University of Toronto Law School Faculty Blog

Prof. Anita Anand: "Telus funds ignore governance"

This commentary was first published in the Financial Post on April 28, 2012.

The collapse of Magna’s dual-class share structure in 2011 via an insider bid for Frank Stronach’s holdings raised eyebrows because of the unprecedented pay out of an 1,800% premium that Mr. Stronach (through a private holding company) received in the transaction. Dual-class structures are once again in the spotlight with the recent proposal by Telus to eliminate its dual class structure. It was clear that Magna concerned securities regulators at least from a disclosure standpoint. By contrast, regulators have been conspicuously silent on the Telus transaction.

Under the terms of the Telus proposal, which goes to a shareholder vote on May 9, each non-voting share would be converted to a common share on a one-for-one basis. The two classes of shareholders will vote separately on the transaction. Two-thirds approval from each class is required in order for the votes to pass. Thus, a concern about shareholder participation that existed in previous dual class transactions, such as Canadian Tire, falls away since shareholders in each class have a vote.

Prof. Jacob Ziegel - "Who can regulate Canadian securities?"

This commentary by Prof. Jacob Ziegel was first published in the National Post on July 15, 2011.

On April 12 and 13, the Supreme Court of Canada held a two-day hearing on a Reference from the federal government asking the Court to determine the constitutional validity of the proposed Securities Act published by the federal government in May, 2010. The question all the parties to the hearing must now be asking themselves is how the Court is likely to respond to the Reference.

The need for federal securities legislation has been discussed for at least 30 years, yet successive Liberal and Conservative governments refused to bite the bullet. The Harper administration showed greater mettle and became convinced that a national securities regulator was essential for Canada in light of the financial crisis that gripped North America, and much of the rest of the world, in 2007 and 2008. It was also the solution recommended by three federal task forces that were established between 2003 and 2009.

As Jim Flaherty, Minister of Finance, pointed out in introducing the draft Act, Canada is the only industrialized country in the Western hemisphere - if not among all developed nations - without a national securities regulator and national securities legislation. Instead, Canada depends on 10 provincial securities acts and 10 provincial regulators with all the inefficiencies and duplication that this implies.

Or so it seemed. The Ontario government, the Canadian Bankers' Association and other influential business organizations supported the federal initiative, but most of the other provinces, led by Alberta and Quebec, were strongly opposed. They argued that the provincial legislation was essentially uniform and was kept abreast of market developments through the adoption of uniform policy statements by the provincial administrators, and that an efficient and competitive market in securities prevailed in Canada thanks to a passport system adopted by all the provinces entitling securities registered in one province to recognition and freedom to trade in all the other provinces.

Introducing the Canadian Securities Law Portal

        For several decades, various expert panels have examined the possibility of creating a national securities regulator in Canada. On May 26, 2010, the Government of Canada tabled for information in Parliament the proposed Canadian Securities Act, which would establish a Canadian securities regulator. The Attorney General of Canada concurrently referred the Act to the Supreme Court of Canada, asking whether the proposed Act is within the legislative authority of the Parliament of Canada. This case is set to be heard in April, 2011.
        The newly-formed Canadian Securities Law Portal will serve as a vital hub of information about this complex issue. The Portal will address numerous questions concerning the ongoing battle for jurisdiction to regulate the Canadian securities markets, including: Does the Parliament of Canada have legislative authority to enact the proposed Act? Why is a Canadian Securities Regulator necessary? What legal structure will ultimately govern issuers, intermediaries, self-regulatory organizations, investors and other capital market stakeholders? Would the structure proposed under the Act be effective if implemented? What are its strengths and weaknesses?
        The Portal aims to enable interested stakeholders on all sides of the debate to understand the major issues involved, to see the arguments being made by the various litigants, and to engage with the extensive literature addressing the proposed regulatory model. The intention is that the site will serve as a gateway for stakeholders to become engaged in an issue of vital concern to the regulation of Canada's capital markets. Is a national securities regulator the way forward for Canada? Follow the arguments and related debate at: http://www.securitieslawportal.ca.

Contributed by Professor Anita Anand and Adam Friedlan

Prof. Jeffrey MacIntosh: "Systemic Fallacy"

The following first appeared in the National Post on November 23, 2010.

SYSTEMIC FALLACY

A national regulator wouldn’t have prevented the credit crisis

By Jeffrey MacIntosh

In its legal argument filed with the Quebec Court of Appeal, the federal government argues that securities regulation can and should address systemic (or economy-wide) risk — and that a national regulator would be better positioned to do this.

