Canada
Financial Sector Assessment Program-IOSCO Objectives and Principles of Securities Regulation-Detailed Assessment of Implementation

This paper presents an assessment IMF report on implementation of the International Organization of Securities Commission (IOSCO) principles in Canada. It highlights that developing an integrated and robust view of risks to support supervisory actions remains a key challenge. The IMF report suggests that the securities regulators should continue to take steps to ensure timely decision making in policy formulation. However, the current governance arrangements, based on a consensus building approach across several entities, is expected to affect timeliness of decision making.

Abstract

This paper presents an assessment IMF report on implementation of the International Organization of Securities Commission (IOSCO) principles in Canada. It highlights that developing an integrated and robust view of risks to support supervisory actions remains a key challenge. The IMF report suggests that the securities regulators should continue to take steps to ensure timely decision making in policy formulation. However, the current governance arrangements, based on a consensus building approach across several entities, is expected to affect timeliness of decision making.

Introduction and Scope

6. A targeted assessment of the Canadian Securities Market was conducted June 3–28, 2013, as part of the Financial Sector Assessment Program by Ana Carvajal, Monetary and Capital Markets Department. A full assessment was conducted in 2007 based on the methodology approved by IOSCO in 2003. As a result Canada met the minimum threshold for a targeted assessment. Based on the due diligence2 conducted the assessment covered principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, and 35 in their entirety while principles 25 and 37 were partially reassessed3. Nothing in the due diligence suggested the need to reassess the remaining principles. The guidance for targeted assessments requires the assessor to carry over the description of the principles that have not been assessed in order to provide a complete view.

7. Such due diligence took into consideration (i) risks and vulnerabilities of the securities markets in Canada, (ii) regulatory developments that have taken place in Canada since 2007, (iii) areas where deficiencies were found in 2007, (iv) new areas of emphasis in the new IOSCO Principles and Methodology,4 and (v) the lessons from the crisis, both in terms of areas that require deeper attention as well as in regard to the need for assessors to take a more critical look at both the regulations in place to determine whether they are adequately capturing the risks of the system, and the intensity of supervision and enforcement, to determine the extent to which the regulatory framework is being implemented in practice. Information and Methodology Used for the Assessment.

8. The assessment was conducted based on the IOSCO Principles and Objectives of Securities Regulation approved in 2010 and its Methodology adopted in 2011. Principle 38 is not assessed as this Principle now is covered under the Principles for Financial Market Infrastructure; as a result issues related to CDCC as an SRO are not covered in this assessment.

9. The recent global financial crisis has reinforced the need for assessments to be more critical, both in terms of the robustness of regulation as well as the intensity of supervision. On the regulatory side, assessors are been required to look more closely at the extent to which regulations in place adequately capture the risk undertaken by different participants. On the supervisory side, assessors are required to look more deeply into the licensing process, the off-site monitoring and onsite inspection programs as well as how the supervisor follows-up on findings, including the use of enforcement actions, to make an informed judgment on the overall quality of supervision. In jurisdictions that rely extensively on SROs such critical analysis has also applied to them. In many jurisdictions this enhanced approach has had an impact on grades. In addition, experience has been gained in connection with principles 6 and 7 which allows assessors to delve deeper into the analysis of the processes in place to identify emerging and systemic risk. Furthermore through the Assessment Committee, IOSCO itself is developing further guidance to assess these Principles.

10. The assessment largely relies on an analysis of the regulatory framework and supervisory practices of the four largest provinces (Ontario, Québec, British Columbia and Alberta) to draw inferences on the level of implementation of the Principles for the country as a whole, given the challenge of assessing 13 frameworks. As will be further explained below, securities regulation in Canada is under provincial regulation. Given that the legal and regulatory framework has been largely harmonized via national instruments and the fact that these four provinces comprise roughly 95 percent of the activity of the Canadian securities market; the assessor believes this to be a reasonable approach. When relevant, the assessor has made the necessary distinctions in the legal and or regulatory framework, and practices of specific regulatory agencies are mentioned to provide examples as to how a particular requirement has been implemented in practice.

