Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 3 -- Evidence
Ottawa, Tuesday, May 7, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day, at 10:00 a.m., to continue its examination on the state of the financial system in Canada.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: With us this morning are Mr. Grant Sawiak of the Toronto office of Gowling, Strathy & Henderson law firm and Mr. William J. Braithwaite of the Stikeman, Elliott law firm.
These two gentlemen, assisted by Ms Patricia Olasker, did a pro bono study for our committee involving a questionnaire sent to a cross-section of people involved in issuing securities in Canada. The survey sought to define the costs associated with having a fragmented securities exchange, rather than one single national exchange.
Some senators here were not on this committee when this study began almost two years ago, having arisen from our first committee meeting in this Parliament wherein we discussed the various issues of concern to us. We decided then to commission this study.
We would thank both of these gentlemen and Ms Olasker for their time spent on this work. We would also thank your firms for allowing you to spend that time on our behalf.
We have had the report for a couple of weeks. I will ask our witnesses to take us through the highlights of the report. Many of the committee members have a substantial number of questions.
Mr. William J. Braithwaite, Stikeman, Elliott: Mr. Chairman, if it would be useful, we will begin by advising committee members about our backgrounds and why we thought we were capable of doing this work through a thumbnail, biographical sketch.
I started my legal career as an academic, teaching for five years at Osgoode Hall Law School as associate professor and assistant dean. While at Osgoode, I taught primarily corporate law. I have practised securities law for the past 15 years. During that time, I served on the advisory committee to the Ontario Securities Commission.
The Chairman: May we continue without the translation? There is a problem with the sound system which will be fixed shortly. Meanwhile, the testimony is being recorded and the transcript will be translated.
Mr. Braithwaite: I served on the advisory committee to the Ontario Securities Commission for three years, for two of those years as chairman. During that time, I was involved in advising the commission on matters of policy. I have been retained by the Ontario Securities Commission on a number of occasions in the past, in particular to advise them with respect to implementing an expedited review system, a select-to-review system and, most recently, I advised the OSC on implementing a cooperative system for adviser registration.
I was retained by the Ontario government three years ago to advise them with respect to securities law matters pertaining to what was then Bill 190, the venture capital legislation introduced by the Ontario government 3 years ago.
I have also been retained by the Industry Canada corporate directorate to advise on particular matters, including a policy with respect to plans and arrangements under the Canada Business Corporations Act. Most recently, I authored the background papers on insider training and takeover bids which are part of the Phase III reform under the CBCA. I have also spoken on a number of occasions and written a number of articles on securities law.
Mr. Grant V. Sawiak, Lawyer, Gowling, Strathy & Henderson: I am a graduate of the University of Manitoba law school. I am licensed to practice law in the provinces of British Columbia and Ontario. I have practised securities law for 18 years.
Early in my career I acted as counsel to the Toronto Stock Exchange on various matters, including procedures before the Ontario Securities Commission, before that exchange retained house counsel. My last position with the Toronto Stock Exchange was in senior management in the listings department, that department which governs the affairs of public companies.
I have written a text on the Toronto Stock Exchange and its requirements. I have written papers and lectured for such groups as the Canadian Bar Association, INFONEX, the Canadian Institute, the Institute of Chartered Accountants of Ontario, the Canadian Institute of Chartered Accountants. My practice is confined to securities law on cross-border and international transactions.
Mr. Braithwaite: I will give you now the background of how the report came about in its present form.
Mr. Sawiak, Pat Olasker and I were approached about 18 months ago to assist this committee in identifying whether higher transaction costs existed due to the current decentralized system of securities regulation. It was my personal view at that time, having been involved as a securities practitioner advising issuers, underwriters and other market participants, that there were additional costs associated with a decentralized securities system.
That view was shared by Mr. Sawiak and Ms Olasker, but rather than simply reporting on our personal views based upon our personal practices, we decided it would be more useful to this committee to hear about the views of other individuals involved in securities.
With that in mind, we prepared a questionnaire to solicit those views. The questionnaire was circulated to four different market participant groups. We reviewed the responses and prepared the report which has now been provided to the committee.
We are not economists. We are not statisticians. We are not schooled in preparing questionnaires. We are securities lawyers. We prepared these questionnaires as securities lawyers trying to elicit that information which we thought would be useful to this committee in its deliberations. This report does not purport to be statistically reliable. We are not schooled in such matters. However, it does represent the canvassing of a number of individuals whose views now supplement our personal views, all of which is reflected in the report before you.
Mr. Sawiak: In essence, as securities lawyers, we wanted first to ensure contact with participants in the capital market system. Securities lawyers are a participants in that system. We also identified three other major participant groups which we felt could be adequately surveyed: Canadian companies which have recently gone public; companies listed in Canada and cross- border; and the registrants such as brokers, trust companies, and other people who must be licensed to sell to the public. Their views represent a large component of the capital marketplace in Canada.
We realized the need early on, as three Toronto lawyers, to go across the country to obtain representation from other geographic areas of Canada touching each of the four participant groups. We wanted to avoid, as best we could, building our own inherent biases into the questionnaires.
We compiled a reference list of various people to whom we could send the questionnaires in order to test the waters. We then selected from this list what we considered to be a representative sampling. Again, we are not statisticians or economists. The questionnaire was prepared in bilingual form and forwarded to this committee last summer. In fact, two mailings were done last summer in an attempt to maximize our responses.
We spent about six months collating and redrafting the responses and preparing our report for submission.
