Power to the Provinces | Alberta and the National Securities Regulator
By: Bryce Tingle
Federal Finance Minister Jim Flaherty recently reported that “significant progress” has been made toward creating a national securities regulator. Almost the only explanation for this assessment was that Alberta is apparently now talking to the feds about the project.
Last year the Supreme Court ruled Ottawa could not unilaterally create such an institution. As Alberta represents approximately 27% of Canada’s capital markets, any plausible national scheme is usually thought to require its participation.
The news reports provided little detail about the discussions between the parties, but we can safely guess by examining the concerns that animated Alberta’s fierce opposition to a national regulator a year ago. The governance structure of the proposed national securities commission is the big issue and resolving this question will be so difficult that it is probable the project will fail.
At its base, securities regulation is about how money flows to create, support and grow a province’s businesses. In Alberta’s case, oil companies require vast amounts of capital to find and develop resources. In addition, the perennial hope the province can diversify its economy depends on the financing of thousands of new businesses every year.
Alberta’s arguments in last year’s litigation suggest two compelling provincial interests that would have to be protected in any national scheme. The first is that the national regulator would have to be made almost totally independent of the politicians in Ottawa and Toronto.
Leading politicians in Central Canada have historically felt comfortable running against Alberta and its principal industry. Last month alone provided us with the examples of Justin Trudeau and David McGuinty. Earlier this year, Thomas Mulcair blamed much of the nation’s problems on the province.
Alberta’s concerns might be dismissed as paranoia except that Mulcair leads the second largest party in parliament, occasionally topping the Conservatives in national polls, and the painful National Energy Program is still within the living memory of Alberta’s politicians.
The obvious problem is that neither Ontario nor the feds are likely to agree to a governance scheme that completely ties its hands. Questions of innovation, job creation, economic development, fairness, liberty, and environmental protection, among others, are all implicated in securities regulation and it is difficult to imagine governments voluntarily giving up their power in these areas. In fact, it probably wouldn’t be right for them to do so.
The second governance issue is actually less likely to be resolved. Almost certainly, the national regulator would be located in Toronto and largely staffed by the Ontario Securities Commission. This is only reasonable: The vast majority of Canada’s financial institutions and investment capital are located in Ontario.
The difficulty is that the dominance of Ontario-based financial institutions means that a province like Alberta has very few of these institutions itself. Albertan companies may be worth 27% of the total value of Canada’s public businesses, but last year the province received less than 3% of the institutional venture capital in the country. Even oil companies must raise most of their money in Ontario.
The scale of business in the two provinces is quite different as well. Alberta is at the top of the league tables for businesses per 1,000 residents; Ontario is at the bottom. In other words, businesses in Ontario are bigger, while, possibly out of necessity, Albertans are more entrepreneurial.
These differences between the provinces lead to significant differences in their respective securities regimes. Alberta relies on individual investors to a much greater degree to finance its many small companies. With more abundant sources of sophisticated institutional capital, Ontario restricts the ability of the average citizen to invest.
Alberta advocates rules that facilitate relatively small companies going public (often necessary if money is to be raised from individual investors); Ontario advocates rules that protect institutional investors, occasionally without regard to the costs those rules would impose on smaller companies. It is telling that the roots of the TSX Venture Exchange are in Alberta. Many of Alberta’s biggest companies got their start as small companies on that exchange or its predecessors, raising money from personal networks of friends and business acquaintances.
Over the past decade, the difference in regulatory philosophy between Alberta and Ontario has been repeatedly visible in debates about the introduction of Sarbanes-Oxley style regulation into the country or the harmonization of the private-placement or exempt-market registration regimes.
The OSC is a great regulator. It advocates rules that seem best in light of the experiences of its staff and Ontario’s circumstances. It is perfectly natural that the regulations it recommends for the country don’t reflect the circumstances and culture in, say, Alberta.
That brings us to the last governance challenge for a national regulator: restricting the influence its own staff can have on securities regulation in Alberta. It is difficult to see how this could be accommodated in any plausible institutional arrangement.
The governance challenges faced in the discussions between the feds and their provincial counterparts are not without precedent. How to manage the very different local economic and cultural circumstances of the provinces was the central issue for the Fathers of Confederation as well.
They solved the problem by giving the power to the provinces.