Canada
Financial Sector Assessment Program: Detailed Assessment of the Level of Implementation of the IOSCO Principles and Objectives of Securities Regulation

The regulatory framework for the securities market of Canada exhibits high levels of implementation of the International Organization of Securities Commissions’ (IOSCO) Principles. The regulatory framework for most of the areas covered by securities regulation is robust. The general preconditions necessary for the effective regulation of securities markets appear to be in place in Canada. Nevertheless, there are gaps in the regulation and supervision of collective investment schemes (CIS), and enforcement is in need of further improvement, in terms of efficient use of resources.

Abstract

The regulatory framework for the securities market of Canada exhibits high levels of implementation of the International Organization of Securities Commissions’ (IOSCO) Principles. The regulatory framework for most of the areas covered by securities regulation is robust. The general preconditions necessary for the effective regulation of securities markets appear to be in place in Canada. Nevertheless, there are gaps in the regulation and supervision of collective investment schemes (CIS), and enforcement is in need of further improvement, in terms of efficient use of resources.

I. Introduction

1. An assessment of the Canadian Securities Market was conducted from September 10–21, 2007 as part of the Financial Sector Assessment Program by Ana Carvajal, Monetary and Capital Markets Department.1

II. Information and Methodology Used for the Assessment

2. The assessment was conducted based on the IOSCO Principles and Objectives of Securities Regulation and the associated Methodology adopted in 2003. A Committee on Payment and Settlement Systems (CPSS)/IOSCO Assessment was conducted separately; thus Principle 30 was not assessed here.

3. As it was impossible to assess 13 provinces, the assessment largely relied on the regulatory frameworks of Ontario and Quebec to draw inferences on the level of implementation of the Principles for the country as a whole. Given the high level of harmonization in regulations that has been brought about by the adoption of National Instruments, and the fact that these two provinces account for a very significant proportion of the activity of the Canadian securities market, the assessor and the Government of Canada believe that this is a reasonable approach. To the extent possible the assessor has highlighted the cases where important differences exist between the framework of these two provinces and other provinces/territories.

4. The assessor relied on (i) self-assessments carried out by the Ontario Securities Commission (OSC) and the Autorite des Marches Financiers (AMF); (ii) the review of relevant laws, regulations issued by both the OSC and the AMF, and other relevant documents including procedures, manuals and guidelines; (iii) meetings with Board members of the OSC and the president of the AMF, staff of both regulatory agencies, and other public authorities, in particular representatives of Finance Canada and the Bank of Canada; as well as (iv) meetings with market participants, including issuers, financial intermediaries, market operators and self regulatory organizations.

5. The assessor wants to thank both the OSC and the AMF for their full cooperation as well as their willingness to engage in very candid conversations about the regulatory and supervisory framework in their provinces. The assessor also wants to extend her appreciation to all other public authorities and market participants with whom she met.

III. Description of Regulatory Structure and Practices

6. Securities markets in Canada are under a system of provincial regulation and supervision.2 As a result, there are 13 regulatory authorities, each one administering a separate set of securities laws and regulations. Overall, securities legislation in all the provinces and territories has the same underlying objectives—ensuring investor protection and fair, efficient capital markets—and the regulatory authorities share the same core responsibilities. However, actual regulations developed by each province to address these core set of goals and responsibilities can, and do, differ, and so can the specific requirements applicable to different types of market participants as well as the level of investor protection.

7. The nature, structure, resources, and powers of the provincial regulators vary. The assessor was informed that in the smallest provinces in particular, the regulator is still part of the government, funded by it and with limited resources. That is not the case for the four largest jurisdictions—Alberta, British Columbia, Ontario and Quebec—which roughly supervise 95 percent of the market. These regulatory agencies are operationally independent and fully self-funded by levies imposed on market participants. They have comprehensive powers, including enforcement powers. In the case of the AMF, enforcement powers are exercised through an independent tribunal, the Bureau de Decision et de Revision en Valeurs Mobilieres (BDRVM).

8. Under the umbrella of the Canadian Securities Administrators (CSA), provincial regulators are working to coordinate their actions. The CSA is a non-statutory association that brings together all Canadian securities regulatory authorities with the objective of improving regulation of Canadian securities markets. The CSA has undertaken several initiatives to harmonize securities regulation via the adoption and administration of national instruments.