11. The assessor relied on (i) a self-assessment and a report on market data, which were prepared by the OSC, AMF, BCSC and ASC; (ii) the review of relevant national instruments, laws, regulations, and other documents provided by the regulatory agencies including registration, inspection and enforcement files; (iii) meetings with the chairs of the OSC and the ASC, the president of the AMF, and the executive director of the BCSC and staff of the OSC, AMF and BCSC, and other public authorities, in particular representatives of Finance Canada; as well as (iv) meetings with SROs (IIROC, MFDA, CSF, MX); CIPF; market participants including securities firms, market operators (both exchanges and ATSs), auditing firms, credit rating agencies and law firms.

12. The assessor wants to thank staff of the OSC, AMF, BCSC, ASC and CSA Secretariat for their full cooperation as well as their willingness to engage in very candid conversations regarding 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.

Description of Regulatory Structure and Practices

13. Securities markets in Canada are under a system of provincial regulation and supervision. 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 have the same underlying objectives—the protection of investors and ensuring 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 differ. As a result, the specific powers of the authorities can differ (although a set of basic powers is available to all of them), and in a few instances, the specific requirements for a particular category of market participants can differ (although as will be explained below there is currently a high degree of harmonization).

14. The nature, structure, resources and powers of the provincial regulators vary. The assessor was informed that in particular in the smallest provinces the regulator might still be part of the government, funded by it and with limited resources. That is not the case for the four largest provinces—Alberta, British Columbia, Ontario and Québec—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 rulemaking, registration, recognition, designation, supervision and enforcement authority—not only administrative but also quasi-criminal authority. In the case of the AMF, the adjudication of administrative cases is carried out through an independent tribunal, the Bureau de Décision et de Révision (BDR).

15. Under the umbrella of the CSA, provincial regulators are seeking to harmonize laws and regulations and coordinate their supervisory and enforcement activities. The CSA is a non-statutory association that brings together all Canadian securities regulatory authorities with the objective of improving regulation and supervision of Canadian securities markets. A Secretariat, located in Montreal, was established in 2004. The Secretariat currently has 6 staff in charge of providing logistical support to the CSA committees and managing national databases in the area of securities markets.

16. The CSA has undertaken several initiatives to harmonize securities regulation via the adoption of national (and a few multilateral) instruments. There are currently 40 national instruments and multilateral instruments, covering a wide variety of areas including issuers, CIS, market places and registrants. As confirmed by the authorities and market participants, most aspects of securities regulation have been harmonized. However, there are a few important differences that remain in connection with the enabling legislation for derivatives, certain prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions, and registration of non-resident Investment Fund Managers (IFMs), as will be explained in the assessment.

17. On the supervisory front, different initiatives have been implemented to eliminate duplication and ensure coordination. In particular, a passport system has been implemented for issuers, CIS, securities intermediaries and credit rating agencies. Under the passport system a decision to issue a receipt or a registration/designation decision taken by the principal regulator (usually the regulator of the province where the issuer/CIS/securities firm/CRA is domiciled) is automatically extended to the other provinces. Ontario has not joined the passport system; however the provinces created an interface, whereby decisions taken by the OSC as the principal regulator are automatically extended in the rest of the provinces. In cases where Ontario is not the principal regulator, the principal regulator acts as the liaison with the issuer/CIS/securities intermediary/CRA so that vis-à-vis the participant the system works as a single “window”. The principal regulator approach also applies to on-going supervision, including review of periodic filings and on-site inspections. The provincial regulators have also worked on the development of a coordinated approach for SROs. In the case of IIROC and MFDA coordination is based on a principal regulator approach, whereby one regulator acts as coordinator of actions on behalf of all regulators; and in the case of the exchanges is based on a lead regulator approach, whereby one regulator recognizes the exchange, while the others grant exemptions. In the area of enforcement, regulators have made use of joint investigations, joint adjudications and reciprocal orders to coordinate their actions. Finally, a system of committees serves as a forum to coordinate and discuss topics, including on novel issues, and to set up national priorities.