This hobgoblin is very much a latter-day addendum to the traditional apologia for securities regulation, which has always focused on investor protection and securities-market efficiency. What gave this new addition legs? Very simply, the credit crisis. The feds’ factum of legal argument states that “reducing systemic risk is an objective more informed by current experience.” Placing the blame for the economic downturn squarely on the shoulders of the securities regulators, the factum states that the crisis “illustrated a gap in regulatory oversight.” Moreover, “the dangers of systemic risk underscore the need for national, if not international regulation.” A national regulator, say the feds, would be better able to co-ordinate its activities with other federal institutions, such as the Bank of Canada and the Office of the Superintendent of Financial Institutions.

In fact, leading up to the credit crisis, securities regulators may well have failed in a number of respects, including failing to ensure the safety of asset (and especially mortgage) backed securities peddled by the investment banks and others; failing to ensure proper disclosure in relation to such securities; failing to police the activities of hedge funds adequately, particularly in relation to the sale of credit-default swaps; and failing to adequately regulate the rating agencies, which lent their imprimatur to the sale of hundreds of billions of dollars worth of ultimately worthless securities. As illustrated by the system-wide ripple effects that followed the collapse of investment banking giants Lehman Brothers and Bear Sterns, these failures played a material role in bringing about the crisis.

Prof. Jeffrey MacIntosh - "The Houdini Gambit"

This commentary by Prof. Jeffrey MacIntosh was first published in the Financial Post on November 23, 2010.

The Houdini Gambit

Do the feds have the constitutional jurisdiction to create a national securities regulator? Not surprisingly, the federal government thinks so. Also not surprisingly, the government of Quebec does not. Quebec has referred the matter to the Quebec Court of Appeal for a decision (just as the feds have sent a reference to the Supreme Court of Canada, but the Quebec court gets the first kick at the can).

Ottawa’s legal case, in a recently filed factum with the Quebec Court of Appeal, totters on the brink of schizophrenia. At the outset, the factum invites the court to conclude that the issue of constitutionality “does not involve a performance assessment of the existing 13 provincial and territorial regulators.” But, mirabile dictu, much of the balance of the argument is sedulously devoted to demonstrating the manifest superiority of federal legislation. Go figure.

On the legal front, the government has an uphill slog. Of the five factors that the Supreme Court has indicated constitute the presumptive test of constitutional validity, two are almost certainly fatal to the feds’ case. The feds’ first line of attack (the “Houdini gambit”?) is simply to pretend that these factors do not exist. Rather, their presence is merely “confirmatory evidence” of a decision that the court has already arrived at based on the first three factors. By implication, the absence of the other two is essentially inconsequential. While perhaps praiseworthy for its inventive flair, this argument finds no support in the jurisprudence. The Supreme Court enunciated five presumptive factors for constitutional validity, not three. There is no indication whatever that any of these elements was expected to play a merely subsidiary or collateral role.

Selective Use of Data in the Debate about a National Securities Regulator for Canada: A Comment on The Lortie Paper

1.    Introduction

Pierre’s Lortie’s recent paper[1] seeks to discredit federal reform initiatives to create a national securities commission by making the following claims:  Canadian capital markets rank above those in other countries as various international bodies suggest; the empirical evidence does not exist to support such a reform; and, the current passport system that operates in tandem with the Canadian Securities Administrators “constitutes[s] an example of Canadian federalism at its best” and change should not be implemented without compelling reasons.[2] Lortie suggests that Canadian investors, junior issuers, and the fairness and efficiency of Canadian capital markets will not benefit under a national securities regulator. Rather, the status quo is superior as it has allowed Canada’s financial system to outperform those in other countries. Arguing that the proposed model will constitute a “takeover” of securities regulation,[3] Lortie suggests that a national securities commission will be captured by federal interests. An earlier version of his report was filed as evidence by the provinces of Alberta in the Quebec, Alberta and federal constitutional reference cases. 