At page 3 of the report, we deny any claim to statistical validity; we simply do not know how valid it is because we are not trained in that area. However, the findings of the survey tend to be uniform. It helps to know that we found uniformity not only within each participant group -- lawyers, companies, inter-listed companies and registrants -- but we also found a great degree of uniformity between the four participant groups as a whole.
In essence, participants tell us that they would prefer one system nationally in place of the existing system and that the decentralized system which is presently in place does add additional economic costs. This is our overview of the report.
The Chairman: Based both on the survey and on your own experience, would you say economic cost is the only issue?
This committee, as you may have seen in the media, held in February a cross-country series of hearings on corporate governance under the CBCA. We will produce our interim report on that in a couple of weeks.
One of the themes which came up in the Calgary hearings and, to a lesser extent, in the Winnipeg hearings, was the notion that all securities exchanges are not the same. Vancouver, for example, allows different kinds of firms to get in on the action which would not likely be the case under a single national exchange.
So I ask whether the cost to firms is the only issue. Is it possible that different regional exchanges could be providing different services and thereby providing a very useful function although it may be marginally more expensive?
Mr. Braithwaite: Our instruction was to look at costs and it is our conclusion that there are greater costs. We should clarify what we mean by that term. Costs here are the out-of-pocket costs borne by market participants.
The question implies a number of statutes and one regulator. By definition, one statute and one regulator would mean lower costs. We try to document that now for the committee.
Having said that, other considerations must be taken into account by anyone in making a decision. For example, regional considerations must clearly be thrown into the hopper.
The Chairman: What are some of the other considerations beyond the straight, narrow, economic issue of cash?
Mr. Sawiak: Although we went out to study associated costs, we heard a clear message from the survey participants that their primary concern was availability of capital pools. At some point, the available capital pool justifies the costs. The survey almost turned over on this whole issue.
Mr. Braithwaite can add to this, but the only concern which I found of a regional nature was expressed by Western Canada; that is, British Columbia and Alberta. Participants there stated that the type of capital required by junior issuers in the west would carry prohibitive costs in the capital pools of the larger markets such as Ontario and Quebec.
I have practised securities law in Vancouver with those kinds of issuers and I would fully agree. Junior issuers face problems in getting small amounts of money in the larger capital markets.
You talked about stock exchanges. Regional stock exchanges are a different concern. We are talking about the securities regulator who imposes the law, not the marketplace on which the transactions are done. The second issue on regional stock exchanges is something that was never within the mandate of this report and was not addressed.
The Chairman: Some of the questions in your survey were what I would have called, in my old research business, open-ended questions; they invited narrative-type answers. Yet no one responded by raising that issue?
Mr. Sawiak: No.
The Chairman: You say that access to capital issue is a bigger concern to participants?
Mr. Sawiak: That is the biggest concern to the people who use the capital markets.
The Chairman: To that extent, the regional pools are a significant asset which would not necessarily be available in a unified system.
Mr. Braithwaite: It depends upon your model for a unified system.
Mr. Sawiak: Let me give an example. If I want to raise $500,000 on an initial public offering to be listed on the Vancouver Stock Exchange, the cost of raising that sum and tapping into the Ontario capital markets would probably be too high. The capital pools available to the junior issuers then are limited.
Senator Angus: Welcome. I am sure my colleagues will join me in thanking you for this work which you have done on a gratuitous basis. As a member of the bar, I know it is not easy to get people to work pro bono. Let me assure you of our appreciation.
In your introductory comments, you specifically point out that you have not addressed constitutional issues and the costs associated with bilingual filings, head office locations, et cetera.
Correct me if I am wrong, but I have concluded from that comment that this whole issue of moving toward a single, unified regulator in Canada is a very complicated issue involving substantial, delegated, constitutional authority. Am I right in that?
Mr. Sawiak: I would say that is an understatement.
Senator Angus: I am sure you are familiar with the expression, "If it ain't broke, why fix it?"
I should like to ask that preliminary question of you both. If our securities system "ain't broke," why fix it?
Mr. Braithwaite: It depends how one would define a broken system. In my personal view, there are advantages to a national securities commission which become evident as we start looking outside Canada at the world stage. The global economy is growing. National barriers for the free flow of capital are being eroded. As that phenomenon continues -- and it will continue -- there will be a free flow of capital all around the world.
It is very important that Canada has a single, strong voice speaking for us at the international table. That would be the CSC. Such a move would be consistent with other federal systems, namely Germany and Australia, which have recently moved to a federal securities commission.
Perhaps it is not correct to suggest our system is "broke." We must ask whether there are other advantages, beside cost savings, associated with a national securities commission. I see as one advantage that single, strong voice to represent Canada on the world stage.
Mr. Sawiak: I return again to the term "broke." Perhaps we should ask whether the system is as good as it could be? In my view, it is not. Why do I say that? When I see the national body of provincial securities administrators, the CSA, getting together to adopt policies to address jurisdictional conflicts or inconsistencies between the provincial and territorial securities administrators, that strikes me as recognition of a system which is not working as well as it could or should. Participants mirror that inefficiency when they state, "We in effect do uniform filings."
Both sides of the capital market then are recognizing, to some degree, that the present system might not be broke but it is not perfect. If the system were broken, obviously no one would be doing offerings and I would not be hearing or reading such comments. I would not hear about the regional concerns which exist in the west or the inability to tap a capital market within Canada.
We have a very anachronistic system in view of the global barriers coming down, international trade and movement of money and funds in general. As with banking capital, money will seek its best home. Money moves around. A number of Canadian companies have told us that they will eventually go to the United States. Why would we want to make things any more difficult for them in Canada?
With regard to money moving around the world freely, this survey shows that everyone's main concern is the size and availability of capital markets. As long as the markets are big enough, any cost to access them will be justified.