18. Provincial regulators rely largely on self-regulatory organizations (SROs) for the regulation and supervision of the market and its participants. The regulation and supervision of investment dealers and market surveillance of all equity markets is under the Investment Industry Regulatory Organization of Canada (IIROC), the regulation and supervision of mutual fund dealers except in Québec is under the Mutual Fund Dealers Association of Canada (MFDA), mutual fund dealers in Québec are under the supervision of the AMF and the discipline and education of individuals who act on behalf of mutual fund dealers in Québec is a responsibility of the Chambre de la Sécurité Financière (CSF), and all other non-equity exchanges are primarily responsible for market surveillance, including MX and NGX for derivatives markets.

19. A recent decision of the Supreme Court of Canada ratified the provincial nature of securities regulation but recognized a role for the federal government on “matters of genuine national importance and scope going to trade as a whole in a way that is distinct from provincial concerns, including management of systemic risk and national data collection.”5

Market Structure6

A. Markets

Equity exchanges

20. The total market capitalization of the Canadian equity market at the end of 2012 was nearly $2.2 trillion, or about 121 percent of GDP. There are four equity exchanges in Canada: TSX, TSXV, Canadian National Stock Exchange (CNSX), and Alpha Exchange Inc. (Alpha).7

21. The TSX and TSXV, owned and operated by the TMX Group have a combined market capitalization of $2.18 trillion and over 3,800 listed companies, making the TMX Group the eighth largest exchange group worldwide by market capitalization. The TSX, with 1,567 listed companies, is the senior equities market, representing approximately 98 percent of the total aggregate Canadian market capitalization. The majority of the largest companies listed on the TSX operate in the financial sector or extractive industries. The TSXV, with 2,257 listed companies, is the junior equities market and public venture capital marketplace for emerging companies. Approximately 57 percent of listed companies on the TSXV operate in the mining sector.

22. CNSX is an alternative stock exchange for smaller issuers that offers simplified disclosure requirements and a market structure tailored for micro-cap and emerging companies that do not have the financial resources to list on other major exchanges. At the end of 2012, total market capitalization of equity listings was $1.18 billion with 189 listed companies. CNSX also operates Pure Trading, a facility which provides an alternative marketplace for the trading of securities listed on recognized Canadian stock exchanges other than CNSX.

Debt markets

23. The major components of the Canadian bond market are the market for Government of Canada bonds, Canada Mortgage Bonds, provincial bonds and corporate bonds. The nominal value of total bonds outstanding at year-end 2011 amounted to just under $2.2 trillion (approximately 122 percent of GDP, both in local and foreign currency). Of those, corporate bonds amounted to $631 billion, of which a little more than 50 percent was issued by non-financial corporations.

24. The amount of corporate bonds issued in Canada has continued to increase since 2008, while the issuance of money market instruments, such as commercial paper and bankers’ acceptances, declined following the financial crisis up until 2010. In 2011 and 2012, net issuance of both commercial paper and bankers’ acceptances showed signs of recovery. Canadian chartered banks are major investors in CAD-denominated bonds, with these instruments representing approximately 40 percent of their total assets.

Derivatives markets

25. The MX is Canada’s financial derivatives exchange, listing equity, currency, index and interest rate derivatives. The over-the-counter (OTC) derivatives market is concentrated amongst the big six Canadian banks and the majority of transactions involving Canadian market participants are entered into with foreign counterparties. Globally, Canada accounts for US$18 trillion in OTC derivatives, or approximately 2.8 percent of the global market in 2012, with interest rate swaps and foreign exchange contracts being the dominant products.

26. The Natural Gas Exchange (NGX) is Canada’s largest energy exchange based in Calgary. It provides electronic trading, central counterparty clearing and data services to the North American natural gas, crude oil and electricity markets. NGX offers physical spot and forward natural gas and crude oil contracts deliverable in Canada and the U.S., and financial natural gas and electricity derivatives contracts.

