The highest standards of investor protection, effectively and consistently applied;

Efficient, cost-effective, streamlined and simplified regulation;

Ability to adapt to future marketplace changes;

Transparency, accessibility and accountability for stakeholders as well as accountability to governments; and

Canada-wide harmonization of laws and rules that permits defined and complementary exceptions to accommodate local and regional differences.

ANALYSIS OF EXISTING STRUCTURAL ISSUES

The discussion paper accurately describes the concerns of many market participants with respect to a broad range of existing structural issues. These concerns include:

The negative impact of differences in law and regulation between jurisdictions within Canada;

The existence of differing local interpretations of the meaning and effect of laws and regulation even where provisions are harmonized, leading to inconsistencies in enforcement;

Unnecessary costs incurred by registrants, issuers, exchanges and self-regulating organizations;

The inability of the current regulatory system to respond to changes in the marketplace in a timely and consistent manner; and

The desirability of a more effective Canadian voice in international discussions of securities regulation issues.

There has indeed been some progress in addressing these issues. In particular, the Council has been supportive of the Uniform Securities Legislation (USL) project of the Canadian Securities Administrators (CSA).

The CSA’s harmonization initiative is a necessary first step toward effective reform, but cannot by itself resolve the issues identified in the ministers’ discussion paper. More to the point, if all jurisdictions accept the CSA’s conclusion that it is indeed feasible to create a harmonized, Canada-wide set of rules, why are 13 parallel organizations required to administer it?

The USL discussion paper, Blueprint for Uniform Securities Laws for Canada, shows that it is clearly feasible to remove almost all of the current differences in law and regulation, while making only minor exceptions for local rules. But preserving the existing regulatory structure would perpetuate the possibility of conflicting interpretations and inconsistent enforcement. And the maintenance of 13 parallel structures would inevitably involve higher administrative costs that would have to be borne by market participants.

But the most serious and urgent challenge not addressed by the reform actions taken to date is with respect to the vital need for a harmonized framework to evolve in a timely and consistent fashion in response to changes in the global marketplace.

In this respect, the CSA Blueprint notes that even non-controversial amendments have taken as much as four years to be passed in every jurisdiction. Harmonizing the rules between 13 jurisdictions appears feasible; the ability of harmonized rules to evolve in an effective manner within the current regulatory structure is at best dubious.

COMMENTS ON THE PASSPORT SYSTEM

Provincial ministers have chosen to focus their consultations on a proposal for a passport system. In essence, this proposed structure would enable any issuer or registrant to deal with a single "primary" regulator, whose decisions would then be respected by all other regulators.

As noted in the discussion paper, a passport system offers the potential for improvements in addressing some issues. In particular, it would simplify market access and compliance for issuers by enabling them to deal with a single set of rules through a single window.

However, a passport system would fail to deal effectively with a number of the other concerns described in the discussion paper. These include:

Excessive costs to market participants. A passport system would reduce some of the costs faced by issuers, such as the need for legal work in multiple jurisdictions. But it would not reduce the size and cost of the regulatory structure, and indeed, might require regulators to increase staff in order to monitor and take into account the actions and decisions of other jurisdictions in maintaining harmonized rules and consistent interpretation and enforcement.

The discussion paper notes that matters crossing jurisdictions would require cooperation between enforcement staff from affected jurisdictions and "possibly joint hearings". And it is clear that issuers would still be expected to pay fees to all jurisdictions, albeit through a single transaction.

Inconsistent interpretation and enforcement. While virtually complete harmonization of rules would be a pre-requisite for a passport system, it would not address the need for consistent interpretation and enforcement between jurisdictions.

The discussion paper notes that while an issuer would supposedly have to learn and deal only with the rules of the primary regulator, investors would have recourse to the courts in their jurisdiction of residence. Furthermore, the discussion paper notes that the "host" regulator (in the investor’s jurisdiction) also could take enforcement action of its own "if dissatisfied with the actions of the primary regulator".

In short, any differences in rules or interpretation could undermine the confidence of issuers in their ability to rely on the single set of rules established by the primary regulator.

Timely and consistent response to changing needs. A passport system would not address the need for a harmonized set of rules to evolve in a timely manner. It would continue to rely on the CSA to make recommendations for amendments to legislation by each provincial and territorial legislature, a process which has proven to be inadequate. Also, this process provides no means of breaking a deadlock and ensuring a timely and harmonized response to key issues on which there is no consensus between provinces.