If we stay fragmented in Canada, our position vis-à-vis the United States will be like David competing with Goliath, and we must decide whether we should fight Goliath with one arm tied behind our back.
Senator Angus: That is very interesting. You talk of the anachronistic nature of our system. Is that essentially related to decentralization and the federal elements of the system, or are there other relevant aspects?
Are there improvements to be made? I will explore with you the issue of electronic filings and the advances which are progressing within the current system and which will go a long way to levelling the playing field.
Are there not substantial improvements which can and, in fact, are being made while keeping the system decentralized?
Mr. Sawiak: There is only a finite amount of improvement which can be made to a system. You either state what the core of the system is or you change the core of the system.
With regard to improvement, I can give you an example in the negative. In my opinion, the adoption of a national security system as an overlay on the present provincial securities commissions would be an absolute disaster. That is not the way to fix it.
Senator Austin: Why would it be a disaster?
Mr. Sawiak: Because that would require more regulation. As I interpret the survey responses, investor protection should be balanced against the ability to raise money. A double regulatory system would impede the raising of capital. I personally do not believe that such a system would be necessary to increase investor protection or capital market integrity.
Senator Austin: As in the U.S., the market would be allowed to choose which regulatory system worked best for the market.
Senator Angus: Or for their particular interests.
Mr. Sawiak: The responses from the U.S. criticized the duality of the U.S. system. The only advantage was that two-thirds of the states regard compliance with the SEC as compliance with Blue Sky. Participants were vehement that a federal system should not be overlaid on the existing provincial systems. In my opinion, it cannot be justified.
Senator Austin: It may be that the only way to have a federal system is to begin that way. Would you accept a federal system that began as a double system and evolved as the market eventually decided which system worked best?
Mr. Braithwaite: I am not sure. Your proposal of having two systems would probably result in the present status quo. The MOU model of 1994 is the same as the one we have today, rather than two different organizations, because you have substituted the provinces which have opted for the federal system and left the ones which have opted out. That basically describes the status quo. You are not replicating the system.
Senator Austin: I do not agree. A national system which provides one Canadian capital market in which dealers in any city can access the whole country on an IPO would be a much more efficient capital market system. Presently, an IPO from one province is limited to the capital availability of that province.
It is my view that a national system would work well for all provinces with the exception, possibly, of British Columbia, Ontario and Quebec, but one must start somewhere to create one national capital market.
The Stevens Royal Commission of R.B. Bennett's day concluded that the federal government had shared jurisdiction over national security -- but was paramount where shared -- and that there should be a national securities system.
It is quite interesting that the arguments which were used in 1934 are again at play in 1996. The issue is whether it serves us as a country to have one capital market and how we would get there.
Mr. Braithwaite: The results of our questionnaire support having a single national market.
Senator Austin: It was Mr. Sawiak's comment that triggered my question: How do arrive at a single national market, except by creating a federal parallel system that competes with Ontario, Quebec and British Columbia for the attention of the investment community?
Mr. Sawiak: I am having trouble conceptualizing how that would work.
Senator Austin: That is what happened in the U.S. when the SEC was introduced.
Senator Angus: That is how it is in the U.S. now, and there is a trend toward even further decentralization, is there not?
Senator Austin: No, definitely not.
Mr. Sawiak: I would not have thought so.
Let us go back to your original question. Is the system "broke?" No. Is it working as well as it could? No.
The United States followed a model called the Blue Sky legislation. I would prefer that Canada was more progressive than the United States, if possible, rather than adopting a model simply because it was deemed to be good enough for the United States. We can go past that. We can strive to have the very best system.
In designing a system, one must ask the participants in the system about their requirements and design the system to meet those demands. That must be the guiding principle. Based upon this survey, that double system would be a compromise which participants may or may not be willing to accept, but it certainly would not be close to their first choice.
Mr. Braithwaite: Senator Angus, you commented that, under the current regime, the cooperation which exists between the security regulatory authorities has gone a long way to addressing the identified problems. Our report acknowledges the substantial gains which have been made through the CSA; although we have provincial securities acts, the legislation is, in large measure, uniform.
There have been a number of cooperative efforts by members of the CSA such as a national filing system and a uniform prospectus form as approved by the securities commissions. There have been a number of cooperative initiatives which have been partially successful. That success will always be partial because even identical policies will at times be interpreted differently by different regulators. At the end of the day, the CSA is not in agreement on every initiative and matters before the CSA often get bogged down.
I have mentioned already the 1994 proposal for a cooperative system for the registration of advisors. One commission would take responsibility for processing advisor registration on behalf of the other commissions. That was published for comment two years ago. It is still out there. Nothing is happening on it. Things get bogged down at the CSA when input is required from a number of regulators. Yes, there is a spirit of cooperation. However, many things just do not happen.
Senator Angus: I am sure you will find a fairly large measure of consensus here. In an ideal world, we would like to have the best system. We would like to be progressive, to have something which attracts the most capital and which can be accessed in the most economical way. As you acknowledged at the outset in something of an understatement, there are tremendous roadblocks in this nation of ours in terms of arriving at the best system.
I have conducted a few interviews with representatives from different areas of the capital markets with a view to reviewing your report this morning. I think your report is excellent. My interviews have shown me not only the measure of cooperation involved in making improvements but also the other factors within the cost issue, especially in the area of electronic development.
We can start with things like insider trading and administrative filings. However, I understand there are even more significant improvements coming down the road.