9. Authorization and supervision of issuers, CIS, and registrants are the areas where more progress has been achieved. The provincial regulators have developed a mutual reliance review system (MRRS) for issuers and CIS, whereby decisions are taken by one regulator under a highly harmonized regulatory framework, while the others retain the authority to opt out. A similar regime, the National Registration System (NRS), has been developed for registrants, though regulatory harmonization has not taken place yet. The provincial regulators have also worked on the development of a coordinated approach for exchanges and self regulatory organization (SRO) oversight, with more progress being achieved at the level of the exchanges.

10. Provincial regulators rely largely on self-regulatory organizations (SROs) for the regulation and supervision of the market and its participants. The main SROs are: (i) the Investment Dealers Association of Canada (IDA), which has self regulatory powers over investment dealers; (ii) the Mutual Fund Dealers Association of Canada (MFDA), which has powers over mutual fund dealers; (iii) the Chambre de la securite financiere (CSF), which regulates mainly mutual fund representatives in Quebec; and (iv) Market Regulation Services Inc. (RS), which has self regulatory powers over the trading in equity marketplaces.3 In addition, the Montreal Exchange (MX) is recognized as an SRO, and the equity exchanges (the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX V)) should be considered SROs, although they have outsourced market regulation functions to RS. A proposal for the merger of IDA and RS has already been submitted to the regulators.

IV. Market Structure

11. Canada has a system of specialized securities intermediaries, although the categories and requirements vary across provinces. In general there are three main categories: investment dealers, mutual fund dealers, and advisors. Investment dealers and mutual fund dealers are required to be members of an SRO (either the IDA or the MFDA; except in Quebec where mutual fund representatives are required to be members of the CSF while mutual fund firms are not). Membership in these SROs has de facto harmonized requirements for these two categories of participants (except for mutual fund dealers in Quebec).

12. The main exchanges work under a model of specialization. Under a noncompetition agreement, the TSX and TSXV have specialized in equity (senior and junior, respectively) while the MX is a derivatives market. The TSX has already announced that it will pursue the creation of a derivatives market once the agreement expires in 2009.

13. The TSX is the 7th largest equity market by market capitalization. As of December 2006, market capitalization of the TSX Group amounted to US$1,701 billion. It ranks 12th by value of equity trading, with a traded valued of US$1,282 billion for 2006. There is an important link with the U.S. market: in 2006 there were 195 interlisted issuers out of 1,598 TSX-listed issuers, for a combined market value of US$1.2 trillion or 61 percent of the total domestic market. Moreover the regulatory authorities have developed a Multijurisdictional Disclosure System, under which issuers from the United States and Canada largely rely on the filings that they produce in their home countries for purposes of the cross listing.

14. Ontario has a significant share of the market and its participants. Approximately 31 percent of listed issuers, amounting to 46 percent of Canada’s equity markets, are based in Ontario; 60 percent of IDA member firms have their Canadian head office in Ontario; 76 percent of CIS assets are held by firms based in Ontario; and 49 percent of the assets of the top 100 employer funds are also held by Ontario based pension funds.

V. General Preconditions for Effective Securities Regulation

15. The general preconditions necessary for the effective regulation of securities markets appear to be in place in canada. Those preconditions relate to sound macroeconomic policies, appropriate legal, tax and accounting frameworks, and the absence of entry barriers to the market.

VI. Main Findings

16. Principles related to the regulator—The largest regulatory agencies work independently of the government under a vigorous system of accountability. They are funded by levies imposed on market participants. Self funding has allowed them to retain sufficient qualified personnel to carry out their functions. They are subject to a high degree of transparency, including public consultation on regulations and published policy statements. At the same time, they abide by high standards of ethics that have been codified into an ethics code, with certain reporting obligations. They are active on investor education. Under the umbrella of the CSA, provincial regulators are coordinating their actions, albeit with uneven progress: issuers, CIS and registrants are the areas where more progress has been achieved.

17. Principles for SROs—SROs are subject to authorization based on eligibility criteria that among others address issues of financial viability, capacity to carry out their functions, governance, and fair access. Supervision is based on a set of mechanisms that include off-site reporting, on-site inspections, as well as regular meetings and close contact with SRO staff to discuss ongoing issues.

18. Principles for enforcement—Canada has established a credible system for the supervision of the market and its participants in which SROs play a significant role. Enforcement has experienced positive change during recent years; however, it is still in need of considerable improvement. Although matters of a criminal nature and securities law matters are enforced by different authorities, these authorities can and do cooperate with each other in certain circumstances. However, the development of a coordinated approach to enforcement between criminal and securities law enforcement, with clear lines of accountability and benchmarks, seems to be missing. Both the federal authorities and the provincial regulators have taken important steps in that direction.

