Presentation to the Calgary Chamber of Commerce

An address by David Wilson

Vice-Chairman, Scotiabank and
Chairman and Chief Executive Officer,
Scotia Capital

April 5, 2004

"Canada needs a new approach. There exists a window of opportunity to establish a true national securities regulator. And I would urge Canadian business and investors to carefully examine this issue and consider what system you feel is best."

"The single regulator provides a clear and comprehensive response to the imperatives of efficient capital markets in a global setting and best positions Canada for future success. When I consider the need to meet global best practices, investor protection, and economic efficiency, the case for a single regulator has never been stronger."

Check Against Delivery

Good afternoon ladies and gentlemen and thank you Murray (Sigler, President, Calgary Chamber of Commerce) for that introduction and welcome. I always enjoy coming to Calgary for a number of reasons - not the least of which is the kind exaggeration of the people who introduce me.

What I want to talk about today is securities regulation and reform in Canada, a subject that is receiving a great deal of attention - and not surprisingly, given the recent spate of corporate scandals, especially in the United States and Europe.

Now my views on this are in part driven by the diversity of Scotiabank Group's dealings in global capital markets. Scotiabank is a frequent issuer of debt in Canada, the U.S. and Europe. Our shares are listed on both the Toronto and New York Stock Exchanges. We provide investment advice to Canadians and Canadian business in every province and territory. We operate in 50 countries around the world and are engaged, like many Canadian businesses, in global competition. We compete against the largest institutions in the world and we have helped many corporations - small and large - compete with global players in almost every industry.

And on a personal level, over the course of my 30 years in the securities industry, I've witnessed the changes that have been driven by the powerful forces of globalization and technology. These forces have truly transformed financial markets and have shifted both capital flows and competition to a global stage. Thanks to technology and globalization, investors can take advantage of the world's markets, viewing their investment options not through a local, provincial or even national lens, but with a truly international perspective.

Canadian business has adjusted to this reality, but I feel that the Canadian securities framework risks falling further behind this new reality, a reality that some of our competitors - in the European Union, for example - have accepted and are even moving beyond.

As most of you know, Canada's capital markets are regulated at the provincial level, with every province and territory operating a commission governing the issuance and trade of securities in their jurisdiction. This means that any investment offered nationally has to be approved by 13 regulators. There has been some streamlining of these approvals, but there remains a clear duplication of efforts on too many fronts.

Recently, more and more investors, businesses and governments have questioned the wisdom of our current approach and have reached a consensus about the need for change.

Looking at where we are today, for the most part, our system has ensured that investors across Canada and around the world can have confidence in investing their capital in Canadian companies. And our provincial regulators have done good work in trying to make Canadian capital markets as efficient as possible under the circumstances.

But given the critical importance of Canadian capital markets - in other words the efficient access to capital by business - there is a constant need to examine the public policy underpinning our management of this critical part of our economy.

Certainly, Alberta has long been noted for its foresight on these kinds of issues. For example, it is the only province that has eliminated all capital taxes and not surprisingly per capita investment in Alberta is about twice that of Canada as a whole. I believe the kind of bold approach that has led to Alberta's success needs to be applied to securities regulation right across Canada.

Now, as I have said, while there is a clear consensus on the need for change, there are different views as to what the Canadian securities framework should look like. I'm trying to come at this in a very practical sense - knowing full well many policy experts have opinions and views - but I'll try to take it down to what it means to the efficiency of markets and ultimately to issuers, investors and the economy at large.

From this perspective, I believe the solution is clear. The reality is that we need one single Canadian regulator that serves both the users of capital - our businesses - and investors of capital. I believe that there are three key criteria that lead to this conclusion. First, the regulatory framework needs to provide Canadian firms with a regulatory environment that meets global best practices. Second, the regulatory framework must protect Canadian investors, large and small, whose confidence can make or break the system. And third, the regulatory framework needs to provide the most efficient means of exchanging capital between investors and businesses. On the basis of these three criteria, I believe that a single regulator best meets the needs of Canadians.

Obviously, local input into a national regulator will be critical to address the objectives of individual provinces and that's a point I agree with, and which can be accommodated, and I plan to come back to this.

But first, let me begin by discussing each of the three criteria - the issues of meeting global best practices, investor protection and economic efficiency - and tell you why each of these factors build a powerful case for a single Canadian regulator.

To begin with, I think it's important to recognize that already at an international level - outside of Canada - there are growing concerns about the lack of a single national regulator, concerns that are in effect raising a red flag about Canada's standards of investor protection and disclosure. Let me give you my perspective on this, relating specifically to our activity and access to the U.S.

