1 Canadian Capital Markets Regulation - Moving Forward Lawrence E. Ritchie Executive Vice President and Senior Policy Advisor Canadian Securities Transition Office May 7, 2013

The History – Studies and Consistent Recommendations for Change 2

Canadian Securities Transition Office  July 2009 – Office established  May 2010 – Proposed Canadian Securities Act  July 2010 – Transition Plan  April 2011 – Supreme Court hearing on Act  December 2011 – Supreme Court decision  April 2012 – Office mandate extended to July 2013  March 2013 – Office mandate to be extended beyond July

“Is the proposed Canadian Securities Act within the legislative authority of the Parliament of Canada?” Argument’s Focus: “General Trade and Commerce” clause of S. 91(2) Supreme Court Reference 4

Scope of the Argument: The Division of Powers Federal Powers Section 91 Provincial Powers Section 92 91(2) “The Regulation of Trade and Commerce.” 92(13) “Property and Civil Rights in the Province.” Potentially overlapping Boundaries set by case law 5

Scope of the Argument: The Trade and Commerce Power 91(2) “The Regulation of Trade and Commerce.” “Interprovincial and international trade” “General trade affecting the whole of the dominion” Agricultural Products Marketing Act Motor Vehicle Transport Act National Energy Board Act Competition Act Consumer Packaging and Labelling Act Trade-marks Act 6

Scope of the Argument: “General Trade” Branch  “Trade as a whole” rather than a particular industry  Provinces, acting alone or in concert, would be constitutionally incapable of enacting  Failure to include one or more provinces would jeopardize the successful operation of the scheme General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R

Supreme Court Reference  Unanimous decision that the Proposed Act, as drafted, is not valid under the general branch of the federal government’s power to regulate trade and commerce  The Proposed Act overreaches into areas of provincial jurisdiction because it purports to regulate all aspects of securities regulation, including “day to day” matters 8

Supreme Court Reference “The common ground that emerges is that each level of government has jurisdiction over some aspects of the regulation of securities and each can work in collaboration with the other to carry out its responsibilities.” (para. 131) The Court states that: 9

Supreme Court Reference “[T]he growing practice of resolving the complex governance problems that arise in federations … by seeking cooperative solutions that meet the needs of the country as a whole as well as its constituent parts.” (para 132) The Court noted: 10

Supreme Court Reference “It is open to the federal government and the provinces to exercise their respective powers over securities harmoniously, in the spirit of cooperative federalism. The experience of other federations in the field of securities regulation, while a function of their own constitutional requirements, suggests that a cooperative approach might usefully be explored, should our legislators so choose, to ensure that each level of government properly discharges its responsibility to the public in a coordinated fashion.” (para. 9) 11 The Court states, however, that a cooperative approach is available:

Supreme Court Reference Areas of provincial jurisdiction: o Investor protection (para 128) o Trades or occupations within a province (para 117) o Local markets (para 115) o Day-to-day, routine and/or administrative aspects (para 125) 12

Supreme Court Reference Areas of federal jurisdiction: o Fair, efficient and competitive markets (para 117) o The integrity and stability of Canada’s financial system (para 123) o National data collection (para 121) o Prevention of and response to systemic risks (para 128) o Other matters that are “genuinely national in scope and qualitatively distinct from those falling under provincial heads of power.” (para. 70) 13

Supreme Court Reference The Court defined systemic risk as: “risks that occasion a ‘domino effect’ whereby the risk of default by one market participant will impact the ability of others to fulfill their legal obligations, setting off a chain of negative economic consequences that pervade an entire financial system.” (para 103) 14

From the 2012 Federal Budget: “The Government is consulting with provinces and territories, a number of which have reaffirmed their interest in working on a cooperative basis towards a common securities regulator.” James Flaherty, Federal Finance Minister: “…[T]he reference decision by Supreme Court of Canada acknowledged that there are areas of provincial jurisdiction and also areas of federal jurisdiction relating to securities and urged the governments to work on this together which is what we’re trying to do. And I’m modestly encouraged by the discussions that have happened so far.” March 30, 2012, Post-Canadian Club Speech Since the Decision: Consulting with Provinces 15

Recent Developments – Budget 2013 From the 2013 Federal Budget: “The Government’s preferred approach to improving the regulation of Canada’s capital markets is through a common securities regulator established cooperatively with provinces and territories. If a timely agreement cannot be reached on a common regulator, the Government will propose legislation to carry out its regulatory responsibilities consistent with the decision rendered by the Supreme Court of Canada.” 16

From the 2013 Federal Budget: “The Government would be prepared to delegate the administration of its own securities legislation to a common securities regulator if a critical mass of provinces and territories were willing to do the same. The Government would support an agreement with willing provinces and territories to establish a common regulator with the following elements:  The common regulator should administer a single set of rules.  It should be operationally independent and self-funded through a single, simplified set of fees.  It should be directed by a professional board of directors with broad capital markets-related expertise.  A common regulator would also preserve the elements of the current system that work well, such as maintaining regulatory offices in each participating jurisdiction, with the capacity and resources to serve market participants locally.” Recent Developments – Budget

Minister Flaherty: “…[T]he Supreme Court of Canada told us that we ought to work with the provinces, and that’s exactly what we’ve done. In fact, we’ve been doing that for more than seven years on this issue. But the Supreme Court of Canada also told us that we federally have a responsibility, among other things, for systemic regulation, for systemic risk, including derivatives. So we have a responsibility that we cannot ignore. We’re working to see if we can create a unique securities regulator for the entire country, but we’re not there yet. “ BNN TV Interview with Catherine Murray March 22, 2013 Recent Developments – Budget

Provincial/Territorial Council of Ministers of Securities Regulation – “The Council also believes the federal government has a role to play in securities regulation - but not the same role allocated to provinces in the day-to-day regulation of securities in Canada by the Supreme Court of Canada. The Council is prepared to work with the federal government to improve how securities regulation operates in Canada while respecting provincial jurisdiction. ” Council’s 2012 Annual Progress Report January 2012 to December 2012 Recent Developments – Report from the Council 19

“Ontario remains prepared to work with the federal government and other interested provinces to establish a common cooperative securities regulator.” Budget Released May 2, 2013 Recent Developments – Ontario Budget

“ An updated and streamlined securities regulatory framework in Canada would include: an expert and independent board to govern the new regulator and be accountable to a council of participating ministers; a corporate and executive head office in Toronto, while recognizing and building on the expertise of securities regulators across Canada, such as oil and gas expertise in Calgary; an effective voting structure in relation to any fundamental changes to the regulator that recognizes the significant role of jurisdictions with major capital markets; and reduced costs for issuers and investors, while providing a more modern and responsive regulatory environment. This framework would offer real benefits to businesses raising capital and to investors, and it would enhance Canada's international reputation for excellence in financial regulation. In the meantime, the government will explore options to work with the federal government to ensure the effective and efficient regulation of systemic risks in Canada's capital markets including risks that arise from derivatives markets.” Recent Developments – Ontario Budget