If adopted, a passport system would offer some marginal improvement over the current framework of securities regulation in terms of simplicity and cost savings to issuers.

It will not work at all without full and prompt implementation of a uniform securities legislation framework along the lines of that proposed by the CSA. And even if fully implemented by all jurisdictions, a passport system will maintain excessive costs for market participants, involve continuing legal uncertainty and inconsistent interpretation and enforcement, and be unable to evolve in a timely and consistent manner across the country.

BEYOND PASSPORTS: A SINGLE CANADIAN REGULATOR

The discussion paper noted that two other options, a single federal regulator and a dual federal-provincial regulatory framework, were rejected out of hand because they would not respect provincial responsibility for the regulation of securities. It seems obvious, however, that it would be possible to create a single regulator for Canada while fully respecting provincial jurisdiction in this area.

One option that is inexplicably not even mentioned in the discussion paper would be the creation of a single regulator run jointly by the provinces. Alternatively, as long as federal participation involves provincial consent, a dual federal-provincial framework would not violate the constitutional prerogatives of the provinces.

The key to the creation of a single regulator that does respect provincial jurisdiction lies in the concept of delegated authority advanced by the CSA. Under its USL proposals, regulators could delegate any of their specific functions to another regulator. In doing so, they would not surrender their power to rescind such delegation.

Delegation also is implicit in a passport system. Provincial governments would agree uniformly to delegate certain responsibilities from "host" jurisdictions to "primary" jurisdictions. Here too, there has been no suggestion that such delegation between provincial authorities would violate provincial jurisdiction.

This concept logically could and should be extended to encompass wholesale delegation by provinces to a new single regulator for Canada. The difference between the concept of delegation as advanced in the USL or passport models and that involved in creating a single regulator is one of degree, not of principle.

In constructing a single regulator on this basis, respect for provincial jurisdiction could be ensured in three ways:

The governance structure would ensure that control would rest with provincial governments;

The new regulator would be able to exercise only those powers explicitly delegated to it by participating provincial and territorial governments; and

Provincial and territorial governments would not surrender their power to revoke such delegation at any time, subject to the need for an orderly transition in the marketplace.

At the same time, investors, issuers and registrants would benefit from all of the advantages that would flow from replacing 13 regulatory bodies with one: one set of rules for all participants; lower administrative as well as compliance costs; consistent interpretation and enforcement; timely response to changing circumstances; and a more effective Canadian presence internationally.

The creation of a single regulator would not prevent individual provinces from developing or maintaining local rules, as long as they did not undermine the integrity of the harmonized framework. (This condition would be necessary for both simple harmonization and for a passport system as well.) Local rules could be administered either by smaller, specialized provincial bodies, by existing provincial ministries or even on behalf of provinces and territories by the single regulator.

The delegation concept also provides for an orderly transition to a single regulator from the current system. To become a single Canadian regulator, the new body would of course have to win the confidence of all provincial and territorial governments. However, creation of the new body and development and passage of the necessary enabling legislation need not await unanimity.

Initial development of the concept could be carried out by a consortium of interested governments, with the formal launch conditional on a commitment to delegate from an agreed critical mass of provincial and territorial governments.

Even if it covered only a majority of jurisdictions initially, the new body would have an opportunity to demonstrate the advantages of this approach in reducing the number of regulatory bodies while leaving the door open to delegation by other jurisdictions moving forward.

A single regulator for Canada could operate on a purely inter-provincial basis, but provincial and territorial governments may wish to consider the possible advantages of a federal presence.

In terms of governance, federal participation might provide additional assurance against the possibility of undue domination by one or two provinces. In addition, the use of federal enabling legislation would have the advantage of ensuring seamless authority between as well as within provinces, and might also be used to enhance the accountability process.

Unless the provinces wish to argue that a regulator constituted jointly by the provinces alone would lack some key element of authority over inter-provincial transactions, a federal presence is not necessary. By the same token, however, the issue of jurisdiction provides no excuse for provincial and territorial governments to reject the idea of a single regulator.

The only acceptable cause for rejecting creation of a single regulator would be the development of an alternative that would be even more effective in delivering on the goal and principles laid out in the discussion paper. A passport system does not meet this test.