Canada has long been granted expedited access to American capital markets and exemption from some Securities and Exchange Commission (SEC) regulations as a result of what is called the Multi Jurisdictional Disclosure System - or MJDS. No other country has this level of expedited access to the deepest and most liquid capital markets in the world. The Ontario Securities Commission estimates the MJDS to be worth between $1.4 and $3.5 billion dollars in savings for Canadian business over the next 10 years. It is a terrific program for Canadian firms, big and small, including many represented in this room. Yet the SEC has re-examined this system twice in the last five years because many American market players - including some in the SEC - feel that Canada's regulatory system has had difficulty keeping pace with global best practices.

Part of the problem is that changes in Canada must be agreed to and made across 13 jurisdictions and can take up to four years to be agreed to and implemented. In an international environment increasingly defined by sensitivity to investor protection, 13 regulators cannot respond quickly enough to rapid change, which can cause Canada's MJDS privileges to be questioned.

For example, Canadian regulators were unable to provide a comprehensive and co-ordinated response to the introduction of the Sarbanes-Oxley corporate governance regime in the U.S. In the end, three multilateral instruments were developed, specifically on auditor standards, CEO sign-off on financial statements and independence requirements for Board audit committees. They came into effect last week. These involved protracted negotiations among all Canadian securities regulators. However British Columbia has opted out of this initiative, meaning that Canada's response to Sarbanes-Oxley has an asterisk next to it and other international jurisdictions are left to question the uniformity of our regime. Canada's regulatory regime must keep pace with global best practices so that international investors and global regulators continue to have the utmost confidence in the regulation of Canadian capital markets.

My second reason for supporting a single regulator is that this structure delivers the most comprehensive framework for investor protection.

Improving investor protection is a primary consideration for a couple of reasons. First, the investment community has a basic fiduciary obligation to ensure that investors are not taken advantage of. The second reason is that it's just plain good business. Without public confidence in the markets, investors will withdraw their money from public markets, depriving Canadian businesses of properly priced capital that supports job and wealth creation.

How will a single regulator improve investor protection? Through the universal application and consistent enforcement of a single set of regulations. For a number of reasons, some cases of investor fraud and malfeasance have not been pursued across provincial borders owing to individual regulators having different opinions on whether or not the fraud was considered serious enough to pursue. Other investigations have taken five years for resolution because of the multiple jurisdictions that need to be involved.

To be fair, Canadian securities administrators have undertaken a number of initiatives to harmonize different consumer protection provisions. However these initiatives involve changes to 13 sets of legislation and even if the legislation is harmonized, the statutes can then be interpreted in 13 different ways. All of this creates significant differences in application and compliance without similar differences in overall policy goals.

In addition, smaller provinces often do not have the resources to maintain expertise or to do adequate due diligence on the vast array of securities offerings and investment advisors. As such, many Canadian investors do not have the best possible protection for their investments, as many smaller jurisdictions do not have the scale of activity to justify a larger commitment of resources. This disparity between resources and demands creates systemic risk for Canada's financial system and does not inspire the confidence in the marketplace that is fundamental to sound regulation and investor faith.

In a recent survey, almost 50 per cent of the members of AIMR - investment professionals that generally hold the Chartered Financial Analyst designation - believe that the fairness, consistency and strength of enforcement of securities regulation in Canada were poor or very poor. AIMR felt that a single regulator with uniform enforcement, one compliance framework and expertise in the application of existing regulation would not only make compliance easier for firms, it would also be much better placed to deal with non-compliance.

The federal government's Wise Persons Committee on Securities Reform, in its report entitled "It's Time," noted that the current system allows for fringe players in the industry, who often create a disproportionate share of challenges to regulators, to switch jurisdictions after being banned in one province.

Through a single regulator, we can ensure that Canadian investors receive consistent and professional application of a single regulatory code and that capital markets are as insulated from crises of confidence as they can be.

The third area where a single regulator would improve Canadian capital markets is through a boost in the efficiency of the capital raising process. We need the Canadian capital market to efficiently support the flow of capital between investors and businesses. I believe that creating one regulator would facilitate the flow of competitively priced capital to areas where it can earn the highest return.

Capital is a critical asset for economic development. It is the oil in the engine of our economy. And as we all know, capital is especially important for small firms looking to grow. Unnecessary, costly impediments to the flow of capital are counterproductive, both internationally and within Canada.

