Canadian Securities Regulators and Regulatory Instruments

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 109-150

109

CHA PTER 4

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 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.

SECU RITIE S LAW110

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.

B. THE CONSTITUTIONAL ISSUE

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).