The securities industry has released a report, and I can tell you the Ontario Securities Commission won't like it:

Capital markets regulatory offences should be handled in a new, separate court whose jurisdiction would supersede provincial and federal courts, a securities industry task force has recommended.

The Task Force to Modernize Securities Legislation released its final report yesterday, saying the special court could also be granted jurisdiction over civil liability cases that emerge because of regulatory violations.

The 12-member task force, created by the Investment Dealers Association of Canada, recommended a national court in order to create "uniformity in the treatment of securities issues," [Thomas Allen, chairman of the task force and partner at Ogilvy Renault LLP,] said in an interview.

Now this is interesting in so many ways. It flies in the face of what the OSC does and what the OSC is driving towards. As I've discussed at length in an earlier post, the OSC is self-financing body with quasi-legislative power. One piece of legislation, the Securities Act, essentially devolves all the legislative burden with regards to securities to the OSC. The OSC creates rules to regulate the capital market. These rules have the force of law, but are not created by lawmakers, reviewed by the legislature or passed through committee, or voted on by our elected representatives. Instead, the minister in charge has an opportunity to reject the rules put out by the OSC. If he doesn't do anything, or if he's asleep at the switch, the rule is assumed to be approved.

Essentially the same situation exists in other provinces.

Moreover, the OSC is working with other provincial and territorial securities commissions to "harmonize" the rules. That means that, at the end of the process, we'll have the equivalent of federal legislation, that is, a set of rules that affects the capital markets anywhere in the country, without the involvement of the federal government, even the minimal involvement of the Minister of Finance, since these harmonized nation-wide rules would have been created at the provincial level.

That is not to say the federal authorities might not be involved, but they don't need to be involved.

This task force seems to recommending a very different approach. Consider this statement from the study's mandate:

Potentially greater role for a principle-based approach versus prescriptive rules-based regulation - in a litigious society is principle-based behaviour a pipe dream, with those asked to behave on principle increasingly seeking the safe harbour of rules? If so, and if principle-based behaviour is in fact desirable to avoid the arbitrariness of rules, what might be done to encourage principle-based behaviour?

The task force wants regulations based on principles. Principles are set by legislative acts passed by governments. Those principles would then used by this new capital markets court to guide it in interpreting the law and regulations to make sure the principles are being respected. That means that players in the capital markets can judge whether they are following the principles, and so can be confident that they won't run afoul of regulators. If they do, they can mount a defense based on their understanding of those principles, and challenge the regulators in court to prove that their interpretation of the principles is the correct one.

Notice the separation of powers promoted by this report: the legislatures define the principles, the regulators execute according to those principles, and this new court passes judgment on those principles.

Today, the environment is seen as arbitrary and opaque, with rules set by the regulators, enforced by the regulators, and with the regulators sitting in judgment on whether the rules are being followed properly. That's not my opinion, that what the Investment Dealer's Association thinks.

What of the OSC? Its role is seen to be dramatically curtailed:

The proposed national court, however, does not mean the provincial regulators will be abolished, Mr. Allen said.

"There would still be a role for certain offences to be addressed at the regulator level -- relatively small matters, such as whether a registrant was guilty of an improper filing, for example," he said.

Ouch.

So, do you think the OSC likes this idea? Hell no! And the spokesperson uses the strongest possible terms to make that clear:

In respect of the release of the Final Report of the Task Force to Modernize Securities Legislation in Canada, the Canadian Securities Administrators (CSA) are issuing the following statement from CSA Chair, Jean St. Gelais:

"We welcome the Report of the Task Force and view it as a constructive document that will add to the debate on securities regulation in Canada. We will review the Report carefully and consider its contents in light of this debate."

Oh yeah, they hate it. They will carefully consider it and point out that the burden of a new court and of the legislative process is inappropriate in the fast moving world of securities, and that the OSC is already working on many of the issues raised by the report through internal refinements of the process and in conjunction with other provincial and international regulators. Or something like that.

The real question is whether we will see a dramatic shift away from a regulatory rules-based environment to a legislative principle-based one. That will take a commitment from Queen's Park and from Ottawa. I haven't heard that this sort of overhaul is on the radar.

Even if it was, the OSC has pretty deep pockets to fight it, thanks to the fact that the OSC is self-financing and can keep whatever money it makes from fees. This is ironic, since the fees are paid by the members of the Investment Dealers Association. I'll be keeping an eye on this.

Addendum: A link to this post from advisorlink.ca, an online community for Canadian financial advisors, generated this comment from the discussion that followed:

Well the federal/national perspective of the IDA's report certainly appeals to my belief that we would be better served by national oversight rather than the current environment of provincial fiefdoms setting and enforcing their own rules. Any attempt to "harmonize" the rules will never work and is just a blatant attempt to develop a "sort of" national regulator that won't put provincial securities organizations noses out of joint or threaten their power. The trouble is it won't really solve the problems either. Nope, we definetely need truely national regulations and enforcement. Principle based laws rather than flavour of the month rules based on questionable logic and subjective opinions seems like a positive approach too.

Maybe the current federal government has the stones to do it. I hope so anyway.

Am I tapping into a general underlying discontent with the OSC and Canadian securities regulation in general? I thought the issue with OSC powers was an academic problem, but now I'm starting to think the "average investor" is worried about this issue too.