Since the election of the Ford government in Ontario last year, the debate about reducing the “regulatory burden” has occurred in numerous policy contexts, including in the securities realm. While advocates continue to stress the importance of reducing “burden,” a thoughtful approach to this call to action has yet to be devised. The Ontario Securities Commission (OSC) has created a task force to oversee burden reduction. But what is the best means by which this “reduction” should occur?
We should begin by acknowledging that, at first glance, the notion of reducing the regulatory burden is generally appealing. A recent report by George Mason University suggests that Ontario is a “heavyweight” in terms of the extent of its regulations. Of course, this type of claim triggers an instinctual reaction that this province should not be a heavyweight and should reduce the number of its regulations. But this is a vague objective: How should such a broad-based goal be accomplished in complex capital markets comprised of participants whose interests often diverge?
While the objective of protecting the public interest tends to pervade the regulatory regime, individual spheres have separate regulatory goals. In the securities realm, these are enunciated in the legislation to be: protecting investors and fostering fair and efficient capital markets, contributing to the stability of the financial system and reducing systemic risk. Despite these explicit objectives, reducing the regulatory burden is sometimes explained in terms of increasing regulatory efficiency – but what does “efficiency” mean?
Here, we must confront one of the most intractable problems in securities regulation, which is that “efficiency” is a frequently used term with no universally accepted meaning. Of course, as economist Eugene Fama sets forth in the “efficient markets hypothesis,” efficiency relies on the concept of whether, and the extent to which, the observed market price of a security reflects all information relevant to pricing the security. This concept of efficiency is central to understanding capital markets, but other concepts of efficiency also persist and legitimately underpin the debate about burden reduction.
Allocative efficiency refers to the efficacy with which a market channels capital to its highest, most productive uses. Efficiency in this sense ensures that the market provides the lowest cost of capital to issuers. Misdirected or excessive regulation may threaten the ability of the market to allocate capital at low cost and may distort the allocation of capital to the most efficient uses. Thus, a key question to be considered in policy-making is whether the proposed regulatory change imposes costs or other disadvantages that affect issuers’ behaviour regarding their capital-raising choices.
This type of efficiency leads us to consider cost benefit analysis (CBA), which in fact is explicitly built into securities regulation. The Securities Act (Ontario) provides that the OSC shall publish a description of the anticipated costs and benefits of any proposed rule. The problem is that it’s often impossible to quantify the costs and especially the benefits of proposed regulation. For example, how does the OSC quantify consequences to investor welfare in a given instance? How can it weigh a reduction in issuer costs against potential consequences to investors?
The bottom line must be that while an analysis of costs and benefits of regulation is important, CBA should not be solely determinative in reducing the regulatory burden. This is the constant struggle between a commitment to CBA on the one hand and ensuring stakeholder interests are taken into account on the other. The sacrifices of reducing the regulatory burden on stakeholders must somehow be taken into account within the context of the securities regulatory mandate.
Burden reduction and investor protection can be mutually compatible, but the analysis differs depending on the issue. For example, reducing the burden can entail harmonizing regulation across the country, creating more efficient access to documents by overhauling the OSC website, SEDAR and SEDI, ensuring a speedy review of offering documents prior to sales to the public and ensuring that disclosure is more readable. These reforms would likely benefit all stakeholders, including issuers and investors. (We could also question why a specific task force is necessary to bring these reforms onto the regulatory agenda.)
But what issues relating to burden reduction may run counter to investors’ interests? Generally speaking, lessening disclosure is not in investors’ interests, as would be the case if Canada moved to a semi-annual rather than quarterly reporting period for financial disclosure. This is the type of issue that is more controversial than those listed above, because it directly pits the interests of investors against those of issuers. How will the OSC make a decision on these types of problems? Will it simply follow the SEC’s lead (whatever it is) or will a unique approach be adopted? As with the corporate-governance regime in Canada following the United States’ introduction of the Sarbanes-Oxley Act in 2002, will it adopt a specific Canadian solution? Will it take into account the number of cross-listed issuers, and the global nature of capital markets, in the analysis?
We likely all share some commitment to reducing the regulatory burden, but the consistent difficulty is to identify an appropriate methodology. We should be careful not to throw out the baby with the bathwater, and ensure that during this process, investors’ interests are well protected as the securities regulatory mandate demands.
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the Faculty of Law, University of Toronto.