For the purposes of this record and for the report which we will eventually write, I would like to hear more about this regional problem in the west. I am not sure if it exists to the same degree in Quebec. It is prohibitively expensive for the small- to medium-sized enterprise to do an IPO on the VSE, for example. Can you illustrate for us how that circumstance arises?
Mr. Sawiak: The only regional concern which we saw, and Mr. Braithwaite can correct me if I am wrong, was this concern from the west.
Senator Angus: It is a cost-related one, is it not?
Mr. Sawiak: Yes. These participants are usually junior resource or junior industrial companies who would much prefer to put money into the pockets of shareholders rather than the pockets of advisors. I practised in B.C. and I know that the review process for a local offering there is much less intense as between the lawyers than it is in Ontario, in Quebec or in the major capital markets. That is simply a function of the fact that such companies cannot spend $150,000 or $200,000 on lawyers' fees on a major offering in Ontario because there would be nothing left for the company. Certain rules have been adapted in the west which have worked wonderfully well.
In that regard, I refer to the junior capital pool developed in Alberta. Since the early 1980s, the Vancouver Stock Exchange has allowed companies to go public using the facilities of the exchange. The VSE rules have been streamlined to recognize that junior issuers cannot justify such costs. When the regulators did that, they must have balanced the economic necessities and considerations against investor protection.
That seems to be working fine. New companies are arranging financing and creating jobs in that particular market which probably could not be done in other parts of Canada. If junior issuers were to gain access to more capital through the other regional pools, again, some type of recognition would be required. In my opinion, that would improve the whole situation.
Senator Angus: I have one administrative question for you. Perhaps Mr. Braithwaite will understand my reasoning.
You have produced as an appendix a list of securities lawyers and the different cities in which they practice. Is this an exhaustive list?
Mr. Sawiak: No, it is not.
Senator Angus: This report, having been tabled here, is a public document.
The Chairman: Yes, it is in effect a public document now.
Senator Angus: This report is sort of state of the art on this issue. People who are interested in this report may also be interested in finding a securities lawyer, say, in Montreal. Here is appendix listing five firms in Montreal. This goes against Mr. Braithwaite's interests since his firm is not even mentioned there. That must be a shock for his partners in Montreal.
Mr. Braithwaite: That would be a conflict of interest.
Mr. Sawiak: If someone read the appendix to the report with that interpretation, then they would be wrong. They would be reading it for the wrong purposes.
Again, this is a survey. It does not mean that every group must be canvassed. Is it a fairly representative survey? Yes, I think it is. I would not put my name on a document that I considered flawed.
However, if someone read the report and surmised that only the best securities law firms are listed, or that the best blue chip companies are those mentioned in this report, or that capital appreciation will come from those IPO companies which went public in this period, then they would be putting a spin on this document which was never intended.
Senator Angus: I understand that. I just wanted to have that clarified for the sake of the record.
Senator Hervieux-Payette: I have a technical question. I did hear about your survey from some colleagues in Montreal. Some were wondering why they were not asked to participate. I see that you approached seven firms in Vancouver and nine in Toronto. The sample from Montreal is much smaller. What was your methodology? How did you decide to consult only four firms in Quebec?
Mr. Sawiak: We did not decide that there would be only four firms in Quebec. We began as three Toronto lawyers representing three different law firms with branch offices all across Canada. We attempted to avoid presenting a cocoon of our views by targeting representative law firms right across the country.
Senator Angus: That is not easy to do; but you were well advised.
Mr. Sawiak: We selected the firms at random. For example, Faskens in Toronto is associated with Martineau in Montreal. Bull, Housser in Vancouver is associated with McMillan Binch and Byers Casgrain in Montreal.
You may ask why we included four law firms for each of Prince Edward Island, Quebec and Saskatchewan. The answer is that we attempted a representative sampling.
As I said earlier, I take comfort in the fact that if this sampling were somehow in error, then it certainly did not show up in the questionnaires. An example of that is the occurrence of the only regional issue coming from Western Canada. I am unaware of any problem which was created.
The other list includes the head offices of companies, many in Quebec and Vancouver. Basically, it was a random sampling.
From what I have seen, all provinces had an adequate opportunity to respond and set out their concerns within each of the four participant categories. The results I see in the surveys tend to bear that out.
Senator Hervieux-Payette: My confrères in Montreal queried me and so I am asking you: Why were so few offices consulted on this question? I was not able to answer that question.
You talked about the costs involved to register in every province. Please clarify this question of costs. I hear that any securities commission should charge fees for their work in direct relationship to the cost of the operation; that such fees should not be a mechanism to collect taxes. This is an important factor when we discuss costs to companies.
We talk a lot about costs, but we do not have any specific data. During my conversations about the situation in Quebec, I have been told that, generally, all the commissions in Canada collect a total of $100 million for their operations but that the actual cost of these operations is about $50 million. This means that each provincial government is collecting more than the actual cost of the commissions. There is room then for some reduction. I do not think it is the intent to tax companies through these fees.
At the same time, if a province negotiates to delegate its authority to the federal government, will the federal government compensate that province for its loss of benefit?
I ask myself how people would be attracted to a national securities commission? Would we pay them? How can we settle the question of collecting money to cover these operations when, at the end of the day, the provinces would lose a benefit which now goes to their provincial treasuries? In these economically difficult times, how would we solve these problems?
Mr. Braithwaite: Our report talks about costs that are external to the costs paid to securities regulators. I hope that was made clear to the market participants who responded to our survey. We did not canvass market participants with respect to those fees because that information is available to the committee simply by checking the filing fees with the commissions and by verifying internal revenues generated by the provinces.
Our report talks about those external costs borne by the market participants in dealing with those regulators as opposed to the money that goes directly to provincial coffers.
