Financial Regulation Gone Amok
By: Chuck Strahl
Reducing regulations is generally good advice. As the Great Communicator once warned the business community about governments, “If it moves, they’ll tax it. If it keeps moving, they’ll regulate it. And if it stops moving, they’ll subsidize it.” Excessive regulation is the midpoint of a famous road paved with good intentions.
When I was Transport Minister, the pleasure craft registry had expanded (for reasons unknown) to include the registration of canoes and kayaks. On the registration forms, kayak owners were asked to “estimate the tonnage of your vessel”! It was a clear example of regulators gone amok. I did not try to fix the regulation, I simply eliminated it. It was a regulation in search of a problem where none existed. It was a mistake, pure and simple, and kayak owners were not amused (regardless of their tonnage!).
After the Supreme Court of Canada ruled that the federal government’s attempts to establish a National Securities Regulator were an invasion of provincial jurisdiction, the government proposed a cooperative Capital Markets Regulatory System as an alternative. The principle components of the proposed system include more provincial legislation, complementary federal legislation, a new Capital Markets Regulator (“CMR), a Council of Ministers to oversee the CMR, and new regulatory offices in every province that is a participating jurisdiction. In addition, if not all of the provinces and territories sign on to the above arrangement (and two of the bigger provinces say they will not sign), the current provincial regulatory structure will continue to operate in each of those jurisdictions. All of this runs the risk of becoming a more complex, bifurcated federal-provincial system, characterized by excessive, costly, and burdensome over regulation.
At the same time, there are worrisome signs at the provincial level of misguided regulation concerning the exempt capital market. In 2011, while $50-billion in investment capital was raised in the public capital markets in Canada, approximately $160-billion was raised through the “exempt market.” A large number of entrepreneurial, job creating, small- and medium-sized enterprises depend on that exempt capital. By any measure, the exempt market is the flagship of the capital markets in Canada. But when regulators come prowling, even a flagship isn’t safe.
On the positive side, the Ontario Securities Commission proposes to open up the Offering Memorandum Exemption, which enables companies to raise capital without a full-blown prospectus. However, the proposed OSC exemptions will limit the exempt market investors to the purchase of a maximum of $30,000 of securities per year, and will introduce further restrictions on who can sell securities under that exemption (the “Proposed OSC Restrictions”). The net effect of these additional rules will be increased costs, coincidental with constricted markets. What’s worse, the evil which the new rules strive to “fix” are adequately addressed through policies and rules that the OSC and CSA already have in place.
The bottom line of all of this: When you can’t replace provincial securities regulation with a single national regulator, don’t pursue a federal-provincial system if it compounds the regulatory burden. And if the exempt market is already generating $160-billion in investment capital for a multitude of small- and medium-sized businesses, seek to enlarge it rather than restrict it.
I’m sure that regulating canoes and kayaks seemed to make sense to somebody when it was first proposed. Knowing how many kayaks were at the Boy Scout camp must have seemed important, as was their tonnage. But increasing the weight and complexity of government regulation “just because you can,” usually isn’t worth it. By all means, let’s take steps to ensure transparency and accountability in private capital markets. However, doing it through more and tighter regulations may well sink the ship we’re all relying on for job and wealth creation.