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Remarks to the 2008 International Bar Association Conference

Panel on Mutual Recognition

Lawrence Ritchie

Vice-Chair, Ontario Securities Commission

Oct. 13, 2008


• First, thank you to the International Bar Association for inviting me to participate today.

• I welcome the opportunity to add my thoughts and remarks about a very important subject for the capital markets – mutual recognition.

• Let me add at the outset that the opinions expressed in my remarks are my own – and not necessarily the opinions of our Commission, Commission members, or the staff of the OSC.

• I’m going to provide a Canadian’s perspective on mutual recognition.

• As Hernando de Soto stated so elegantly, and so passionately, in his riveting presentation last night, now, more than ever, we all must resist the temptation to turn our backs on globalization.
  1. And that is true of economic and securities regulation.
  2. Instead, we must all strive to strengthen our efforts through both political but also legal initiatives – and that is precisely what principle is behind the mutual recognition concept and initiatives.

• In these brief comments, I’ll focus on three topics:
  1. Harmonization;
  2. Canada’s unique experience with mutual recognition systems; and
  3. the possible impacts that mutual recognition could have on market participants.

1. Harmonization

• As I have stated, harmonization efforts in all matters relating to securities regulation is highly desirable, perhaps a necessity, and has become an important part of the regulatory landscape. One only has to look at the extent of international co-operation and coordination over the past few weeks to appreciate this truth. The world is interconnected and interdependent and regulation has to keep up, and reflect this.

• Consistency of regulatory rules/policies is in all of our best interests.

• Mutual recognition levels the playing field. In this time of market turmoil around the world, it’s more important than ever for securities regulators worldwide to work together towards common goals – a mutual recognition framework would provide a formal platform through which to work together on common issues.

• Some think there are risks that mutual recognition will lower regulatory standards to the lowest common standard.

• I disagree.

• The globalization of our markets require harmonization efforts that raise regulatory standards – that certainly has been our experience with IOSCO – the International Organization of Securities Commissions.

• As Jane Diplock, Chair of IOSCO’s Executive Committee, noted in a recent speech:
  1. The 30 IOSCO Core Principles of Securities Regulation, the IOSCO Multilateral Memorandum of Understanding and the network of various mutual recognition agreements could be solid bases for what she called “virtual super-regulation”, without requiring nations to cede jurisdiction or sovereignty.
  2. She noted that: “these arrangements recognize and ensure the differences necessary in domestic regulatory approaches. Rather than mirroring of regulatory approach, they rely on regulatory equivalence. Rather than envisioning standardized model frameworks across jurisdictions, mutual recognition allows domestic laws and regulations to reflect national imperatives while providing the capacity for cross-border co-operation and enforcement”.

• Formal coordination, if based on sound principles, can address gaps in market regulations by providing an opportunity for identifying these gaps, and facilitate more effective dialogue and debate – an opportunity grounded in a legal framework.

• Under a mutual recognition regime, regulator partners are required to be vigilant on articulating clear standards, and in their commitment to enforce them. Principles underlying such a framework would require mechanisms for:
  1. defining and monitoring standards among multiple jurisdictions;
  2. co-operating among jurisdictions on regulation; and
  3. working towards the harmonization of rules and standards.

• In terms specifically of the U.S.-Canada mutual recognition, there has been some progress: on May 29, 2008, the SEC and the four largest Canadian provincial regulators announced a schedule for the completion of a process agreement that would open the way for discussions on a U.S.-Canada mutual recognition.

• Mutual recognition raises challenges, as all bilateral or multilateral arrangements do – co-operation and coordination require patience and work.

• Canada is accustomed to these efforts.

• In Canada, there is no single, national regulator. We have 13 provincial and territorial regulators which, by necessity, work together toward regulatory harmonization across the country in the best interests of investors, issuers and market competitiveness.

• Since not everyone here is familiar with the structure of the Canadian securities regulatory framework, I’m going to run through a few slides that describe the Canadian landscape.