27. Intercontinental Exchange (ICE) Futures Canada is Canada’s agricultural exchange. It was established in 1887 as the Winnipeg Grains and Produce Exchange and has been facilitating futures contract trading since 1904. ICE Futures Canada offers futures and options contracts for the global benchmark Canola contract.

Ats

28. There are currently seven ATS trading in equity securities in Canada. There are also three ATS trading debt securities; however, most of the debt trading is done over the counter. There is also one securities lending ATS.

Table 1.

Ats

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29. ATS have grown in number and significantly increased their share of trading volume in the last decade. The chart below shows the relative market share of ATSs, as measured by trading volume, for TSX listed stocks.

Figure 1.
Figure 1.

Market Share Trend (TSX Listed Stocks)

Citation: IMF Staff Country Reports 2014, 073; 10.5089/9781475523850.002.A001

30. Dark pools operate as ATS. Currently Liquidnet, Matchnow, Instinet and IntraSpread—Dark pool activity reached a high of 5.67 percent of volume traded in September 2012 before declining sharply, down to 1.73 percent as of December 2012. This decline has been attributed to regulatory changes that mandate a minimum level of price improvement for dark trades and give priority to lit orders over dark orders, at the same price on the same market place.

B. CIS

31. Canadian investors access the market through a diverse range of product channels, but continue to favor financial advice over making self-directed investment decisions. At the end of 2011, 91 percent of investment fund assets were acquired and held by investors through distribution channels involving the intermediation of an advisor.

32. Mutual funds remain a popular investment vehicle for Canadians, accounting for about 27 percent of total financial wealth in Canada. As of December 2012, the mutual fund industry had assets under management of $849.7 billion, surpassing pre-downturn highs. Since February 2009, the low point for industry assets during the crisis, mutual fund assets have increased by $298.8 billion or 54 percent. Total mutual fund net sales for 2012 were $30.4 billion, up from $21.2 billion in 2011. In addition, annual long-term fund sales in 2012 were the highest they have been since 1997.

33. In reaction to the GFC, the fund industry has seen a shift from equity funds to balanced and fixed income funds. Money market funds have also experienced a decline of assets, as a reaction of investors to lower yields paid by MMFs relative to their alternatives such as high interest savings accounts.

Table 2.

Fund Type by AMU (CAD millions)

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ETFs

34. While still small, ETFs have grown markedly in recent years. They reached a quoted market value on the TSX of $56.4 billion from 265 funds listed in 2012, up from $19.4 billion from 77 funds in 2008. At the end of 2012, ETFs accounted for 6 percent of total investment fund and managed fund assets. As of December 2012, in Canada, the assets of leveraged and inverse ETFs constituted approximately 2.5 percent of all ETF assets. As of December 2012, synthetic ETFs held approximately 5 percent and physical replication ETFs held 95 percent of total ETF assets under management. At September 2012, approximately 58 percent of Canadian-listed ETF assets were held by retail investors, with the difference accounted for by institutional clients. In addition to Canadian listed ETFs, Canadian retail investors also held $10.1 billion in U.S. listed ETFs which represented 16 percent of all ETF investment by Canadians at September 2012.

Hedge funds

35. The Canadian hedge fund industry is relatively small. Canadian hedge fund assets were estimated at $31 billion, or about 2 percent of the global hedge fund industry, which was estimated to be about $2.6 trillion in 2012. In 2012, there were 275 hedge funds in Canada, which also includes funds of funds. As compared to mutual funds, HFs are only about 4 percent of the total size of mutual funds in Canada. Individual Canadian hedge funds also tend to be small, with more than 80 percent of all hedge funds having less than $100 million in assets under management. The hedge fund industry is concentrated within a few firms.

C. Intermediaries

36. Canada has a system of specialized securities intermediaries. As a result banks and insurance companies that want to provide securities markets services must do it through a subsidiary. There are three main categories: dealers, advisers and investment fund managers (IFMs). Within the dealer category there are five subcategories: investment dealers (IDs), mutual fund dealers (MFDs), scholarship plans dealers, exempted market dealers and restricted dealers. IDs and MFDs must be members respectively of IIROC and MFDA, except mutual fund dealers in Québec which are subject to the oversight of the AMF.

