STAFF NEWS & ANALYSIS
Canada Creates Own SEC
By Staff News & Analysis - May 29, 2010

Flaherty outlines securities watchdog plan … Finance Minister Jim Flaherty (left) unveiled a federal government plan Wednesday to create a single Canadian securities regulator. Under the proposed Canadian securities act, the new regulator would replace the current "balkanized" system where Canada has 13 regional regulators, Flaherty said at a news conference in Ottawa. "[That's] 13 sets of rules and 13 sets of fees," Flaherty said. Flaherty will bring the bill to the Commons on Wednesday, but Ottawa will also ask the Supreme Court for advice on the issue. "We'll be asking the Supreme Court of Canada a clear question: is the next proposed Canadian securities act within the legislative authority of the Parliament of Canada?" Flaherty said. Currently, each province and territory runs its own regulator. – CBC News

Dominant Social Theme: Efficiency is a good thing – in business and regulation.

Free-Market Analysis: Yesterday, we wrote about the American Securities and Exchange Commission and what we consider to be its documented incompetence. The SEC does not, for instance, "protect" Americans from fraud or theft, not really. Occasionally it prosecutes cases that its own regulations have turned into civil offenses but these mostly do not deter anyone, in our opinion. In fact, we wonder how much fear of punishment deters actions. People perform crimes for a variety of reasons, mostly for reasons of greed or desperation. Believing they can get away with it may be low on the list.

Nonetheless, hope – at least bureaucratic hope – springs eternal. The above article (excerpted) shows us quite clearly that Canada is intent on moving ahead with its combining of regulatory authorities into a single national entity. In our opinion this is not necessarily a good thing – even though we have received several feedbacks explaining that a single regulator will be able to quash negative market manipulations that are apparently being attributed to Canada's big neighbor to the South. In fact, the issue seems to combine a number of controversial aspects of the Harper administration, including religious ones. It's obviously a contentious issue.

We checked in with our friends at Vancouver-based Foremost Research Group (contributors to ARBP's Swiss Confidential newsletter) and they assured us that outrage is rampant within the local financial community as industry execs are not pleased to see Canada moving in this direction. Foremost CEO, Shawn Perger, commented, "This is likely only the first step towards an eventual marriage between the US and Canadian financial marts that will formalize what many here already know – that Canada's regulators jump whenever big brother to the south beckons. In actual fact, here in Vancouver the SEC has been formally operating via joint US task force arrangements for many years now. It's really a shame to watch Canada's independence erode."

Either way, one thing we do know is that in the long-term governments are NEVER efficient. Efficiency is something that private sector can accomplish, and thus consolidation in the private sector can be seen as a net positive. Why is it that few voices in the Western world (these days anyway) are raised against more and more regulation (at least at a formal level)? Actually we think we know the answer. "Efficiency in government" is a power-elite dominant social theme, and those who in one way or another are beholden to the elite are loath to challenge it.

The idea that the private sector shall run amuck if not restrained by a savvy, honest and courageous public sector is somewhat ridiculous in our opinion. The trouble with this thinking (troublesome for us, not the elite elements that propose it) is that the private sector already has a governor – competition. Businesses need to compete for customers and it is a rare business (and one soon to go broke) that does not attempt to perform its services satisfactorily so customers return and word-of-mouth spreads.

Unfortunately, the public sector does not have customers to please. Public sectors rely on taxes and therefore are not beholden to any group of constituents. Thus, there is nothing EVER truly efficient about the public sector. However, one observation that does tend to hold true is that devolution is far preferable to continued enlargement and further nationalization of regulatory functions. Smaller is better when it comes to regulation. And less is preferable, too. Those regulators, for instance, who deal locally on a one-on-one basis with those being regulated are apt to know a good deal more about the effects of regulation and also to be more sympathetic to those being regulated.

In fact, we would tend to think, given that government almost always works best in small doses at a local level, that Canada like other Western countries would be trying to reduce and localize regulatory authorities instead of combining and nationalizing them. Not only will combining regulatory agencies not make the process more "efficient" in our opinion, it will also give rise, sooner or later to additional regulation. This is because a bigger Canadian regulator will have more clout, a bigger budget and thus more ability to lobby and more power to gain turf. Too bad. The past 100 years may fairly be labeled as the "regulatory century" when it comes to Western approaches to governance. But it seems to us in so many ways that the results are in – and show overwhelmingly that regulation doesn't make things better, but may indeed make things worse. Even much worse.

Market manipulation is a big deal right now. Pundits cry fraud and Goldman Sachs especially has been made into a scapegoat on this issue. We have no sympathy for Goldman – none at all – but the idea that regulatory authorities can make markets fairer by somehow rooting out manipulation flies in the face of reality. In fact, regulation cannot be effective or fair. Marginal utility and the Invisible Hand both tend to show us clearly that every regulation is a price fix, and every price fix distorts the market and brings about unintended consequences. This is why whenever a legislative body passes a law, especially a financial law, a few years later it is found that another part of the industry has destabilized or another group of investors has paid the price for the "fairness" that the legislation was trying to achieve.

We do note that there is at least some pushback to this idea of a national Canadian SEC. The article excerpted above delineates concerns that provincial regulators have over the nationalization. Of course, the arguments that are being made are not the ones that we have made. They have more to do with job loss and loss of local power. Here's some more from the article:

Two provinces — Alberta and Quebec — have vowed to fight any plan to create a single national regulator. A number of larger Quebec companies have joined with the province in opposing Ottawa's plan. For decades, both Conservative and Liberal federal governments have tried to replace the current system. Liberal Leader Michael Ignatieff voiced his cautious support for the proposal Wednesday, as long as it doesn't encroach on provincial activities. "We have to be absolutely sure that a cross-Canada solution will not harm provincial jurisdiction," he said. "It is possible to have an institution which is there to protect investors' investments, but we shouldn't be doing that at the expense of the jurisdiction in Montreal or Vancouver or Calgary," Ignatieff said.

Canadian stock markets and especially Canadian mining stocks have brought much value to the world over the past decades. The prospecting by Canadians has led to some of the biggest and richest mineral strikes in the world and has generally proved a most positive industry for Canada generally. But it is very clear to us that the trend in Canada for additional securities regulation is already having a deleterious effect on the mining marketplace. We would anticipate that a nationalization of regulation might only exacerbate these difficulties – if not now then sometime down the road.

After Thoughts

Here is what Canada's industrialist and regulators ought to keep in mind. There are plenty of places to mine in the world and plenty of well-capitalized entrepreneurs outside of Canada. Regardless of the reasons for the current SEC-style legislation, we would have to believe that over time having a national body should result in more regulation, not less. With additional regulation (if and when it comes to that) Canada runs the risk of harming its markets and reducing its competitive posture with over-regulation and onerous reporting requirements. You know, it used to be that Canada was the primary exporter of mining expertise in the world. Now its other financial centers, such as here in Switzerland, that are the willing recipients of Canada's latest export offering – talented brokers and traders seeking to get out before the regulators reduce their livelihood. Willkommen!

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