Canadian Securities Regulators and Regulatory Instruments

AuthorChristopher C. Nicholls
ProfessionFaculty of Law, Western University
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 re gulat ion.” A s
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.”2 This emphasis on societal protection,
rather than individual punishment, helps to explain the somewhat
unique collaboration between secur ities regulators and those they regu-
late. Securities pract itioners, for example, have often served “on second-
ment” or in other temporary arrangements at provincial securities
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.
2 Committee for the Equal Treatment of Asb estos Minority Shareholders v Ontar io
(Securities Commission), [2001] 2 SCR 132 at 150.
commissions, perform ing many key roles, sometimes at the very highest
levels. There are also formal and in formal channels of communication
between the regulators and i ndustry professionals intended to en sure
that regulators understand the dynamic f‌inanci al industry they gov-
ern and the eects on industry, intended and unintended, of specif‌ic
regulatory initi atives. For example, the Ontario Securities Comm ission
(OSC) has established a special committee of practit ioners the Secur-
ities Advisor y Committee to the OSC — to provide advice on regulatory
policies and capital market trend s and issues.3
The perhaps inevitably close relationship between securities regu-
lators and the securities industry has, at time s, fueled suspicion. Uni-
versity of Chicago economist George Stigler famously argued in 1971
that all industr y regulation was at risk of industry capture. As he put
it, “as a rule, regulation is acqui red by the industry and is designed and
operated primar ily for its benef‌it.”4 Thus, for example, Nobel economics
laureate Merton Miller has arg ued that securities reg ulation, at least
in the United States, may in m any ways be interpreted through the
lens of capture theory where the ma in benef‌iciary of that regulation
is considered to be the brokerage industry.5 Not surprisingly, Stigler’s
“Capture Theory” of regulation is generally di smissed by regulators and
supporters of regulatory institutions as inaccurate, at best, and 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.6 Mar y Condon, in a detailed analysi s of the historical development
of Ontario securities regulation, has sim ilarly concluded that it cannot
be said that Ontar io securities regulators were captured by private inter-
ests.7 For a more detailed discussion of competing private and public
interest theories of f‌ina ncial market regulation, the reader i s invited to
3 See OSC Commis sion Policy 11-601, “The Securities Adv isory Committee to the
OS C.”
4 George J Stigler, “The Theory of Economic Reg ulation” (1971) 2 Bell Journal of
Economics 3.
5 MH Miller, Merton Miller on Der ivatives (New York: John Wiley & Sons, Inc,
1997) at 45.
6 See Joel Seligman, The Transformat ion of Wall Street: A History of the Securities
and Exchange Commissi on and Modern Corporate Finance (Bo ston: Houghton Mif-
f‌lin Company, 1982) at xi: “Few have suggested s eriously that the SEC has be en
a ‘captive’ of the indu stries it regulates. Q uite simply, such a suggestion cannot
be sustai ned by a reasonable reading of t he Commission’s history.”
7 Mary G Condon, Making Di sclosure: Ideas and Interests in Canadian Sec urities
Regulati on (Toronto: University of Toronto Pre ss, 1998).
Canadia n Securities Regul atorsand Regulatory In struments 111
look to other sources.8 The balance of this ch apter will provide a sketch
of the basic framework within wh ich Canadian secur ities regulators
operate, focusing on Canada’s largest provi ncial regulator, the OSC, and
oering an overview of the source s of Canadian secur ities regulation.
1) Division of Powers
No discussion of a branch of Canadian law is complete without some
reference to the constitutional question of federal and provi ncial legis-
lative authority. In the case of securities law, the constitutional question
is of particular interest for the reasons explai ned brief‌ly below.
Securities law i n Canada, thus far, has been legislated exclusively
at the provincial level. Unlike the United St ates, Canada has no federal
securities legislation or federal securities regulator 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 section 92(13) of the Constitution Act, 1867,9 which
confers upon each provincial government the power to legislate with
respect to property and civ il rights in the 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 provi ncial securities legislation applied to the
issue and the sale of secur ities of federally incorporated companies. In
1929, it was successfully argued before the Pr ivy Council that provin-
cial securities legislation did not give provincial regulators power over
the sale of securities of federally incorporated corporations where that
legislation eectively “sterilized [the federal corporation] in all its func-
tions and activities.10 This apparent limitation on provincial s ecurities
regulators, however, was readily overcome. In a subsequent decision,11
the Privy Council held that properly crafted provincial securities laws
8 See, for example, Ch ristopher C Nicholls, Financial Inst itutions: The Regulatory
Frame work (Markham, ON: Lexi sNexis, 2008) at 40.
9 Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, Append ixII,
No 5.
10 In Re Sale of Shares Act and Mu nicipal and Public Utility Board Act (Man), [1929]
1WWR 136 at 140 (PC).
11 Mayland and Mercur y Oils Limited v Lymburn and Frawley, [1932] 1 WWR 578 (PC).

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