Canadian Bankers Association research has shown that many small issuers are inhibited from raising capital in multiple provinces. For instance, only one-fifth of Alberta's registering Oil and Gas companies with $5 million to $25 million in assets are also registered in Ontario. In contrast, almost 100 per cent of larger firms did register in Ontario, to get the most cost-effective funding. Some of this local preference is a natural result of contact networks and local knowledge. But much of it is because the regulatory cost is too high. If it were as easy to raise capital across Canada as it is to raise it within Alberta, I cannot think of one firm that would choose to seek capital from fewer investors. Creating a single national regulator would increase opportunities to both raise and supply capital more efficiently.

Defenders of the current system believe that it benefits economic development, by allowing locally crafted rules that meet provincial economic development goals. However I think that a significant degree of local control of securities policy can and should be maintained in a single regulator. There is certainly no inherent conflict. A national regulator and commission could be structured so as to incorporate industry-based or size-based rules, as well as provincial appointments, regional offices and a policy committee consisting of provincial ministers responsible for securities regulation, all of which are being considered.

Some businesses that are in the best position to see the tradeoffs between a single capital market and preferential local regulation have been vocal in their support for a single regulator model. Among large issuers, Cameco has said that it wants "one national regulator and one set of rules and regulations consistently enforced. " Canfor, headquartered in B.C, thinks "the consolidation of regulatory activities into a single Canadian regulator will result in a more efficient and responsive structure." EnCana said "securities regulation in Canada should be simplified so that participants need only deal with one regulator under one set of rules."

And for similar reasons, but more strongly motivated by the high fixed costs of registering in multiple jurisdictions, many small firms also prefer a single national regulator. One of the most active organizations on this front is the Prospectors and Developers Association of Canada, which has done some remarkable research on this issue. They found that if a firm were looking to raise $600,000 and to do so across all 13 jurisdictions in Canada, that it would cost $300,000, creating the equivalent of a 50 per cent capital tax.

Small investors too would benefit from an expansion in the number and diversity of investment opportunities to which they have access. When barriers exist so that all investors and all issuers are not able to meet, that's inefficiency. When inefficiencies are eliminated, that's good governance.

Let me give you one further example of the inefficiency of multiple regulators. For every billion dollars in equity market capitalization, Canada has almost 18 regulators employed. That doesn't sound unreasonable until you consider that the comparable figure in the United States is about nine - half of ours. Great Britain operates with about three regulators per billion dollars of market capitalization.

I'd like to now turn to the issue of a model that has been proposed as an improvement to the current system and an alternative to the single regulator called the passport system, where registration in one province would be recognized by all other jurisdictions. At Scotiabank, we have always welcomed progress on the harmonization front and we applaud those provincial ministers, including Greg Melchin, who are looking to improve the efficiency of capital markets through this initiative. However to the extent that some governments see the passport model as a substitute for a single regulator, we think that these provinces are settling for second best.

In dealing with the standard of international best practices, Canada would still be forced to make 13 changes in order to meet new global regulatory standards. And if another wave of corporate scandals hits, it will be difficult for individual provinces to escape a broad-brush response if one or more provinces does not respond quickly enough. The passport system would continue to create international perceptions of Canada as a splintered and slow to respond capital market.

On consumer protection, a passport system would not provide the best system of investor security. Securities frauds would continue to need seamless co-ordination between multiple regulators that, even then, would not reach global standards for efficient and timely justice. As well, large organizations would still have to implement costly compliance procedures to maintain national scope, diverting resources from core functions of oversight and consumer protection. Even if the project, currently underway, to create uniform securities legislation across all provinces were to be completed, we would still face 13 different interpretations of that legislation and the reconciliation of 13 different views every time change is needed. For these reasons and more, the passport system is not the best that we can do for investor protection.

As for economic efficiency, the proposed passport system would not fully eliminate existing inefficiencies. Local regulators would continue to charge fees for securities issuance in their provinces, even when oversight has been ceded to another province. The passport system would essentially retain most of the overhead and inefficiencies of the current system. In the battle for efficient capital markets, we should not settle for anything less than the best system for economic development and efficiently priced capital flows - a single regulator.

In closing, ladies and gentlemen, I feel that Canada needs a new approach. There exists a window of opportunity to establish a true national securities regulator. And I would urge Canadian business and investors to carefully examine this issue and consider what system you feel is best.

The single regulator provides a clear and comprehensive response to the imperatives of efficient capital markets in a global setting and best positions Canada for future success. When I consider the need to meet global best practices, investor protection, and economic efficiency, the case for a single regulator has never been stronger.

Thank you.