Mr. K. all wet on securities regulation

June 21st, 2008
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This month’s column in Alberta Venture magazine on the (in my view) folly of a national securities regulator triggered a strong response from a reader who reports that he agrees with me on most topics. He has direct experience of the provincial securities bureaucracies and the costs and headaches they impose on companies in the process of entering the public markets.

Reader Eric H. is strongly in favour of a single national regulator, and makes some powerful arguments borne of personal experience. He and I continue to disagree profoundly on this subject, and I believe I have some good counter-arguments to his but, since I had a chance to make my case in print, it’s only fair to present his as well, unchallenged by snide editorial insertions that attempt to undermine his argument in midstream.

– George Koch

First, extensive checking of the regulatory approach worldwide suggests that Canada is, to the best of my knowledge, the only developed nation with provincial securities regulators. It is not just the United States that has adopted this model, but nearly all the rest of the planet. Your argument that “the U.S. has a central regulator and therefore it must be a bad idea” sounds like the medicare arguments against some form of blended private/public medical system. The U.S. does not work, therefore Canada’s system must be superior; despite the fact that the rest of the world has adopted something very different from Canada’s approach.

The Canadian provincial system is an obscene money grab by an inefficient band of ineffective regulators. My company recently raised capital on the private equity markets. No stock exchanges were involved, nor was the general investing public, yet we had to pay fees to the B.C., Alberta, Saskatchewan Ontario and Quebec securities regulators just because individuals from those provinces invested in our company. In some jurisdictions it is a flat fee and in some it is a percentage of the funds raised. Regardless, it is inefficient and costly. Canada is the only jurisdiction I have come across that has these fees that are levied even when they’re out of any proportions to the amount of enforcement work the securities commissions have to perform as a result of your company’s activities.

Not only do most countries have centralized securities regulators, some jurisdictions further improve efficiencies and costs by delegating many of the duties to the investment bankers. I took a company public in London on the Alternative Investment Market (AIM), where the various brokerage houses could earn the right to be a Nominated Advisor (Nomad). The Nomad did the due diligence prior to listing and once it attested to the stock exchange that the listing company had met the regulatory criteria, the listing was granted.

This system places the incentives generated by self-interest at the heart. The investment community of course wants to see lots of new companies listed, and as quickly as possible. But, if the Nomad permitted companies onto the exchange that were subsequently determined to be in violation of the rules, the Nomad would lose the privilege of acting in this capacity, cutting off the source of revenue. This system means the official regulator is not the sole policeman of the markets, because the individual Nomads are also vigilant. A Canadian investment bank is one of the top Nomads in London – showing that we could do it given the chance!

Your article pointed to Enron, Worldcom and Tyco as failures of the SEC. Yet in each case, senior executives were sent to jail for violation of the rules. In Canada you can point to Bre-X and Nortel as instances of irregularities or fraud – yet in each case, nobody has gone to jail or paid a fine. So you need to admit that both systems are ineffective at preventing irregularities – but only in Canada are there no real penalties for doing so.

Lastly and most disappointingly is the opportunity that has passed us by. With “over the top” regulations in the U.S., Canada could offer the world’s mid-cap companies an effective way to access global capital markets by creating an efficient, cost-effective listing venue in North America. The investment banking industry of Toronto, Vancouver and Calgary could offer an attractive alternative to companies that need capital but do not want the expense of Sarbanes-Oxley compliance.

A single securities regulator and an aggressive marketing campaign could add new economic growth to Canada’s financial sector. We could provide true value to mid-sized firms (those under $5 billion in market cap) that wish to operate or merely be listed in North America.
I receive repeated invitations to London Stock Exchange marketing presentations – held right here in Calgary! The LSE comes all this way to market and show prospective companies see how easy and effective it is to list there.

Sad that I have never been invited to a Canadian presentation. Canada’s myriad of securities regulators are too busy defending their turf and charging their fees to act in the best interests of a financial sector that is not living up to its potential. A single securities regulator is needed for the sake of making our industry efficient. A knee jerk “the Americans do it so it must be bad” argument implies that the Canadian status quo is fine – when it is antiquated and problematic.

For all these reasons, I applaud Finance Minister Jim Flaherty’s attempt to develop a centralized securities regulator – the nation needs it.

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