.

Anita Anand, Associate Professor

anita.anand@utoronto.ca