• I’ve included several statistics to help put the Canadian market in context.
  1. (Slide 2) Canada is the 2nd largest country by land mass, and has the 36th largest population in the world. Canada has the 9th largest economy and accounts for 3.18% of the $10.5 trillion in world exports.
  2. (Slide 3) The TSX is Canada’s senior exchange, which the OSC oversees. It is the 8th largest equity market by market capitalization.
  3. (Slide 4) Companies listed in Canada make up 45% of the world’s publicly traded oil and gas companies, and 57% of the world’s listed mining companies.
  4. (Slide 5) Approximately 31% of listed issuers are based in Ontario and they account for 40% of Canada’s equity market value.
  5. (Slide 6) As stated, in Canada, securities regulation is done by province and territory. The 13 provincial and territorial securities regulators are collectively represented in and by the Canadian Securities Administrators, or CSA. The CSA’s main objective is to coordinate and harmonize regulation of the Canadian capital markets.
  6. The OSC is responsible for regulating Canada’s largest capital market, Ontario. It has a dual mandate:
    1. to provide protection to investors from unfair, improper or fraudulent practices; and
    2. to foster fair and efficient capital markets and confidence in capital markets.

• Given our 13 regulators, Canada has worked with the concept of mutual recognition domestically, to ensure that there is maximum co-operation, harmonization (where feasible), enforcement coordination and information-sharing across the country.

• Canada has a history in dealing effectively and efficiently with co-operative federalism, where policies are structured in a way that respects each province’s particular needs.
  1. We have experience with mutual recognition involving multiple regulators;
  2. We have a system of mutual reliance across the multiple Canadian securities regulators – which is a system which generally allows a market participant to deal with one securities regulator when filing an offering document or an application for exemptive relief.
  3. As well, in the 1990s, we established a system based on mutual recognition with the U.S., for purposes of offerings and continuous U.S. disclosure documents. This has generally worked effectively over the years.

• In terms of mutual recognition between the U.S. and Canada, we are primarily, or initially looking at recognition of exchanges, and regulation of brokers.

• In these areas we feel there are a number of specific benefits of mutual recognition, particularly between Canada and the United States:
  1. Canadian and U.S. broker-dealers would see a reduction or elimination in the duplication and costs associated with adhering to two independent regulatory regimes; and
  2. Investors will have a wider range of investment choices and lower transaction costs resulting from increased competition. This would in turn, make each market more accessible and attractive to investors in the other country. Mutual recognition fits well with the American/Canadian reality.

• Canada and the U.S. share a common border, language, historical background and similar legal system.

• 12% of Canadian issuers listed on the TSX are inter-listed on a U.S. exchange. These issuers represent approximately 60% of the total market value of all Canadian firms on the TSX.

• In July of this year, Canadian residents purchased almost $2 billion in U.S. equity securities. U.S. shares accounted for 80% of the total investment in foreign stocks by Canadian residents.
  • Maintaining satisfactory standards for investor protection is a potential challenge under mutual recognition.

  1. The potential problem identified by critics of mutual recognition is that investors might not be well-protected because they do not have recourse against a foreign broker-dealer, or against a foreign exchange (if they choose to bring an action against those).
  2. Jurisdictions generally deal with these concerns by ensuring that:

    • A mutual recognition arrangement is based on a solid and substantive analysis of each regime, to ensure a comfort level with the way that markets and market participants are regulated in the foreign jurisdiction.
    • Where there are gaps in regulation, the jurisdictions work together to enter into co-operative arrangements to fix those gaps, or other workaround solutions (such as introducing new legislation or guidance). This is a positive aspect of mutual recognition and similar initiatives.
    • Each jurisdiction retains its ability to enforce its laws that regulate fraudulent behaviour in the market, including that of the foreign jurisdiction.
    • I repeat that mutual recognition can be an effective tool in revising and harmonizing standards for market participants who participate in each others jurisdictions. It can provide an opportunity for a broadened dialogue on coordinating solutions to common problems.

Conclusion

• The U.S.A.-Canada mutual recognition process may benefit a small group of people at the start in our two countries but it’s part of a bigger, ongoing process.

• Mutual recognition is one of the components in the move toward greater symmetry in international securities regulation. For example, this move includes the initiatives related to International Financial Reporting Standards (IFRS) and XBRL (eXtensible Business Reporting Language).

• These efforts can lead to many benefits:
  1. greater liquidity for investors;
  2. more efficient capital markets; and
  3. the elimination of duplicative and unnecessary rules (therefore, a lower regulatory burden).

• Mutual recognition will help regulators move to a more unified, harmonized regulatory code for the global capital markets.
  1. But it is one mechanism in the move towards greater international co-operation and coordination.

• The process of moving towards mutual recognition is as important as the final outcome.

• The process will help jurisdictions gain a deeper understanding of each other’s markets.
  1. Such comprehension can lead to greater co-operation and information-sharing, particularly in times of crisis and market disruption.

• Ultimately, this can result in fairer and more efficient capital markets, and greater protection for investors – which is the ultimate goal.

• Thank you.