12/22/2011 07:30 EST | Updated 02/21/2012 05:12 EST

Supreme Court Securities Decision Not a "Defeat" for Feds


Canada has 13 sets of rules and regulations administered by 13 different provincial and territorial securities regulators, creating a significant degree of regulatory duplication, inefficiencies and complexity. This system also puts Canada out of step with the rest of the world: Canada is the only industrialized country without a national securities regulator and lacks a national voice on the international stage.

For this and other reasons, the federal government has been attempting to establish a unified regulator for some years now.

While today's knee-jerk press reaction to the defeat of the Government's efforts to get Supreme Court blessing for the creation of a national securities regulator to supersede the current patchwork of provincial regulators suggests that this was a catastrophe for the Feds -- nothing could be further from the truth.

In fact, the Court decision released today acknowledges the Government's pre-eminence in regulating and managing systemic risk in the Canadian economy as well as its legitimate right to collect data and information from regulated market participants. In this, the Court is simply recognizing current market thinking on these matters.

The International Organization of Securities Commissions (IOSCO) published a paper last February emphasizing that governments everywhere should be concerned with and establish measures to protect their economies from systemic risks.

That analysis itemizes the various ways in which securities regulators and regulation are central to this task.

Beyond management of systemic risks, the Government has emphasized there have historically been a number of good reasons for the establishment of a unified Canadian securities regulator:

1) improved investor protection;

2) better enforcement and fraud prevention;

3) greater efficiencies in the capital markets and a reduction in the cost of raising capital;

However, the global financial crisis (GFC) and related developments including the eurozone crisis and Chinese investor frauds have made the creation of a more unified national regulator more important that ever before.

The GFC made it obvious that financial risks move easily and quickly between capital markets and financial markets. This means that the regulatory system governing the capital markets in Canada needs to be focused, with efficient and timely coordination of efforts between capital and financial market regulators.

In Canada, this coordination is more difficult because we have 13 different securities regulators.

The eurozone crisis has highlighted the need for regulators -- including securities regulators -- to have a structure to deal quickly and effectively with systemic risk. The regulatory structure in Canada seems well suited for this in all respects except securities regulation.

The GFC has also clearly highlighted that now more than ever before Canada needs to have an effective national voice when international bodies are developing securities regulation. Having 13 different securities regulators limits our effectiveness in influencing global standards governing capital markets. While provincial securities regulators can perhaps be Canada's ear on the international stage, there is nobody that is Canada's voice.

While today's Supreme Court decision most likely signals the end of the Government's efforts to do away with the provincial regulatory bodies and substitute them with a unified regulator, it does open the possibility that there will be a sharing of regulatory powers between the Feds and the provinces within a new and more unified framework than has been the case in the past.

In fact, in its judgment the Court did emphasize that such a co-operative effort would be constitutionally legitimate. Therefore it is likely possible that a less expansive Federal initiative to regulate those aspects of securities market activities over which the Court agrees that the Government does have jurisdiction could be reasonably expected to be launched in the not-too-distant future.

Market forces and business logic certainly demand a more comprehensive approach.

Watch this space.