Incentives, Experts, and Regulatory Renewal.

• Author: Sarro, Douglas

Introduction

1. The Advisory Committee Process in Context

   1. Legislative and Regulatory Obsolescence

   2. The Lead-Up to the 1994Amendments

   3. Ontario's Experience with Advisory Committees

2. Incentives

   1. Backgrounds of Committee Members

   2. Career Concerns

3. Implications

   1. Advisory Committee Recommendations

   2. Advisory Committee Process

   3. Subsequent Legislative and Regulatory Change

4. Potential Reforms

   1. Substantive Guardrails

   2. Procedural Guardrails

   3. Selection Criteria?

   Conclusion

   Introduction

   Updating rules to reflect new information about the world is easier said than done. One approach is for a legislature to commit to revisiting its rules periodically. (1) But when it comes to matters that are largely technical rather than politically charged, legislators may lack the incentive to develop the expertise to carry out this review in a meaningful way--put another way, legislators may find they can achieve higher political returns by devoting their scarce time and attention to other matters. (2) An alternative is to task civil servants with reviewing rules periodically and implementing needed changes on their own or making recommendations to the legislature, as appropriate. (3) Civil servants may have the expertise to carry out this work, but their incentive to use the review process to justify the expansion of their own powers and jurisdiction renders suspect any conclusions they reach. (4)

   Ontario securities law employs a structure that seems to avoid these pitfalls. It provides that, every four years, the Minister responsible for administering the Securities Act (generally the Minister of Finance) will appoint an advisory committee to review the entire body of securities "legislation, regulations and rules". (5) Committee members work much like a team of consultants, generating recommendations for change and delivering them to the Minister at the end of their engagement. (6) The possible advantages of this structure are obvious: committee members bring expertise and, unlike the government's in-house experts (civil servants), presumably will not have any reason to lean towards making recommendations that expand bureaucratic power.

   The appointment of a new Advisory Committee in 2020 was highly anticipated and long overdue--it was only the second convened since the structure was introduced in 1994. (7) But its work would not receive the kind of reception one would expect for an independent, technocratic review. The draft recommendations included in the Committee's July 2020 consultation paper faced what one media report called a "barrage of criticism" from stakeholders, who viewed the recommendations as "ill-conceived" and likely to "threaten investor protection". (8) Other stakeholders took issue with the sixty-day period the committee allowed for comments, saying it did not give them enough time to fully consider the forty-seven reform proposals disclosed in the consultation paper. (9) Others said the proposals were not supported by enough reasoning to meaningfully engage with them (10)--proposals tended to receive brisk treatment in the consultation paper, with the committee at times pointing to "concerns" raised by "stakeholders" as a basis for acting without citing any evidence substantiating these concerns. (11) The Committee's final report, published in January 2021, also received mixed reviews, with one columnist calling it a "grab bag of ideas" that "fails to offer the kind of detail and analytical depth needed to support the recommendations". (12) Nonetheless, the Committee's recommendations were well-received by government, and appear set to have a transformative impact on Ontario securities law. (13)

   Without commenting in any comprehensive way on the work of the 2020 Committee, this article aims to identify why Ontario's advisory committee process might fail to work as intended, and what changes to the legal structure governing this process could mitigate this possibility. (14) These changes could be implemented as part of the pending overhaul of securities laws in Ontario announced by the government in response to the 2020 Committee's report. (15) More broadly, this article serves as a case study illustrating the need to exercise care when outsourcing regulatory renewal to third-party experts. While offering a potential solution to the problem of inattentive legislators and overreaching bureaucrats, these experts also bring their own set of incentives to the table. Absent adequate guardrails around these experts' mandates and deliberative processes, these incentives could give rise to new sets of problems.

   Advisory committee members often are mid-career professionals who stand to benefit from using their committee work to bolster their profile within the securities industry, whether in the hopes of advancing in their private sector careers or securing a senior appointment at a regulator. (16) To further this interest, advisory committee members might gravitate towards recommendations they deem likely to attract attention from industry and be embraced by the Minister. These incentives are a strength: they give committee members a reason to think outside of the box, broach topics career civil servants might be too risk averse to raise, and develop reforms that reflect the priorities of the government chosen by the public. But they are also a weakness, in that they could lead these third-party experts to choose recommendations for their political salience and potential to attract attention rather than their quality.

   Low-quality, incentive-driven recommendations from third-party experts pose problems if they (i) are worse than the status quo or (ii) divert resources away from worthwhile reforms that otherwise would have been generated within government. Imposing guardrails around the committee's consultation process would mitigate the first of these risks. Minimum periods for consultation and a requirement that comment letters be published would ensure proposed recommendations are subjected to meaningful scrutiny before they are adopted. And a deadline for completion of the committee's work (which would be subject to extension) also could improve the overall quality of recommendations by keeping the committee focused on those issues it views as most important.

   Focusing the committee's mandate on securities legislation, as opposed to regulation, would mitigate the second of these risks. Absent an advisory committee's involvement, legislation seems unlikely to receive sufficient attention from politicians (who might prefer to focus on more politically salient matters) or securities regulators (who might prefer to focus on regulatory reforms they can undertake without having to make demands on politicians' time). (17) This more targeted mandate would allow these third-party experts to play a distinct role that complements, rather than displaces, the work undertaken by the government's in-house experts. By contrast, the committee's current mandate to review the entire body of securities law (i.e., both legislation and subordinate regulation) all but guarantees that a good portion of a committee's work will involve second-guessing and displacing reforms generated by securities regulators. What is more, this second-guessing seems unnecessary to ensuring regulation evolves in line with broader government priorities, given that securities law provides several other mechanisms for achieving this objective.

   Part I of this article provides relevant context, including the circumstances that led to the adoption of the advisory committee structure in Ontario and the work of the two advisory committees that have been constituted since then. Part II discusses the possible incentives of advisory committee members, having regard to the backgrounds and career trajectories of past committee members. Part III describes these incentives' potential implications for the advisory committee process and subsequent legislative and regulatory change, drawing on Ontario's experience with prior advisory committees. This Part also describes potential drawbacks of allowing advisory committee recommendations to displace reforms generated by the in-house experts at Ontario's securities regulator, the Ontario Securities Commission (OSC). Part IV discusses potential reforms.

1. The Advisory Committee Process in Context

   The advisory committee process was part of a package of amendments to the Securities Act enacted in 1994, (18) after years of political inattention to securities law brought about a legislative and regulatory failure that threatened to topple much of the infrastructure of rules and policies underlying Ontario's capital markets. After introducing the problem of rule obsolescence and how committing a legislature or regulator to revisit its rules periodically could address this problem, this Part reviews the events that led to Ontario's adoption of the advisory committee process and Ontario's experience with this process.

   1. Legislative and Regulatory Obsolescence

      Over time, rules become obsolete and must be revisited. Scholarship discussing the challenge of identifying and updating obsolete rules stretches back over a half-century. (19) One way to meet this challenge is via a legislative "sunset clause", under which the legislation will automatically expire after a period of time unless the legislature re-enacts it. (20) Variants on the sunset clause include provisions that cause licenses granted under the legislation to expire absent periodic extension by the legislature (found in the federal Bank Act), (21) or require legislators to review legislation after a fixed period (found in the federal Copyright Act), (22) in some cases with the benefit of a report from the minister responsible for that legislation (found in Quebec's Securities Act and various federal statutes). (23) These clauses are intended to serve as commitment devices that force the legislature to revisit its legislation and consider whether it...