Why regulate, and provincial jurisdiction

Two countries, two designs

A US company that wants to sell shares to the public registers the offering once, with a single national regulator, the Securities and Exchange Commission. A Canadian company cannot, because there is no federal securities regulator in Canada. Securities regulation is a matter for the provinces and territories — ten provinces and three territories, thirteen regulators, each administering its own securities statute. What a US student learns about the SEC does not transplant; the exam's first regulation question is usually a test of exactly that.

Worked example — Cobalt Ridge Mining raises $30,000,000

Cobalt Ridge, an Alberta exploration company, wants to sell shares to investors in Alberta, British Columbia and Ontario. It files a prospectus with the Alberta Securities Commission, its principal regulator, and — because it is selling in three jurisdictions — the offering must be cleared in each. How the thirteen regulators avoid making Cobalt Ridge do everything three times over is the next lesson's subject (the CSA and the passport system). The point here is simpler: the authority is provincial, the statute is provincial, and the commission that can stop the offering, order a correction or bring an enforcement proceeding is a provincial body.

Suppose, later, that an Ontario investor is misled by Cobalt Ridge's disclosure. She complains to the Ontario Securities Commission, not to a federal agency, and if the matter goes to a hearing it is under Ontario's Securities Act.

Why regulate at all — four goals

The goals of securities regulation are usually stated as four, and each is easiest to see through what happens without it.

1. Investor protection. Without disclosure rules, an issuer can sell on a story; without registration and proficiency rules, anyone can call themselves an adviser. The prospectus, continuous disclosure and know-your-client rules exist for this goal.
2. Fair and efficient capital markets. Without rules against manipulation and insider trading, prices reflect who knows what rather than what the company is worth, and capital is misallocated.
3. Confidence in the market. Investors who believe the game is rigged withdraw; the market shrinks and the cost of capital rises for every honest issuer. Enforcement that is visible serves this goal as much as the rule itself.
4. Reduction of systemic risk. The failure of one dealer or one clearing house should not bring down the others — hence capital requirements for dealers, CDS as central counterparty, and CIPF.

The OSC states its own mandate in these terms: protecting investors, fostering fair and efficient markets, fostering capital formation, and contributing to the stability of the financial system. What is not a goal: guaranteeing that investments make money. Regulation polices the process — disclosure, conduct, fairness — and leaves the outcome to the market.

Three abuses to map

A dealing representative sells a retiree a speculative stock without asking about her finances — investor protection (KYC and suitability, Lesson 3). A trader buys ahead of a takeover he learned of from a friend at the target — fair and efficient markets (insider trading, Lesson 5). A dealer's capital falls below the required level and it keeps trading — systemic risk (and, once clients' property is at risk, investor protection too).