In this comment, I analyze the evidence on which Lortie bases his argument and argue that: the evidence that he cites does not in fact support his position; his reliance on this evidence to bolster his argument regarding enforcement in Canada is misguided in its selective use of the data; and, his review of costs is superficial.  While Lortie criticizes the federal proposal for a national commission for failing to consider the evidence, his own paper falls victim to this folly.  His argument involves a cursory, selective review of the academic and empirical literature and does not in fact lead, “to the inescapable conclusion that the arguments made to justify the takeover of securities regulation by the federal government lack a solid foundation…”[4]

Comprehensive Draft Federal Securities Act Released Today

The federal government today released a draft securities act filed in support of its constitutional reference to regulate capital markets activity.  The draft act is largely based on provincial securities legislation: for example, the provisions relating to disclosure of information, prospectus offerings and the public interest power remain generally the same.  However, the act contains a number of new provisions which together appear to be improvements over existing law.

To begin, the act contains a new purposes section. In addition to protecting investors and fostering fair, efficient and competitive capital markets, the new Canadian Securities Regulatory Authority must contribute “to the integrity and stability of the financial system”.  Expanding the purposes section in this way is sound. The financial meltdown demonstrated that systemic risks can arise from increasingly complex products (such as derivatives) and highly leveraged institutions (such as hedge funds) that distribute these products. Contributing to the stability of the financial system is thus a pertinent goal of securities regulation.

In other words, these are areas of substantive law within securities regulators’ purview and the draft act clearly acknowledges this point. In fact, the act contains a whole part on derivatives which provides, for example, that no trading in an exchange traded derivative can occur unless the exchange is recognized. In addition, prescribed disclosure must be filed with the Chief Regulator. Furthermore, cooperation with other agencies is mandated with the Authority required to share information with  other organizations (such as OSFI, CDIC and FCAC) if the disclosure is to contribute to the stability of the financial system.

Watch visitor Prof. Edward Altman and panel discuss the global credit meltdown

On March 3, 2010, the Faculty of Law hosted a discussion on "Current Conditions and Outlook in Global Credit Markets." Professor Edward Altman, of the Stern School of Business, New York University, gave a presentation, followed by a panel discussion with international and Toronto specialists in the field.

You can watch the entire event online, and read Prof. Altman's presentation.

• Watch the presentation and panel discussion
• Read Prof. Altman's presentation

Prof. Altman was also interviewed on BNN television about the current situation in global credit markets.

• Watch the interview on the BNN website

Should Securities Regulators Care about Systemic Risk?

One of the implications of the global financial meltdown is a renewed focus on the purposes of securities regulation and whether these purposes should include considerations relating to systemic risk. Monitoring systemic risk has traditionally been within the realm of financial institution (i.e. prudential) regulation, not securities law. Yet the line between prudential regulation and securities law is becoming increasingly blurred given the complexity of financial markets, a complexity characterized by the growth of private markets in which derivative securities are bundled and sold by a variety of institutions. This evolution in financial markets means that securities regulators now need to care about systemic risk. Indeed, monitoring systemic risk should be a principle that is integrated into the securities regulatory regime.

Defining “systemic risk” is not straightforward.  What types of risk are truly systemic? Does the term refer to a single event that occasions successive losses affecting both institutions and markets?[1]  Does it refer to the potential for substantial volatility in asset prices, corporate liquidity, bankruptcies and efficiency losses brought on by economic shocks?[2]  Does it refer to a “domino effect” whereby the risk of default by one institutions or market participant will impact the ability of other participants to fulfill their obligations to still other participants?[3]  The common denominator in these various explanations seems to be a trigger event that causes a chain of negative economic consequences that pervade financial markets.[4]  But apart from this, the idea of systemic risk is vague[5] and when utilized by regulators, requires greater specification.

Profs. Anand and Green on "The Move Towards a National Securities Regulator"

Profs. Anita Anand and Andrew Green have posted a new article on SSRN titled "Why is this Taking so Long? The Move Towards a National Securities Regulator."

Abstract:

Game theoretical analysis can be useful in contexts such as securities regulation, where multiple decision makers (i.e. securities regulatory authorities or commissions) act unilaterally but can also potentially reap benefits from cooperation. We deploy several models in seeking to render more transparent the strategies and payoffs that motivate jurisdictions to support or resist the introduction of a national securities regulator for Canada. Our analysis suggests that consensus has not been reached regarding a national regulator not only because of a lack of cooperation but also because of a lack of coordination. Indeed, it seems plausible both that provinces recognize the benefit of adopting a common standardized regulatory model; and that the source of disagreement surrounds the precise regulatory content of that common standardized model. This paper explores the implications of this insight.

The article will be published in the University of Toronto Law Journal, Vol. 60, No. 2, April 2010