Mr. Sawiak: To elucidate, I do not know the mechanism which should be used, senator. Senators Austin and Angus were saying that this is only part of the overall study. No one should interpret this study as being conclusive. It is but one facet of everything. The constitutional issue is also important. Because of those issues, I do not know if and when this will ever work.
Senator Austin, the proposal you mentioned this morning may be the one which will work as a compromise for everyone. Again, this is not the blueprint for doing that. It is but one facet for the committee to consider and on which to garner more comment.
Senator, if you think certain facets with respect to Quebec were not answered, then put the report out for publication; ask for feedback; let people take shots at it. If there are valid points, you will learn about those as well.
Again, this survey represents only one component of a very large, complex and lively debate in which this committee will participate.
Senator Hervieux-Payette: I understand your answer on the question of costs. Before distributing your questionnaire, did you first make a sample to test the direction of the survey? How did you proceed to assemble this questionnaire before taking the larger sample?
Mr. Braithwaite: We started from our personal experiences. When we were first approached, we were asked what conclusions we formed from our own experience. Based upon that, we tried to develop questions which would test whether our personal experiences were consistent with others across the board.
We struggled with the questions. In terms of dollar amounts, that area is very imprecise. It is difficult for a public company to define how many additional dollars were spent dealing with more than one regulator. We tried to ask general questions. We tried to come up with grids which we thought were consistent with our personal practice. There is no science here.
Mr. Sawiak: Those questions go to qualitative and not quantitative answers. If a company can respond because it has already created an internal budget to track filing costs in various provinces, or if it is paying someone to track those costs internally or externally, then the problem has already been recognized. The desire to quantify that amount suggests that filing costs are important in their budgetary process.
Again, if the company has identified a budget item or an employee cost for a person whose task is to handle the filing securities forms and updates, then they recognize that as a cost of doing business. That cost is deemed to be important and not simply a cost to pay that particular person.
Senator Hervieux-Payette: I see all these sophisticated incorporation schemes for all sorts of fiscal purposes. I see holding companies parenting five or ten other companies, created by great lawyers like yourselves, some under provincial jurisdiction and some under federal jurisdiction. I see these things and I ask myself: Why not have just one law at the national level? If we were to add an eleventh jurisdiction, would it be any better?
How would it help us to compete in the global market? It is not clear to me from this report that we will be more competitive globally and, at the same time, will keep Canadian companies from moving to the U.S. market. Companies move south because of the cost of money, not because of better deals on the cost of New York lawyers.
Mr. Sawiak: They move because of the size of the capital pool, senator. Their capital pools are much larger than ours. In one example from the survey, respondents said that the difference in size of American capital pools justifies the costs over those in Canada.
I tried to say this earlier. In my view, we went out looking at transaction costs. The answer came back: The issue is not really the cost but the markets which we want to access. There is a critical point at which the market is large enough to justify the costs in accessing it.
Your example about the five holding companies and the ten jurisdictions is a bit different. If I set up my corporate structure in three different companies, rather than one, then I should pay three times the normal fee.
This report is asking whether we should be paying three times ten fees or three times one fee. With regard to whether it should be made for competitive markets, I can only say that the participants in the markets have expressed their preferences to us. I do not know how far that can be accommodated within the other constraints.
Senator Kolber: What I am hearing makes very good sense. If you need a large amount of money, you can afford to pay for it; if you need a small amount of money, you cannot. We did not need to have a hearing to learn that.
Could all the commissions in Canada agree that a company seeking funds under a certain limit need not apply to each commission separately? In other words, do the rules have to be the same for companies of every size?
Mr. Braithwaite: There is no reason, even under a federal system with a federal securities commission, that you could not have special rules for special markets within that regime.
Senator Kolber: Can we have it under the present regime?
Mr. Braithwaite: We do have it under today's regime. It is open to a province to have that. Alberta has special rules; Ontario has worker ownership rules.
Senator Kolber: Explain to me again about the fellow in Vancouver who wants to access Ontario.
Mr. Sawiak: You asked whether, if someone had a small threshold limit, they could access across Canada under the existing regime, and the answer is no.
Senator Kolber: Is that not something which could be changed?
Mr. Sawiak: That is a constitutional issue. I do not know.
The Chairman: I am getting a bit confused. You are telling me that some of the commissions have a different set of rules for small amounts of money than they have for large amounts of money?
Mr. Sawiak: Yes, for small issuers as opposed to larger issuers.
The Chairman: "Large" defining not the size of the company but the size of the issue?
Mr. Sawiak: Both, in some cases.
The Chairman: Is the definition of "small" different across the country and are the rules for small issuers different across the country?
Mr. Sawiak: To go back to Senator Kolber's question, I understood it to be whether there is a system in place in Canada right now where a small issuer who wants to raise a small amount of money can access all the provinces for that $500,000.
Is that the question you asked, senator?
Senator Kolber: Yes.
Mr. Sawiak: No, there is not. Provinces do have special rules for small issuers, but they are limited to the province.
The Chairman: Is it possible to solve the problem of trying to raise $500,000 on the VSE by having the provinces agree to a common set of rules, even though there might still be 10 commissions? As you said, it is not there now. Without getting into constitutionality, is it possible to solve the problem that you and Senator Kolber were discussing by some common agreement among the commissions?
Mr. Braithwaite: This could be handled under the cooperative regime which is in existence today. It would take a long time, but it would be possible for the individual provinces to accept, in principle, a set of rules for small-capital issuers.