As of December 2012, there were 1,498 active firms registered to carry out investment activities in Canada, of which 1,365 were headquartered in Canada. There are 202 registered firms that are IIROC members and another 119 are MFDA members. The remaining registrants are directly overseen by the securities regulators. Out of such number 543 were IFMs.

37. Some of the largest securities firms are subsidiaries of major Canadian banks. Further, through their subsidiaries the six major banks play an important role in securities markets. Below is some data on the importance of bank-subsidiaries.

  • The six bank-owned dealers accounted for 93 percent of the revenue in Ontario of the top 10 firms.

  • As of December 2012, the six bank-owned dealers accounted approximately for 80 percent of all trading volume.

  • Canadian bank-owned asset management subsidiaries exercise control of 60 percent of AUM of the top 10 asset management firms and 27 percent of the sector’s total AUM.

  • The subsidiaries of the six Canadian banks accounted for 92 percent of the total number of sales representatives of IDs and 64 percent of the sales representatives for MFDs.8

General Preconditions for Effective Securities Regulation

38. The assessment conducted in 2007 included the following findings in regard to preconditions: “There are a number of general preconditions necessary for the effective regulation of securities markets that 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.” Preconditions were not reassessed during this assessment. The assessor notes, however, the existence of modern contract and company law at the provincial level. Accounting and auditing standards are of high international quality; further IFRS have been implemented for issuers that offer securities to the public and auditors have to comply with the International Auditing Standards. There is in place a system of oversight of the auditing profession. There are alternative dispute resolution mechanisms and an impartial judiciary.

Main Findings

39. Principles related to the regulator—Current governance arrangements in the four regulatory agencies provide them a high degree of independence from the government, while at the same time subject them to strong accountability. The existence of part-time commissioners can pose conflict of interest, which are mitigated by the selection process established in the provinces and on an ongoing basis by the obligation of members to recuse themselves on decisions where they face conflicts. Under the umbrella of the CSA the provincial regulators have made significant progress in coordination and in ensuring a level playing field; however a few challenges remain. They have also made significant progress in the development of arrangements for the identification of emerging and systemic risk, although the availability of data and use of quantitative analysis is currently a challenge. Finally the regulators are aware of key conflicts of interest prevailing in the market, and are currently reviewing the sets of actions needed to address them. Carry from the 2007 assessment: “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”.

40. Principles for SROs—SROs are subject to recognition 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. There has been a significant evolution on governance arrangements in all SROs; but some challenges remain vis-à-vis conflict of interest.

41. 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. Current arrangements include both offsite monitoring and on-site inspections. While overall the regulatory agencies have in place an adequate risk-based approach to on-site inspections, in the agencies with the largest populations such risk based approach has resulted in a more focused use of on-site inspections. Enforcement by the regulatory agencies has experienced significant progress in recent years and is currently robust. The SROs are taking important steps to ensure timely response of firms to the deficiencies found in their compliance reviews (MFDA) and to strengthen the nexus between their compliance reviews and their enforcement activity (IIROC). Material challenges remain in connection with enforcement of criminal laws by government departments and law enforcement agencies.

42. Principles for cooperation—Carry from the 2007 assessment: “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”.

43. Principles for issuers—Carry from a 2007 assessment: “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”.

44. Principles for CIS—CIS operators are subject to registration based on fit and proper requirements. While requirements have been harmonized, the process to review applications varies in important ways across provinces. Current arrangements for the supervision of intermediaries—which include both off site monitoring as well as on-site inspections—are adequate; however the use of a risk-based approach has resulted in a more focused use of onsite inspections, particularly for the agencies with the largest populations. Hedge Fund managers are subject to the same regulatory regime than other CIS operators. All CIS that are offered to the public are required to have a custodian. Although custody can be provided by a related party, additional safeguards are in place, including the requirement that custodians are themselves regulated entities, the existence of the IRC, and disclosure to investors. Carry from the 2007 assessment: “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”.

