Canadian securities regulators and regulatory instruments

• Author: Christopher Nicholls
• Pages: 75-106

75

CHA PTER 3

CANADIAN SECURITIES

REGULATORSAND

R EGUL ATORY

INSTRUMENTS

A. INTRODUC TION

Although the title of this book is Securities Law, it has become custom-

ary in both Canada and the United States to refer to the complex web

of rules that govern our capital m arkets as “securities reg ulat ion.” As

explained in Chapter 1, this phrase was coined by the late Profes sor

Louis Loss in the title to his seminal book on the subject f‌irst pub-

lished in 1951.1 The term is an apt one because many of the most fre-

quently encountered rules to which market participants are subject are

not “laws” in the strictest sense. They nevertheles s represent important

initiatives relating to the regulation of the capital ma rkets.

The focus of such industry regulat ion, as the Supreme Court of Can-

ada has stated, “i s on the protection of societal interests, not punishment

of an individual’s moral faults.” This emphasis on societal protection,

rather than indiv idual punishment, helps to explai n the somewhat

unique collaboration between securities regulators and those they reg u-

late. Securities pract itioners, for example, have often served “on second-

ment” at provincial securities commissions, performing m any key roles,

sometimes at the very highest levels. There are also formal and informa l

channels of communication between t he regulators and industry

1 Anecdotes of a Secur ities Lawyer (Boston: Little, Brow n and Company, 1995)

at 51. The Loss book evidently e volved from teaching materia ls he used in his

pioneering cours e on the US Securities and Exc hange Commission, f‌irst t aught

at the Yale Law School in 1947. Ibid at 48 –51.

SECU RITIE S LAW76

professionals intended to ensure t hat regulators understand the dynam ic

f‌inancial indust ry they govern and the effects on indust ry, intended and

unintended, of specif‌ic regulatory initiatives. For example, the OSC has

established a specia l committee of practitioners — the Securities Adv is-

ory Committee to the OSC — to provide advice on regulatory policies

and capital market trends a nd issues.2

The perhaps inevitably close relationsh ip between securities regu-

lators and the securitie s industry has, at ti mes, fueled suspicion. Uni-

versity of Chicago economist George Stigler famously argued in 1971

that all industr y regulation was at risk of indust ry capture. As he put

it, “as a rule, regulation is acquired by the industry and is de signed

and operated primar ily for its benef‌it.”3 Thus, for example, Nobel eco-

nomics laureate Merton Miller has argued that securitie s regulation, at

least in the United States, may in many ways be interpreted through

the lens of capture theory where t he main benef‌iciary of that regulation

is considered to be the brokerage industry.4 Not surprisingly, Stigler’s

“Capture Theory” of regulation is generally di smissed by regulators and

supporters of regulatory in stitutions as inaccurate, at best, a nd ideo-

logically motivated at worst. In the specif‌ic context of securities regula-

tion, Joel Seligman ha s summarily rejected the argument that capture

theory has any relevance to an understanding of US securitie s regula-

tion.5 Mary Condon, in a detailed analysis of the hi storical development

of Ontario securities regulation, has sim ilarly concluded that it cannot

be said that Ontario securities regul ators were captured by private inter-

ests.6 For a more detailed discussion of competing private and public

interest theories of f‌ina ncial market regulation, the reader i s invited to

look to other sources.7 The balance of this chapter will provide a sketch

of the basic framework withi n which Canadian secur ities regulators

2 See OSC Commis sion Policy 11-601, “The Securities Ad visory Committee to t he

OS C.”

3 George J Stigler, “The Theory of Economic Reg ulation” (1971) 2 Bell Journal of

Economics 3.

4 MH Miller, Merton Miller o n Derivatives (New York: John Wiley & Sons, Inc, 1997)

at 45.

5 See Joel Seligm an, The Transformation of Wall Street: A Hist ory of the Securities and

Exchange Commission an d Modern Corporate Finance (Boston : Houghton Miff‌lin

Company, 1982) at xi: “Few have suggested ser iously that the SEC has been a

‘captive’ of the indu stries it regulates. Q uite simply, such a suggestion cannot be

sustaine d by a reasonable reading of t he Commission’s history.”

6 Mary G Condon, Making Disclosure: Ideas a nd Interests in Canadian Securit ies

Regulati on (Toronto: University of Toronto Pre ss, 1998).

7 See, for example, Ch ristopher C Nicholls, Financial Inst itutions: The Regulatory

Frame work (Markham, ON: Lexi sNexis, 2008) at 40ff.

Canadian Securities Regulators and Regulatory Instruments 77

operate, focusing on Canada’s largest provinci al regulator, the OSC, and

offering an overview of the sources of Canadian secur ities regulation.

B. THE CONSTITUTIONAL ISSUE

1) Division of Powers

No discussion of a branch of Canad ian law is complete without some

reference to the constitutional question of federal and provincial legis-

lative authority. In the case of securitie s law, the constitutional ques-

tion is of particula r interest for the reasons explained brief‌ly below.

Securities law i n Canada, thus far, has been leg islated exclusively

at the provincial level. Unlike the United St ates, Canada has no federal

securities legi slation or federal securities regul ator comparable to the

US Securities and Exch ange Commission. There has never been any

serious doubt cast on the general constitutional authority of provincial

governments to pass legi slation related to the trading of securities. That

authority is found in subsection 92(13) of the Constitution Act, 1867,8

which confers upon each provincial government the power to legislate

with respect to propert y and civil rights in t he province.

Corporations, the entities that issue most marketable securities,

may be incorporated in Can ada under either federal or provincial law.

A constitutional question faced by the courts early in the twentieth

century was whether provincial securities legi slation applied to the

issue and the sale of secur ities of federally incorporated companies. In

1929, it was successfully argued b efore the Privy Council that prov-

incial securit ies legislation did not give provincial regulators power

over the sale of securities of federal ly incorporated corporations where

that legislation effectively “sterilized [the federal corporation] in all

its functions and activities.”9 This apparent limitation on provincial

securities regulators, however, was readily overcome. In a subsequent

decision,10 t he Privy Council held that properly crafted provincial

securities laws could indeed apply to federal companies. Specif‌ically,

such laws are valid as long as they do not require federal companies

to register provincial ly before they can issue securities. The laws must

8 Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, Appendix

II, No 5.

9 In Re Sale of Shares Act and Municipal a nd Public Utility Board Act (Man), [1929]

1 WWR 136 at 140 (PC).

10 Mayland and Mercur y Oils Limited v Lymburn and Frawley, [1932] 1 WWR 578

(PC).