The Ontario Securities Commission published a report last year looking at a separate set of rules for small issuers. That is just out for comment and it will take a long time to examine. If provinces ultimately found it acceptable and amended their statutes or used their individual rule-making authority, that could result in the provinces agreeing in principle to a common regime for small issuers. That is possible, but I do not think it will ever happen.
Mr. Sawiak: That question is almost a restatement of Senator Angus' earlier question. Our system may not be broken, but it does not work as well as it could.
The Chairman: Among the provinces that have different rules for small, is there a common definition for "small"?
Mr. Sawiak: I do not believe so.
The Chairman: I ask that only because "small" in Ontario may be much larger than "small" somewhere else.
Mr. Sawiak: As Mr. Braithwaite has said, I think the definition of "small" in Ontario will change when the OSC project is finished.
The Chairman: Can you give us a sense of the order of magnitude of "small" in various jurisdictions at this time?
Mr. Braithwaite: I do not know what was contained in the draft Ontario report. I have looked at that report but it is not something with which I am well versed, and I am not familiar with the Vancouver regional rules.
Mr. Sawiak: I cannot remember the thresholds off the top of my head, senator.
Senator Austin: Let me tackle two different tendencies which I see in the securities field.
The first tendency is for a security issuer in Canada to go to NASDAQ when it has passed a certain small threshold, be it under the junior capital rules of Alberta or the Vancouver Stock Exchange junior limits. Those are the two most attractive markets for these issuers. This is becoming more and more common in the electronics and biotechnical fields.
It is my view, always subject to change on the basis of further evidence, that Canada's security system has a natural turn-off point because the U.S. system is so attractive. I refer not only to the enormity of their capital pools or the substantial capacity of the U.S. distributors, but also to the fact that theirs is a national capital market. Distributors in the U.S. can go into California, Pennsylvania or Texas using their branch networks to look for capital for a particular issuer.
There is another advantage in NASDAQ which is not within the purview of your report. NASDAQ is an aggressively managed system which goes looking for candidates with whom to trade. It is a broker-owned and -managed system run in an entrepreneurial fashion. Canadian issuers are finding it a market which is more easy to use. Once the SEC registration tests have been met, a company can be traded across the United States without difficulty.
Senator Kolber: It is a difficult market on which to deal.
Senator Angus: It is not a stock exchange.
Senator Austin: The brokers will skin an investor on the way in and on the way out, but I am not talking now about the investors. I am talking about the companies themselves and their raising of capital.
I would like your explanation for why there are in your report two very different answers to what seems to be one question. At the beginning of page 35 you say:
Nearly 80% of the Canadian Inter-listed Company respondents believed the system of securities regulation in the United States was more cost effective...than the Canadian system...
On page 36, under "Securities Lawyers" you say:
The majority of Securities Lawyers (78%) indicated that in their view the U.S. system was not more effective or less costly than the current Canadian system.
Can we begin by an explanation of the apparent difference in conclusions from those two groups?
Mr. Sawiak: I cannot give you one. To be honest, the question was framed in such a manner that the reason for that discrepancy was not evident.
As far as your general statement about NASDAQ being an alternative, I agree with what you have said. Other parts of the report state that people will generally skip over the border to NASDAQ not only because of its larger capital market but also to escape conflicting escrow requirements.
A B.C. company which is escrowed under their local policy 307 may come to Ontario five years later, and the Ontario commission will escrow them all over again even if it is different people. I would not call that an inducement to stay in a smaller capital market.
Senator Austin: Is it not also true that quite often NASDAQ will release those escrow arrangements on listing?
Mr. Sawiak: NASDAQ would not have the jurisdiction to do that, but they would not impose new ones.
Senator Austin: I understand NASDAQ will also ask provincial securities administrators to release escrow restrictions under certain circumstances. Have you not seen that?
Mr. Sawiak: No, I have not.
Senator Austin: One of the situations which we are examining here is the competitive situation with the U.S. market and its capital pools and the potential loss of viability in the Canadian securities system if we continue in the present stream.
The second part of my question may appear contradictory, but I do not think it is. It goes to Senator Kolber's general interest and concern. Mr. Braithwaite has addressed himself to this question. There is a need for local sensitivities, local conditions and local requirements which must be met within a federal system. For example, at one time, Montreal was the dominant financial market in Canada and Toronto was a junior mining market. That is not within the memory of anyone here, but I have been reading about it.
Today, Montreal is a specialized market. Toronto is a general market for all securities. Vancouver is a venture capital market, as is Alberta with some different rules.
Can the requirements of issuers be maintained under a federal system? How do the Americans do that under their federal system?
Mr. Braithwaite: I cannot speak for the American system. Can it be accommodated in Canada? Sure. I do not have any doubt that one could examine the requirements of any federal system and carve out exemptions which would otherwise apply across the board to distributions which are made in compliance with a parallel set of rules in that province.
Venture capital would be a good example. Suppose the Government of Manitoba decided that they wanted to raise venture capital in the province of Manitoba. They might be prepared to allow that venture capital to be raised with disclosure documents which did not otherwise satisfy the requirements for cross-country distribution. Then we could have a "carve-out" for Manitoba venture capital but only in certain prescribed situations to address a local concern.
I talked about the labour-sponsored venture capital corporations which are held by some provinces, Ontario being one. That is another case where the disclosure document, otherwise required under a federal regime, could be modified because of a provincial finding that competing policies or worker participation have warranted departure from the wider standards.
Senator Austin: I agree. How would you see a national securities system impacting on the governance of stock exchanges which are essentially private-sector managed? Each of our stock exchanges is essentially the property of the member brokers.