19. Principles for cooperation—The largest regulatory agencies have explicit and comprehensive powers to share information with both local and domestic authorities and can do so without the need of any external approval. The four largest jurisdictions are signatories of the IOSCO Multilateral Memorandum of Understanding (MMoU). They have the power to obtain information that is not in their files on behalf of foreign regulators. They have shown clear a commitment to exchange information and assist other regulatory agencies both domestically and internationally.

20. Principles for issuers—Issuers are subject to disclosure obligations at the moment of authorization and on an ongoing basis, fully in line with IOSCO standards. The regulatory agencies have developed a system for review of the prospectus as well as continuous disclosure obligations. Liability provisions are in place to ensure issuers’ responsibility for the prospectus.

21. Principles for CIS—CIS operators are not subject to a registration regime. As a result, the regulatory agencies cannot impose eligibility criteria on them and it is questionable whether they can exercise full disciplinary powers over them. However some of the risks of this gap are currently being mitigated by the fact that under their respective securities laws, CIS operators are considered “market participants” and as such are subject to certain minimum obligations. Public offerings of CIS are subject to disclosure requirements at the moment of authorization and on an ongoing basis, fully in line with IOSCO principles. There are rules in place on separation of assets; however not all CIS are required to have a custodian. Supervision of mutual funds and their operators is not a regular part of the oversight program of one of the major regulatory agencies, although the agency does carry out targeted reviews.

22. Principles for market intermediaries—Market intermediaries (investment dealers, mutual fund dealers and advisors) are subject to a registration regime based on eligibility criteria that include integrity, financial viability, and capacity to carry out their services (including proper internal controls and risk management mechanisms). Supervision of investment dealers and mutual fund dealers is carried out by their respective SRO (except in Quebec where mutual fund dealers are supervised by the AMF). These SROs have developed risk assessment models to determine the focus and frequency of inspections. Supervision of advisors (and mutual fund dealers in Quebec) is carried out by the regulatory agencies, also based on risk assessment models. Investment dealers and mutual fund dealers are required to participate in contingency funds.

23. Principles for secondary markets—The operation of an exchange is subject to an authorization regime based on eligibility criteria that include financial viability, capacity, governance, and fair access. Alternative Trading Systems (ATS) are regulated as dealers subject to certain market requirements; however the framework allows the regulatory agencies to regulate them as exchanges once they reach a certain threshold. Exchanges have developed mechanisms for market surveillance, which are complemented by regulatory surveillance. There is sufficient pre-trade transparency for market participants and post-trade transparency for both market participants and the public. There are plans to deal with market disruptions, although in one of the agencies these should be further developed. The two main clearing entities, one for securities and the other for derivatives, have developed reasonable mechanisms to manage large exposures including selection criteria for clearing members, margins and collateral.

Table 1.

Summary Implementation of the IOSCO Principles and Objectives of Securities Regulation

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Table 2.

Detailed Assessment of Implementation of the IOSCO Principles and Objectives of Securities Regulation

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Table 3.

Recommended Action Plan to Improve Implementation of the IOSCO Principles and Objectives of Securities Regulation

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Authorities’ response to the assessment

The authorities are largely in agreement with the results of the IOSCO assessment. They emphasized that the adoption of the proposed National Instrument NI 31-103-Registration Requirements will address the gaps in the regulatory framework for collective investment scheme operators. In addition, the approval of the proposed National Instrument 41-101 will extend custodian requirements to all types of collective investment schemes.

1

An IOSCO assessment was conducted in 1999; however at that time a methodology to assess the level of implementation of the Principles had not been developed. In addition, significant reforms have been brought about by the creation of the Canadian Securities Administrators (CSA). Therefore, a decision was taken to conduct a full assessment rather than an update.

2

The provinces have regulated capital markets using their jurisdiction over “property and civil rights” set out in Subsection 92(13) of the Constitution Act, 1867. Legal opinions commissioned by the Wise Persons Committee concluded, however, that nothing in the Constitution prevents the federal government from regulating this area.

3

The equity marketplaces are the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSXV), Canadian Trading and Quotation System—the new Canadian stock exchange (CNQ), and the Alternative Trading System (ATS).

Canada: Financial Sector Assessment Program: Detailed Assessment of the Level of Implementation of the IOSCO Principles and Objectives of Securities Regulation
Author: International Monetary Fund