Prof. Jeffrey MacIntosh on the National Securities Regulator

The following was originally part of the daily market report for November 28, 2014, but on reflection I have decided it deserves its own post.

A trade group that wants me to write them a cheque alerted me to a series of articles by Prof. Jeffrey MacIntosh on the new national securities regulator proposal. Assiduous Readers with extremely good memories will not need to be reminded that Prof. MacIntosh wrote a very good article on Pegged Orders. The first article of his new series, National Regulator 1: The Grand Market Regulator: Be afraid, very afraid, decries the enormous powers that are proposed:

In a provision that would be very much at home in Albania, North Korea, or The Peoples Republic of China, the federal legislation empowers the “Chief Regulator,” without holding a hearing or even giving advance notice, to “issue a notice of violation [for breach of the statute or regulations]… if the Chief Regulator has reasonable grounds to believe that the person has committed a violation.” The notice may specify a penalty of as much as $1-million for an individual and $15-million for non-individuals.

It is only after this notice is delivered that the person from whom the fine is demanded has an opportunity to make representations, and these representations are made to the very person who levied the fine in the first place – the Chief Regulator. Despite the potential economic burden, the pertinent burden of proof in the hearing is the civil standard (balance of probabilities) rather than the more demanding criminal law standard (beyond a reasonable doubt). Any director or officer “who authorized, permitted or acquiesced in the contravention” is potentially liable for the full amount of the fine.

The Chief Regulator can also order any person with a connection to capital markets to furnish the regulator (the “Authority”) with any kind of information, including information that is personal and/or confidential. No judicial warrant is required.

This information can be passed on to a law enforcement agency or “a governmental or regulatory authority, in Canada or elsewhere.” Indeed, it can be passed on to anyone of the Authority’s choosing. It can also be made public, if “the public interest in disclosure outweighs any private interest in keeping the information confidential.”

The statute specifically excludes any appeal to a court; the only appeal is to the regulatory tribunal.

The second article, A Category 5 blizzard of red tape is headed for Canada’s market players, decries changes in the laws:

Insider trading laws, for example, will now apply to any public company, and not just one that is a reporting issuer in Canada. They will also apply not merely to a purchase or sale of securities, but to any act in furtherance of a trade, a change with completely unknown ramifications. While under current rules, certain insiders are liable to the company in whose securities they trade for any “benefit or advantage” they receive, the new legislation extends the liability to include any benefit or advantage received by “all other persons as a result of the contravention.” Similarly, under current legislation only persons who actually trade with an insider have a right of action. Under the proposal, all persons trading on the opposite side of the market when an insider trades will have a cause of action, with no limitation on the aggregate damages that may be claimed. In a large public company, an insider trading profit of $100 could lead to an aggregate liability in the millions.

In the past, major overhauls of corporate or securities laws have invariably been effected by appointing a blue ribbon panel of experts to consult widely with stakeholders, ruminate at length, and publish a detailed report indicating not only the panel’s recommendations for change but the whys and wherefores of the proposed changes. Not in this case.

Shades of OSFI! The third article, Where are the efficiencies?, casts doubt on promised savings:

The agreement between the provinces and the feds, however, provides initially for the secondment, and subsequently for the transfer to the CMRA of all provincial employees currently engaged in securities regulation. In addition, no provincial regulator will disappear. Rather, each will morph into a branch office of the CMRA. Thus, there appear to be essentially no initial economies in moving to a cooperative regulator. Savings can only be achieved in the long run through expensive buy-out packages or attrition.

No doubt this is a handy-dandy inducement to get more provinces and territories to sign up, since no one in any of those respective organizations need hand out any pink slips. And indeed, to the extent that duplication is in fact eliminated, many employees will end up with a substantially reduced workload.

The final article in the series, The regulatory Leviathan, voices concern regarding accountability:

Various features of the CCMRA suggest that the administrative officials who staff the agency will be largely unaccountable to anyone. One of these arises out of the pesky little problem of maintaining legislative uniformity going forward, which will require legislative amendments in each and every one of the provinces and territories that are party to the scheme. Given the overwhelming lack of importance of securities regulation to the polity, and therefore the average politician, moving the legislative behemoth in a single jurisdiction is labour enough. Doing it in multiple jurisdictions is like attempting to safely shepherd an army of banana slugs across King and Bay during rush hour.

Unfortunately, the proposed cure for this problem is worse than the disease. The CCMRA essentially cuts the various legislatures out of the regulatory process. This is done by turning the uniform provincial legislation (the Provincial Capital Markets Act, or PCMA) into a skeleton, and imbuing the CMRA with the authority to tack on the fleshy structures that constitute the pith and substance of the regulatory apparatus. They do this via a purely administrative rulemaking process.

Market actors who are treated badly by securities regulators have little incentive to fight back. The practical imperative is almost always to get on with the business at hand. And everyone knows that fighting the regulator by insisting on a regulatory hearing is a mugs game. The regulators have made it clear that they will treat those who don’t “cooperate” (i.e. settle on Commission-dictated terms) much more harshly than those who role over and play dead. And if they decide to cream you, your right of appeal plus $4.08 will buy you a Grande Latte at Starbucks. Added to this is the powerful and ever-present incentive of securities lawyers and their clients to remain in the good books of the regulators, lest present squalls breed future tempests.

OSFI Squared! This is why we need academics – practitioners and practicing lawyers are too subject to intimidation.

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