Mr. Sawiak: Yes, but they are governed by the securities commissions in each province. The stock exchanges do not change their rules without getting clearance from the securities commission in each province. I do not think there would be word one as far as impact.
Senator Austin: Could you foresee a national security system where the stock exchanges are run by the provincial securities entities? Or would you foresee that securities exchanges should be run under national rules?
Mr. Braithwaite: Exchanges have self-regulatory- organization status under the various provincial securities legislations. I would see them maintaining that SRO status but reporting to the CSC.
Senator Austin: Who would make the rules for the exchanges, the federal or the provincial securities commission?
Mr. Braithwaite: The federal securities commission would make the rules.
Senator Kolber: I want to ask the chairman a question.
Is it beyond this inquiry to ask what the federal government could do to increase the availability of capital pools?
Senator Austin: Do you mean beyond securities? Through the tax system, for example?
Senator Kolber: Yes, through the tax system. That has nothing to do with this?
The Chairman: No, but that does not mean we cannot look at it in the future.
Senator Stewart: To some extent, my first question has been almost completely anticipated by Senator Austin's questions and by the exchange between Senator Austin and Senator Kolber.
We have a system in Canada which, evidently, has some disadvantages. Companies wishing to raise money, on the other hand, have an alternative: namely, they can go south into the United States.
I do not want my words to bear a meaning which I do not intend, but how much erosion is taking place where large sums of money are being raised? Is the business going willy-nilly elsewhere?
Mr. Sawiak: I have no personal knowledge of the quantities. You need an investment dealer who is familiar with the industry to answer that.
I remember reading a story in one of the national newspapers about one and one-half months ago. The vice-president of an investment banking institution, a national independent investment dealer who worked in Toronto and Ottawa, made the specific point that people will go south of the border for money at some point in time anyway. He further questioned, as would I: Why would we encourage that to happen any faster than it does now?
Senator Stewart: You stated that companies will go south "anyway." Do you mean to imply that, even if we adopted the changes contemplated in the answers you have received, that borrowers would go south of the border anyway?
Mr. Sawiak: There is a specific question asked in the surveys.
Senator Stewart: "Would you go anyway?"
Mr. Sawiak: Yes.
Mr. Braithwaite: Mr. Sawiak is right. If the committee wants proper information with respect to that question, investment bankers can provide definitive information. From our experience as practitioners, there is clearly a growing phenomenon, over the past five years or so, where Canadian issuers are going straight to the U.S., to NASDAQ. That did not happen before but it is happening with regularity now.
There are a number of reasons for that. The escrow in Canada is an impediment to Canadian capital.
There are also market reasons. The analysts in the United States are more sophisticated. There is a perception that you can get more money at a higher price as an issuer in the U.S. capital markets at the IPO stage, the initial public offering.
We should mention, too, the phenomenon of the multi- jurisdictional disclosure system which is one of the efforts at cooperation which I mentioned earlier. It was introduced with the SEC and the Canadian commissions three years ago. As a result of that exercise, it is very easy to access the U.S. capital markets if you are a Canadian public company without doing anything additional to, in fact, filing your Canadian prospectus in the U.S.
Because of the MJDS system and the IPO phenomenon, there is an increase in the Canadian capital being raised in the U.S. by Canadian issuers.
Senator Stewart: We know that, in Europe, there is a project for European monetary union and that the governments of certain countries -- Germany, France, the Benelux countries, Italy and perhaps Great Britain -- are considering adopting a common currency which of course would mean a common monetary policy. There are very good economic reasons, as well as political reasons, which are adduced in favour of such a move.
To your knowledge, is there a parallel move in Europe or elsewhere toward a union of security jurisdiction or security regulation?
Mr. Braithwaite: Yes, it is my understanding that there are directives issued by the EU dealing with various aspects of securities regulations. There is a directive on investment funds; there is a directive on insider training which all the members of the EU are meant to reflect in their legislation and that is taking place over time. I am not intimately familiar with that process, but I understand it is ongoing in the EU.
Senator Stewart: One of the arguments made in certain European capitals in favour of the monetary union is that it will make the member countries attractive to investors. This, of course, concerns Canadians because we might well be competing for the same investments coming from such places as Japan.
The argument could also be made that, as Europe consolidates its security administration in the way you have suggested and perhaps goes beyond it, we in Canada and in North America must also think of the unification of our securities administration.
Mr. Sawiak: Let me answer by essentially repeating some-thing which Mr. Braithwaite said earlier: The trend is that money moves where it gets the best return. We are becoming global one way or the other. The fences are coming down. MJDS is an example of inter-border activity. The trend seems to be toward larger capital pools.
I am not qualified to get into that discussion on the genesis of the EU, be it monetary or securities, but we are becoming more global. Global money markets now exist.
I agree with you. We will be in competition, period, whether we like it or not. It is just a matter of how ready we will be.
Senator Stewart: I will revisit my question with two prongs. First, the implication of what you now say is that Canada, as a country, ought to put itself in a position so that its internal bulkheads do not prevent it from being a reasonably efficient competitor. The second prong is to extend that to North America and this, of course, would concern us more than the Americans because their country is far bigger than ours.
North America then ought not to impede, by reason of internal bulkheads, its ability to compete in the globalized financial markets?
Mr. Sawiak: I am saying that the internal bulkheads, to the extent they prejudice somebody from one province over someone from another province, should be taken down. Someone from Saskatchewan should not be prevented from raising adequate money in Ontario or Quebec. To me, that is a house divided.
If you take down the internal barriers, it is common sense that you help your external system because you are now providing one big capital pool within the country.
Whether or not that ever moves on a North American basis, I do not know and I am certainly not qualified to guess.
