Proposal for a Single Securities Commission: Comments and Discussion
One argument advanced is that the current rules-based regulatory structure should be replaced with a principles-based approach similar to that of the United Kingdom's Alternative Investment Market (AIM). According to the Panel, this approach would allow for a relaxation of the conditions for corporate financing. We will point out the very distinctive characteristics of the Canadian market, which allows emerging companiesthose without income and even without any revenueto carry out initial and subsequent rounds of financing. Our estimates indicate that such financing is carried out at an advantageous cost, and the survival of new issuers seems more certain in Canada than in other countries where the rules for listing on a stock exchange are more restrictive. We believe it would be difficult to further relax the rules of a market in which 45% of issuers are able to list their securities on a stock exchange without reporting any revenue and in which 71% of new exchange registrants do not earn any income. This situation is unparalleled in the world. We will show that adopting a system similar to the AIM model would result in a significant percentage of existing issuers no longer being able to access the market. We therefore concur fully with the opinion expressed by one of the experts enlisted by the Panel, namely, that adopting a system similar to the AIM model in Canada is neither feasible nor desirable.
The Panel expressed concern about the conditions for the financing of junior issuers. We will show that, in general, the direct costs of such financings are lower in Canada than in the United States. We will see that, in fact, there is a very high number of small offerings and issues in Canada. The Canadian markets seem to have developed strategies that are well suited to the characteristics of an economy heavily dependent on small-cap companies and on the resource sector. An analysis of all financings, including traditional and non-traditional stock exchange listings as well as subsequent financings (a total of more than 10,000 transactions), clearly shows that financings are very small and are carried out locally and, in 77% of cases, by issuers from outside Ontario.
The Panel also expressed concern about the level of competitiveness of the Canadian market; this is a concern that we share. We will show that the principal challenge faced by the Canadian market is the gradual shift of transactions involving cross-listed securities to the U.S. market. In contrast to the Panel, we do not believe that AIM listings constitute a major problem. When Canadian companies cross-list their securities, they opt for the U.S. market at a ratio of eight to one. The migration of companies and transactions towards the U.S. market has many causes, but it would be very difficult to argue that the regulatory structure is a key factor. The argument whereby the costs of capital are lower in the U.S. does not stand up to analysis. Several recent and thorough studies indicate that the difference in these costs between the two countries is minimal, leaning in favour of one country or the other depending on the study. Our own findings show that Canadian companies that cross-list their securities do not benefit from any lower costs. The decision to list securities on a foreign market is driven primarily by strategic business factors and by the search for large pools of investors. In that regard, Canada has no advantage, and it seems unlikely that regulatory changes will convert Canada into a significant source of financing for foreign companies. In our opinion, efforts should be focused, above all, on improving and sustaining the financing options available to Canadian issuers.
The Panel has argued that establishing a single commission is necessary for improving enforcement of securities laws in Canada. In this regard, Canada is often compared to the United States. An analysis of data on sanctions shows, firstly, that the SEC is far from being the source of the majority of sanctions imposed on financial market participants. It initiates less than 10% of proceedings involving financial matters and imposes less than one quarter of all monetary sanctions. Secondly, there has been an increase in sanctions imposed in Canada in this area. Thirdly, there are major differences between Canada and other countries. This explains the differences observed and perceived as regards enforcement. The experts enlisted by the Panel have, in fact, recommended a series of eight actions and have suggested, in the eighth item, pan-Canadian enforcement of the law. Consequently, these experts have not concluded that centralization of the securities commissions is an indispensable condition for enhancing the enforcement of securities laws.
The issue of costs arises very often in discussions regarding the Canadian regulatory system. Yet, there is little evidence showing that the current regulatory structure leads to significant costs for investors or issuers. The costs of the regulatory authorities represent a negligible percentage of the transaction costs borne by investors and of revenues from brokerage activities in Canada. The direct costs of regulatory authorities are lower than those incurred in other countries, when expressed on the basis of the number of reporting issuers. Finally, arguments to the effect that a single commission would generate substantial savings are less than convincing. Such savings would be possible only if the activities of securities commissions outside Ontario were virtually abolished.
Three elements appear from our analysis. First and foremost, the principal arguments put forward by the Panel to justify the urgency of centralizing securities commissions in Canada do not stand up to analysis and are, at times, contradicted by the research and the experts mandated by the Panel itself. Secondly, the major challenge faced by the Canadian marketthe shift of enterprises and transactions to the U.S.does not seem to have been perceived as such or even discussed. Finally, we believe it is essential to recognize and preserve the distinctive characteristics of the existing market. It is a market that welcomes growth companies and small-cap companies, is highly decentralized and is apparently very favourable to issuers.