National securities regulator: The devil’s in the details

  • December 01, 2014
  • Doug Beazley

But there are devils in those missing details. The Canadian Bar Association was one of the organizations invited to comment on the legislation. A CBA committee devotes much of its draft response to the bills to protesting their frustrating vagueness — especially when it comes to detailing how much power the CMRA will wield, and how.

“What’s missing is an explanation for why these governments are proposing many of these changes — what they’re trying to accomplish,” says Glen Johnson, a securities law practitioner at Torys LLP. “The thinking seems to have been, ‘Let’s give ourselves all the tools we think we may need at some point, then fine-tune it all later’.”

Take information-gathering — a key plank of the proposed federal government role in forestalling threats to securities markets. Section 10 of the CMSA gives the regulator the power to demand records or data at any time for the purposes of “monitoring activity in capital markets or detecting, identifying or mitigating systemic risks related to capital markets.”

“But what does that mean?” asks Nicholas Dobbek, securities law practitioner at Wildeboer Dellelce LLP. “This section says the regulator can collect information from anyone, whether they are a regulated entity or not, and regardless of their nexus to capital markets. It’s not qualified by any reference to the regulations. This power appears to be very broad.”

The CBA committee wants strict controls on the use of Section 10, so that — as the committee brief puts it — it “could not be used by the Authority as a means of circumventing due process safeguards.” It also argues that “any exception to the requirement to treat non-public information confidentially should be explicitly set out in the statute as opposed to buried in the regulations.” It wants law enforcement agencies to make written requests for information gathered by the Authority under the CMSA, and for Ottawa to build in safeguards to protect confidential information shared with parties outside of Canada.

More sweeping still are the powers listed under the second part of the CMSA, which gives the Authority (in consultation with a Council of Ministers) the scope to declare any trading facility, clearing house, credit rating agency, benchmark, capital markets intermediary or any class of securities or derivatives “systemically important” — which in turn gives the Authority the power to regulate anything from collateral and liquidity levels to public disclosure. The CBA committee wants those sections of the law to explicitly give affected parties the right to make representations to the Authority.

Section 10 of the PCMA, meanwhile, states that any market player must “provide the Authority with any information, record or thing in its possession or under its control” relating to market regulation on demand. The section makes no allowance for solicitor-client privilege — something that alarmed the CBA reviewers. “Could it be used against lawyers?” asked Johnson. “Traditionally, regulators have been quite respectful of privilege claims.”

Section 65 of the PCMA prohibits manipulation of a benchmark — the price used by market participants to set prices for other trades in the same commodity or currency. The idea is to prevent something like the 2012 LIBOR scandal from happening here, but one lawyer on the CBA committee says the law is too broad.

“If you’re just a data-entry guy at an oil storage company, you can’t be expected to know if the data is being used to manipulate a benchmark,” says Dan McElroy, securities law practitioner at DuMoulin Black. “A defence of foreseeability should be written into this section.”

Some in the legal community question the Authority’s power to punish. The arch-critic of the moment is probably Jeffrey MacIntosh, TSE Chair in Capital Markets Law at the University of Toronto. “(The CMSA) gives the national regulator the power to state that there are reasonable grounds for finding that a market participant has violated the law, and to order the offending company to pay up to $5 million, or $1 million in the case of an individual,” he says. “You have 30 days to respond. If you don’t contest the order, you have to pay.

“That’s a hefty fine without a hearing — and there’s nothing in the legislation that requires a hearing.”

All of these concerns add up to one point: Everything depends on what ends up in the regulations. A Department of Finance spokesman says there will be a comment period on the regulations for stakeholders, but its length hasn’t been determined yet.

“We’d like to see at least another 30 to 60 days’ consultation just on the regulations,” says CBA lawyer Noah Arshinoff.

“Right now you’ve got provincial regulators across the country which know their roles and how they work together. This is going to change all that. So we need to be sure.”

Doug Beazley is an Ottawa-based journalist.