Senator Austin: I have a supplementary question to Senator Stewart's comments. Essentially, we could organize the North American capital market in two broad ways. We are discussing first the control of the Canadian capital market for Canadian requirements in the most efficient and competitive way on the basis of international standards. That means that the Canadian issuer would naturally seek Canadian pools of capital for as long as the Canadian market could serve their requirements. Their "requirements" would be quickly and efficiently-raised capital at competitive costs which avoids a currency risk by raising Canadian capital to be spent in Canada.
The other option would be a North American capital market in which we or the Americans, or the Mexicans, for that matter, could raise capital in any capital pool anywhere in North America. Lawyers and accountants and securities administrators would all compete on a continental basis for that particular work.
If a Canadian issuer, such as Bombardier in Quebec, wanted to raise money, it would search out the capital pools and find the best bid from the investment house in terms of the lowest cost. Perhaps it would be a Dallas firm. Bombardier would go use them rather than using Stikeman, Elliott in Montreal or the Montreal Stock Exchange or the Toronto Stock Exchange.
Why? We must ask ourselves, in the area of globalization of international finance, what is Canada's interest in protecting its own capital system? Mr. Sawiak said capital moves quickly; it also has no national loyalties; it increasingly travels without a passport. That is particularly true of North American capital.
Mr. Braithwaite: Those are difficult questions to answer. However, I would like to see one person speaking for Canada at that table shared with the representatives of the Mexican SEC and the American SEC. If we go further to Europe as well, there may be ten people at the table and there be one voice representing the Mexico SEC and the U.S. SEC.
Senator Austin: I concur. My basic bias is shown through my questions. I agree with your comments as witnesses that we are in a global capital market; we have national capital imperatives to protect. To do that, we must organize ourselves along market lines and not along regulatory lines. We must be competitive market-wise and not simply create market barriers through regulation. That is what we have done historically. That is the issue we are trying to tackle here.
Mr. Sawiak: I should have said it so well.
The Chairman: That is why he is an ex-lawyer-senator and you are a lawyer.
Senator Kelleher: It is rather difficult this late in the day to think of a new question. However, I would like to focus for a moment on the globalization aspect which we are facing today. This has been partially explored and answered.
From my perspective as one who practices, shall we say, in the Asian market, I have noticed that many companies, particularly from Asia and more particularly from China, are looking to raise money offshore. They do not have the pools of capital at home which they need.
As opposed to thinking of Canadian companies trying to raise money within our system, I know that a number of Hong Kong and Chinese companies have been looking to Canada for a pool of capital which they can tap.
Do you think that our existing national system of fragmentation inhibits people from coming here or raises their costs or deters them from coming to this market, as opposed to following, say, the American market or the London market?
Mr. Braithwaite: It is a factor. When one is interviewed here by non-resident issuers who are contemplating an offering in jurisdictions around the world, the issuers ask about the regulatory environment and the process which they are contemplating entering.
The issues are complicated. This question arises more often when a foreign issuer is looking to raise money capital in a number of jurisdictions. The issuer must to look at the impediments to doing an offering in Canada as an adjunct to an offering in a number of other jurisdictions versus the amount of capital available here.
We see this oftentimes when multinational issuers do global offerings. They do ask what is involved in filing in Canada by way of how many regulators there are and the potential delays because of multiple regulators. It is fair to say that decisions not to offer securities publicly in Canada can be linked to the cost and hassle associated with doing an offering in Canada.
I am looking at multinational issuers who are deciding to offer their securities in Europe and in the United States. When they ask themselves whether they should add Canada on at the end, the answer is oftentimes no. We are often left out on a public offering because of an additional burden associated with meeting the Canadian requirements.
I am not saying that provincial regulation is the only reason why Canada is left out. However, the multitude of additional regulatory requirements which must be met by a foreign issuer in coming to Canada has led to decisions not to publicly offer securities in Canada.
Senator Kelleher: If this continues, which it probably will because of the globalization of markets, will this be harmful to Canada in the long run?
Mr. Sawiak: I cannot see it being beneficial, senator.
Senator St. Germain: Gentlemen, your report is really saying that the transaction costs are very, very minimal, as compared to the point brought up by Senator Austin and others here that this problem is far exceeded by the regulatory requirements. You were asked to study the costs, but the costs are not really the determining factor in going to a national security system. Is that correct?
Mr. Sawiak: The costs are not the sole factor. The costs are also relative to the issuer in question. There are certain costs which one must incur which should not be necessary at all.
Senator St. Germain: Would you say that these costs are really significant? Am I reading this wrongly in your report? These costs are basically not that large in the overall picture of things.
Mr. Sawiak: It depends on the costs. I think they are significant in some case.
Mr. Braithwaite: Against what are we measuring? That is always the question. Overall, the costs are not materially great compared against most numbers which we are discussing. There are additional costs which are documented and reflected in our report. Are these costs important overall? Are they in the order of magnitude of, say, 10 or 20 per cent against the issue? No, they are not material in that sense.
The Chairman: Mr. Sawiak and Mr. Braithwaite, thank you for coming today. You sparked our interest and many interesting questions. The committee will inevitably return to this subject again. Thank you for all your work. Please pass on to your colleagues and to your firms our thanks for their work and for your time.
Senators, we are adjourned until Thursday at our regular time when we will deal with the last three elements of our draft report on corporate governance -- take-over bids, institutional investors, and the joint and several issue as raised by the CICA -- before we send out that report for comments. We hope to deal with those three elements next week so that, the following week, we can send out the interim report and leave time to prepare the final report on corporate governance in June.
The committee adjourned.