No matter how well intentioned or well run, 13 regulators simply cannot provide the same efficiency of operation, simplicity of compliance, consistency of interpretation or flexibility in handling change as a single regulator operating under delegated provincial authority.

THE CONSEQUENCES OF INACTION

The cost and complexity of Canada’s current system of securities regulation undermines the competitiveness of Canadian companies seeking the capital they need to grow and create jobs from a Canadian base. This economic impact alone is reason enough to pursue serious structural reform.

But regulatory fragmentation is hurting Canadian investors too. As noted by the Canadian Bankers Association in its submission to the Wise Persons’ Committee to Review the Structure of Securities Regulation in Canada, only 5 percent of Canadian issuers bother to register in every jurisdiction, and only one in six reports in at least ten provinces or territories.

When the marginal costs of registering in another jurisdiction exceeds the expected benefits of marketing an issue to that jurisdiction’s residents, companies already are making the logical economic decision. And as the Fraser Institute noted in a study of rights offerings, investors in each territory and in every province except British Columbia, Alberta and Ontario were excluded from a majority of the offerings, with investors in the smallest jurisdictions the worst off.

At the same time, companies have more choices today in terms of where to raise capital. Most major Canadian companies already tap into the much larger pools of capital available in global markets. And even smaller Canadian companies now have a growing range of options, from foreign venture capital funds to direct listings on foreign exchanges.

If regulatory fragmentation persists, the higher costs of raising capital in Canada inevitably will persuade an increasing number of Canadian companies to bypass Canadian markets altogether, rather than just bypassing investors in individual provinces as most issuers do already.

In this context, two less attractive paths forward may come into play if the current constructive efforts to develop consensus on structural reform fail.

First, if the provinces are unable or unwilling to proceed with effective reform, it is possible that the federal government could choose to proceed unilaterally.

This would not be the Council’s preferred option, if only because such a confrontational course could only add to complexity, costs and legal uncertainty in the short term. But the United States successfully went this route in 1996. And the urgency of a coherent Canadian response to the fundamental changes sweeping through capital markets globally is such that unilateral federal action cannot be ruled out.

The final alternative, even less palatable, is what is likely to happen if jurisdictional jealousies and inertia allow the status quo to continue. The world will move on, and so may many of Canada’s current market participants.

A continued shift toward the United States as the primary and preferred point of access to capital for Canadian issuers would have regulatory as well as economic implications. In the absence of significant structural reform of securities regulation in Canada, the result by default will be the effective delegation of substantial authority over Canadian issuers to foreign regulators, especially to the United States Securities and Exchange Commission.

CONCLUSION

The Canadian Council of Chief Executives has consistently supported a seamless Canadian capital market over the years, and in today’s global environment, the argument in favour of structural reform has become overwhelming.

Canadians do not need a passport to live and work wherever they wish within Canada. Neither should participants in capital markets. The Council suggests strongly that the right answer for Canada in securities regulation goes well beyond the passport model described in the discussion paper.

The global evolution of capital markets and securities regulation has reached the point at which a system run by 13 regulators simply cannot perform as effectively as a single regulatory body for the country in meeting the ambitious goal and delivering on the principles agreed by provincial ministers.

The best answer — for the protection of Canadian investors, for the future of Canadian financial service providers, for the health of Canadian capital markets and for the competitiveness of Canadian enterprises — lies in the creation of a new single regulator for Canada.

Creation of such a single regulator, even one controlled by the provinces and exercising only the authority freely delegated to it, will require considerable political courage and determination. But in the sphere of securities regulation, provincial and territorial governments can no longer serve the interests of their own residents without also doing what is best for Canadians from coast to coast.

On July 10, 2003, at their meeting in Charlottetown, Prince Edward Island, provincial and territorial leaders agreed to form a new Council of the Federation through which they intend to address key Canadian issues while asserting their proper constitutional authority.

In the face of the compelling case for action in securities regulation, the ability of provincial governments to lead meaningful reform in this field will be a litmus test of their commitment to the wellbeing of all Canadians and therefore of the legitimacy of their claim to a more potent role in managing the federation in the years ahead.

The Canadian Council of Chief Executives strongly encourages provincial and territorial governments to act on their constitutional responsibility in working together to develop a single Canadian regulator, and is prepared to offer whatever help is required to drive such a project forward to an early and successful conclusion.