45. Principles for market intermediaries—Market intermediaries are subject to registration based on fit and proper requirements. While requirements have been harmonized, the process to review applications varies in important ways across provinces. Overall requirements are robust, however prudential requirements for investment dealers need to better capture the risks associated with the use of un-invested moneys of clients. Current arrangements for the supervision of intermediaries include both off site monitoring as well as on-site inspections. These arrangements are adequate; however the use of a risk-based approach has resulted in a more focused use of onsite inspections, particularly for the agencies with the largest populations. There are early warning systems in place; however there is a need to improve coordination arrangements in the event of a failure of large investment dealers.

46. Principles for secondary markets—Carry from the 2007 assessment: “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. 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”. There are robust mechanisms in place for market surveillance. Exchanges and ATS are subject to pre-trade and post-trade transparency provisions. Dark orders are allowed; but the current framework incentivizes transparency. Arrangements to minimize failed settlements are reasonable, and there are robust reporting requirements in connection with shortselling.

Table 3.

Summary Implementation of the IOSCO Principles—Detailed Assessments

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Table 4.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

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A. Authorities’ Response to the Assessment

47. The Canadian securities regulators participating in the FSAP (the regulators) welcome the IMF’s review of the Canadian framework for the regulation and supervision of securities markets. We appreciate the significant time and effort the IMF Mission Team dedicated to complete the assessment, as well as their thoroughness and professionalism in assessing our system against the IOSCO Principles.

48. We are pleased that the IMF recognizes and concludes thatthe Canadian framework for the regulation and supervision of securities markets demonstrates a high level of implementation of the IOSCO Principles.” In particular, we are pleased that the IMF recognizes and concludes that in a few areas, such as enforcement, the securities regulators have powers that can be considered at the forefront of securities regulation.

49. The IMF’s recommendations in its 2007 FSAP were carefully considered and we continue to develop and implement reform initiatives consistent with our G-20 commitments and with IOSCO reform initiatives, policies and standards.

50. We will carefully consider the findings and recommendations from this FSAP, and we will continue to improve our oversight and supervision of the securities markets. In fact, several of the IMF’s recommendations are in line with a number of projects we have underway and help to highlight the importance of this work.

We would also like to take this opportunity to comment on certain other aspects of the assessment, as detailed below.

Additional Comments

On-site inspections

51. Over the years, the regulators have devised and implemented an on-site inspection program of regulated firms based on a comprehensive risk-based model. This approach to on-site inspections permits the regulators to efficiently and effectively supervise the conduct of regulated firms. By focusing on the firms and the areas of their operations that are considered to be the highest risk, the regulators use resources more efficiently and more effectively and are able to target problematic conduct on the part of registrants. The regulators are continuously assessing the risks posed by each regulated firm in light of all available information and reviewing the factors utilized in the risk-based model, as well as considering any other enhancements that may be made to the risk-based inspection program.

52. Given the comprehensive nature of the risk-based model, coupled with the continuous review and adjustment process, the regulators believe that the current level of on-site inspections is appropriate. As with all securities regulatory matters, the regulators will continue to assess the efficacy of the on-site inspection program and make justified adjustments as necessary.

Enforcement of criminal laws

53. We welcome the IMF’s conclusion that there has been significant progress in enforcement by the provincial Canadian securities regulators. The regulators are also pleased that the IMF has recognized their increased efforts to support the enforcement of criminal laws by the relevant criminal authorities. While the broadly worded opinion in respect of the effectiveness of the criminal law branch of the Canadian justice system goes beyond the scope of an assessment of the securities sector, the regulators want to emphasize that cases involving criminal activity in the capital markets are in fact prosecuted. As part of regulating the capital markets efficiently and effectively, the securities regulators will continue to cooperate with the criminal authorities and assist them in pursuing their responsibilities to prosecute such matters

Commentary on Supreme Court of Canada reference

54. The Canadian securities regulators welcomed the opportunity to provide a comprehensive description of the Canadian securities regulatory regime as part of the IMF’s FSAP assessment and rating of financial market supervision against accepted international standards. In order for such assessments to be viewed as objective, it is important for the IMF to focus on the substantive elements of the securities regulatory regime, as opposed to constitutional and political considerations as to how the responsibilities for implementing the regime have been delineated. As such, the Canadian securities regulators feel comments respecting the observations of the Supreme Court of Canada in a constitutional matter concerning securities regulation go beyond the scope of the assessment against the IOSCO Principles. In addition, the reference to the Court’s decision included in the assessment is a short excerpt of a summary and does not provide the full extent and meaning of the Court’s unanimous decision.

