Securities reform tops agenda

Securities reform has been a major issue for the Prospectors & Developers Association of Canada (PDAC) since 2001, and remains a priority.

Mineral exploration companies account for about 25% of the publicly listed companies in Canada. Most of these companies finance their programs through the sale of shares because they have no cash flow. Financings tend to be small and relatively frequent, relating, as they do, to the stages of exploration. Because of these frequent financings, junior companies pay a disproportionate amount in regulatory compliance costs.

Companies reduce their issuing costs by selectively listing in only two or three of Canada’s 13 jurisdictions, all of which collect fees and require different documentation. As a consequence, domestic capital markets are biased against residents of those provinces that do not warrant the time and expense of qualifying new and normally less expensive stock issues. Many investors in less populous jurisdictions, therefore, cannot get in on the ground floor of a stock issue.

Investors and the mineral industry want effective use of their money for exploration. Spending investors’ money on multi-jurisdictional compliance is wasteful. Investors and the mineral industry also want effective prosecution of fraud. This is best accomplished through a single securities regulator that can enforce the federal criminal code and has the necessary policing powers.

Jurisdictional issues for Canada’s police must be resolved so that perpetrators of white-collar crime can be prosecuted.

There have been many previous attempts over the past 70 years to rationalize the current system of securities regulation, which is fraught with competing interests, constitutional hurdles, fragmentation, and regional disparities. According to former federal Finance Minister John Manley, the U.S.’s Securities and Exchange Commission has become Canada’s de facto single securities regulator. Well-intentioned attempts to create a “passport” system or adopt the Canadian Securities Administrators’ proposal for Uniform Securities Regulation (which itself is not uniform) have only prolonged the decline in relevance of Canada’s capital markets. In May 2004, British Columbia introduced new local rules, which are more at variance with other jurisdictions than the rules they replaced, and in April 2004, New Brunswick updated its legislation and regulations; these are modeled on those of Ontario.

In an April 2004 speech to the Canadian Investor Relations Institute, David Brown, chairman of the Ontario Securities Commission, indicated that a single national regulator need not mean a federal regulator. He also noted that: the national regulator need not be based in Ontario; strong regional offices with sector expertise would be required; and an agreement among an initial core group of jurisdictions is necessary to help facilitate the way forward for the whole of Canada. Since the provinces are not prepared to surrender powers to the federal government, a pooling arrangement similar to one proposed in 1996 would be advisable. This could be an incremental process with a core group of provinces initiating the process and others following.

Serious consideration should also be given to proportionate governance regulations, such as those applied in British Columbia. These are scaled to company size and asset value and would accommodate venture capital companies such as those in the junior mineral exploration business. These companies are the engines of sustainable development and growth, feeding mineral discoveries into the mining pipeline.

Australia has faced similar structural challenges in its efforts to improve its securities regulatory system. The country has made significant progress in making the transition to one regulator by seconding state powers rather than surrendering them to a federal commonwealth body. This is an important step forward for Canada’s primary competitor. Australia is similar to Canada in terms of the percentage of publicly traded junior mineral exploration companies compared to total listings, domestic exploration expenditures and government sponsored geoscience research and development.

The issues are many and complex, but the time has come for political decision. The PDAC has repeated the message that one set of rules consistently applied across Canada by a single regulator must be the goal.

A reformed securities regulatory system should ensure that:

— all Canadians, regardless of province of residence, are treated uniformly with respect to access to new stock issues;

— prosecution under the criminal code of inter-provincial and international securities fraud is made more effective;

— there be a single national regulator, consisting of tiered structure of corporate governance to accommodate the proportionate need for regulation of large and small companies, as reflected by the Toronto Stock Exchange and the TSX Venture Exchange exchanges;

— appropriate exemptions are permitted for small companies across Canada (for example: the integrated disclosure system introduced as Continuous Market Access by the British Columbia Securities Commission).

Ministers are asked to support their premiers and cabinet colleagues in instituting a single securities regulator which is empowered to apply and administer one set of securities rules consistently across the nation.

The PDAC is asking ministers to support this recommendation because:

— Canada’s multi-jurisdictional securities regulatory system discriminates among investors insofar as it offers opportunities to some investors to make money and not to others, simply on the basis of where they live;

— Canada is the sole G-7 country that does not have a single securities regulator (there is anecdotal evidence to suggest that China and members of the European Union are no longer prepared to invest time and effort in working out memoranda of understanding on a province-by-province basis); and

— the existence of multiple provincial securities regulatory bodies, each with its own set of regulations, impedes the efficacy of capital markets and job creation.

— The preceding is an edited excerpt from a brief submitted to the 61st Annual Energy and Mines Ministers’ Conference on behalf of the Prospectors & Developers Association of Canada.