Trade war fuels need for national securities regulator

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The chief executive of stock exchange operator TMX Group Inc. has a wish list for improving Canada’s capital markets in response to the trade war threatened by United States President Donald Trump.

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At the top of John McKenzie’s list: Ontario would finally join other provinces to create a national “passport” system to reduce the costs and regulatory burden of public listings and access to the country’s capital markets.

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“As a home for essentially 3,000-plus Canadian issuers, the idea of being able to knock down trade and regulatory barriers (that make it) difficult to do business province to province can only help our small Canadian companies scale up better,” he said.

The passport system was created 20 years ago and designed so that companies would have to deal with only one of the 13 provincial and territorial regulators. They would then be able to follow a harmonized set of legislative provisions across a national system. There was just one hitch, but it was a big one: The Ontario Securities Commission (OSC), the largest securities regulator in the country, didn’t sign on.

“If you’re a company that’s registered in other parts of the country, you have to register in Ontario as well,” said McKenzie, who spent his first two decades at TMX in senior corporate strategy, development and finance roles and saw firsthand the impact of the fractured regulatory system on numerous companies.

Smaller, growth-oriented businesses are hit the hardest, he said. Time devoted to an additional layer of regulation is costly for them because of the higher fees for paperwork and legal advice and because management time is pulled away from a company’s core operations. 

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“That is a substantial burden and complexity in terms of building your business,” he said.

You have to strike while the iron is hot

John McKenzie

McKenzie’s wish list extends beyond securities regulation. He said he hopes politicians and regulators will use the tariff threat as an opportunity to smooth out provincial differences and speed up various processes, from mining approvals to energy regulation, to help companies cut costs, raise funds and increase their potential to grow into national champions.

“How do we create the next Shopify and not just a lot of small companies? Anything we do here is going to be positive,” he said, adding that faster permitting for Canada’s large number of mining companies would be a good start that would improve their access to funds.

“We have the slowest jurisdiction for permitting in the world, so we could accelerate capital raising if people knew … that they actually could get things approved,” he said. “And then in the energy space, it’s not just permitting, but it’s actually certainty of whether you can get approved at all.”

McKenzie said the uncertainty of obtaining project approvals in all provinces has impacted energy sector financing, which has plummeted on the Canadian public markets to $1.8 billion in 2024 from around $20 billion a decade ago.

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“When there’s no certainty that you can actually execute a project, people aren’t going to finance it,” he said. 

Something such as Ontario joining other provincial and territorial securities watchdogs in the passport system may seem relatively simple compared to the other items on McKenzie’s wish list, but there’s a complicated past.

OSC officials in 2004 rejected the passport system, choosing instead to pursue efforts to create a pan-Canadian regime that would dissolve all the regional watchdogs and replace them with a single, national regulator.

In December 2011, the Supreme Court of Canada rejected the plan, saying it is the provinces, not Ottawa, that have jurisdiction over securities regulation. 

Rather than sign onto the passport system, Ontario put forward another alternative plan: a cooperative regulator based on voluntary participation. It received support from some provinces, but it, too, came up short nationally and fizzled out.

These efforts were always fractious due to expectations from some and fear from others that OSC personnel and practices would be the driving force. Alberta and Quebec were the most vocal opponents, suggesting that the unique characteristics of their regions would be ignored if a national regulator replaced the passport system.

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But Larry Ritchie, a partner at law firm Osler, Hoskin & Harcourt LLP who spent seven years as OSC vice-chair and was seconded to advise on the creation of a national regulator, said the serious trade threats coming from the U.S. make a strong case for revisiting a pan-Canadian model.

“Recent events demonstrate that there are risks to Canada’s ability to nimbly respond to new and evolving challenges due to fragmentation in both trade and financial regulation,” he said. 

Ontario joining the passport system could “move the needle” if it was also expanded beyond reciprocal acceptance of activities such as prospectus filing and obtaining exemptions, he said. But what’s really needed is for governments to recognize the trade threat as a moment to realize that capital opportunity and risk transcend provincial borders.

“The failure of the cooperative model was essentially a lack of political will. The move to removing, or reducing, interprovincial trade barriers ought to be accompanied by a similar attempt to reduce regulatory duplication and overlap necessary to make Canada more competitive internationally,” he said.

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“It need not be a re-emergence of the same approach that was tried and failed, but in some form, the reduction of the number of multiple regulators and overlapping and duplicative regulations has to be pursued.”

David Hausman, a partner at law firm Fasken Martineau DuMoulin LLP, said the trade threats present an opportunity to put more focus on the role of securities regulation in capital formation, which drives job creation and innovation.

“Canada does seem to be capital-starved in everything except investments in real estate, which do not promote innovation or long-term job creation,” he said, adding that changing the dynamics would require a balancing act of seemingly competing objectives.

“One is to entice promising enterprises to elect to pursue public markets versus private equity and the other is to attract foreign investment through better, tougher and more transparent enforcement and stronger corporate governance,” he said.

Glen Johnson, a partner at law firm Torys LLP who focuses on securities regulation and capital markets, said smaller moves such as the OSC joining the passport system could eliminate some administrative and procedural disconnects across the country.

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But he described it as mostly a “symbolic move” at a time when the upheaval threatened by the Trump administration calls for Canada to tackle broader issues, including the competitiveness of its markets. 

“We want Canadian companies to have access to capital in Canada and grow here rather than departing for the south because they perceive (getting) any or all of better opportunities, lower costs or a more favourable securities — or other — regulatory framework going forward,” he said.

TMX CEO McKenzie said the coming weeks and months present “an absolute window” for politicians and authorities to tackle unnecessary costs and burdens for Canadian companies and make the country’s markets more efficient. 

“You have to strike while the iron is hot,” he said.

• Email: bshecter@nationalpost.com

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