Part-time commissioners

55. As is evidenced by the IMF’s assessment, the Canadian securities regulators take the risks attached to the existence of conflicts of interest seriously. We are pleased that the IMF recognized that we have comprehensive and robust policies for managing potential conflicts that work well, and that there is no evidence of interference.

56. In considering and addressing situations where conflicts of interest may arise, the regulators weigh the benefits and risks of permitting situations where a conflict may arise. In respect of the decision on the part of the OSC, BCSC and the ASC to permit, as a matter of law, the inclusion of part-time Commissioners who may be directors of an issuer or registrant, the regulators each engaged in a thoughtful analysis and ultimately decided that the automatic exclusion of otherwise qualified persons on this basis may be detrimental to the ability of those Commissions to effectively and efficiently regulate the capital markets. In respect of the OSC and ASC, the current inclusion of a small number of Commissioners who sit as directors of an issuer, coupled with strong conflicts of interest policies, provides a significant benefit to the collective ability of each Commission to engage in analysis and decision-making. We also note that our conflict management policies and procedures are intended to capture all types of potential conflict situations, and are not specifically tied to a Commissioner’s status as a director of a market participant.

Harmonization

57. As a result of much hard work on the part of the Canadian securities regulators, the Canadian securities regulatory regime is highly harmonized. The regulators recognize the benefits to the capital market of having a highly harmonized securities regulatory regime. However, each Commission has the authority to implement non-harmonized securities laws where doing so is of benefit to that jurisdiction’s capital market, given the size, history and geographic realities of Canada. This is an important element and a strength of the Canadian securities regulatory regime. It permits the regulators to, in the vast majority of cases, implement harmonized securities laws while also permitting each Commission to tailor those laws, where appropriate, in order to achieve the overarching objectives of investor protection and efficiency in that capital market. The regulators will continue to ensure that highly harmonized securities laws are implemented where appropriate, but not where doing so would be to the detriment of any jurisdiction’s capital market.

Direct supervision of shareholder and directors of registrants

58. The Canadian securities regulators implemented an oversight regime for registrants that includes ongoing substantive consideration of the integrity and solvency of shareholders of registrants and of the integrity, solvency and experience of directors of registrants. Such matters are given careful consideration at the time of an application for registration and while the registrant continues to be registered. As a result of the regulators’ legal authority to deny registration on such grounds, and the legal authority to attach conditions to suspend or terminate such registration, the regulators already have the requisite indisputable authority over shareholders and directors of registrants.

Regulatory regime for portfolio managers and exempt market dealers

59. The regulators are mindful that there may be a perception by some market participants that an unlevelplaying fieldexists. However, in promoting an efficient capital market that provides robust investor protection, the regulators have advised the IMF that we must, and do, consider the differences in permitted activities, standards of care applicable to each category, scope of operations (including custody), business model, and types of clients. Such differences will result in substantively distinct, but equally balanced and fair, regulatory requirements for the affected market participants. While the regulators do not feel that, at this time, Portfolio Managers and Exempt Market Dealers should be required to become members of an SRO or should be required to contribute to a contingency fund, they will continue to assess the appropriate regulatory requirements for such entities.

Conclusion

We wish to thank the IMF assessor, Ms. Ana Carvajal, for her professionalism, openness and availability to discuss thoroughly all aspects of this assessment.

Detailed Assessment

60. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.

61. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.

Table 5.

Detailed Assessment of Implementation of the IOSCO Principles

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