The Real Evidence on a National Securities Regulator
In assessing the merits of a national securities regulator, it is important to be guided by rigorous analysis, not selective citation. In his report, “The National Securities Commission Proposal: Challenging Conventional Wisdom,” Pierre Lortie appears to prefer the latter. Lortie seeks to discredit federal initiatives, aimed at creating a national securities regulator by utilizing information that supports his position, while ignoring that which does not.
For example, Lortie attempts to argue that the current securities system already functions well, citing an OECD Report that ranks Canada second in terms of the quality of its securities regulation. However, a closer look at the OECD Report is required. While Canada’s high rank is positive in a general sense, it does not really speak to the quality of our securities regulatory regime. For example, the enforcement of contracts, access to credit and bankruptcy procedures are not integral components to a securities regime and yet they comprise a substantial part of the indices on which the OECD Report is based. It’s a bit like ranking the Toronto Maple Leafs high on a scale of hockey teams by measuring sold out games and the longevity of their history - interesting, but not particularly relevant to actual performance.
Moreover, Lortie chooses to ignore a much more pointed appraisal of Canada’s security system presented by the OECD in a 2008 Policy Brief. There, the OECD states that “the current diversity of regulations...makes it difficult to maximize efficiency and increases the risk that firms will choose to issue securities in other countries. A single regulator would eliminate the inefficiencies created by limited enforcement authority of individual provincial agencies.”
More broadly, Lortie chooses to quote international studies that laud Canada’s financial system, while overlooking reports that call for a national securities regulator. In 2008, for example, the International Monetary Fund stated that there is “significant duplication caused by the system of provincial regulation that should be addressed...” It also concluded that “enforcement is an area where considerable improvement is still needed.” While citing this same report in his paper, Lortie ignores these points.
Lortie points to research by La Porta, Lopez-de-Silanes and Shleifer that lists Canada as second out of 49 countries in terms of the efficiency of securities regulation and the strength of private and public enforcement of investor protection. La Porta et al obtained their data by sending one questionnaire to a lawyer in each of the 49 countries who subsequently “confirmed the validity” of their answers. The La Porta line of studies has been heavily criticized for their questionable methodology, quality of data points and simplistic conclusions. The La Porta studies, it would seem, provide a flimsy foundation on which to build his case.
On the issue of enforcement, Lortie points to a study by Professor Mary Condon which purports to show a consistency across provinces. Again, however, a close reading of Condon finds that her reference is not to quasi criminal cases. In fact, Condon finds in relation to the public interest power that there is “significant variation...across the provinces in relation to infractions...” Condon also found “unevenness in the application of contextual sanctioning factors to individual respondents.” In short, Condon’s work cannot be used to support the notion that there is consistency in regulatory decision-making across all jurisdictions, as Lortie suggests.
Lortie argues that, contrary to conventional wisdom, the U.S. system is not more aggressive than Canada’s in enforcing securities act violations. If we refer to the study that he cites in setting forth this data, we see that over the 2002-2004 period, the number of enforcement actions in Canada is less than 10% of the corresponding number of state-level actions in the US. And, the number of enforcement actions in Canada is less than 6% of combined state/federal figures in the U.S. In this instance, conventional wisdom would appear to be right, after all.
Finally, Lortie advances the idea that IPO costs and the costs of equity are comparable between Canada and the U.S. The relevant question, however, is surely whether costs would be lower under a national securities regulator compared to the present system, not how costs compare to another country. Lortie does not address the important question of revenue lost from issuers deciding to raise capital elsewhere because of Canada’s fragmented regulatory system.
It appears that the evidence presented by Lortie is selectively chosen, leading to an inaccurate assessment of the literature. He claims that his conclusions in opposing a national securities regulator are “inescapable”, but upon examination, it is clear that they are largely unsupportable.
An edited version of this article appeared in the December 2010 edition of the Investment Executive.
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