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Another Take on The Lortie report

Updated: Mar 31, 2018

First published in Investment Executive -

By: Anita Anand

In assessing the merits of a national securities regulator, it is important to be guided by rigorous analysis, not selective citation. Pierre Lortie, former head of the Montreal Exchange, appears to prefer the latter in his report, The National Securities Commission Proposal: Challenging Conventional Wisdom. Lortie seeks to discredit federal initiatives aimed at creating a national securities regulator by using information that supports his position, while ignoring that which does not.

For example, Lortie attempts to argue that the current securities system already functions well, citing an Organization for Economic Co-operation and Development report that ranks Canada second in terms of the quality of its securities regulation.

A closer look at the OECD report is required. While Canada’s high rank is positive in a general sense, it does not really speak to the quality of our securities regulatory regime. For example, the enforcement of contracts, access to credit and bankruptcy procedures are not integral components to a securities regime; yet they comprise a substantial part of the indices on which the OECD report is based. It’s a bit like ranking the Toronto Maple Leafs high on a list of hockey teams by measuring sold-out games and the team’s longevity — interesting, but not relevant to performance.

Lortie also ignores a much more pointed appraisal of Canada’s securities system presented by the OECD in a 2008 policy brief. The OECD states: “The current diversity of regulations … makes it difficult to maximize efficiency and increases the risk that firms will choose to issue securities in other countries. A single regulator would eliminate the inefficiencies created by limited enforcement authority of individual provincial agencies.”

Lortie also chooses to quote international studies that laud Canada’s financial system, while overlooking reports that call for a national securities regulator. In 2008, for example, an International Monetary Fund report stated that there is “significant duplication caused by the system of provincial regulation that should be addressed … enforcement is an area where considerable improvement is still needed.” While citing this same report in his paper, Lortie ignores those points.

Lortie points to research by a team of corporate finance experts led by Rafael La Porta, a professor at the Tuck School of Business at Dartmouth College in New Hampshire. The research lists Canada as second out of 49 countries in securities regulation and the strength of private and public enforcement of investor protection. These authors obtained their data by sending a questionnaire to one lawyer in each of the 49 countries who subsequently “confirmed the validity” of their answers. This line of studies has been heavily criticized for its questionable methodology, quality of data points and simplistic conclusions. These studies seem a flimsy foundation on which to build Lortie’s case.

On the issue of enforcement, Lortie points to a study by Professor Mary Condon of Osgoode Hall Law School, York University, which purports to show consistency across provinces. Again, however, a close reading of Condon’s paper reveals that her reference is not to quasi-criminal cases. In fact, Condon found that in relation to the “public interest” power, there is “significant variation… across the provinces in relation to infractions….” Condon also found “unevenness in the application of contextual sanctioning factors to individual respondents.” In short, Condon’s work cannot be used to support the notion that there is consistency in regulatory decision-making across all jurisdictions.

Lortie argues that the U.S. system is not more aggressive than Canada’s in enforcing Securities Act violations. But if we refer to the study that he cites in setting forth this data, we see that over the 2002-04 period, the number of enforcement actions in Canada is less than 10% of the corresponding number of state-level actions in the U.S. Further, the number of enforcement actions in Canada is less than 6% of combined state/federal figures in the U.S.

Finally, Lortie advances the idea that the costs of initial public offerings and of equity are comparable between Canada and the U.S. The relevant question, however, is surely whether costs would be lower under a national securities regulator vs the present system, not how costs compare to those in another country.

Further, Lortie does not address the important question of revenue lost from issuers deciding to raise capital elsewhere because of Canada’s fragmented regulatory system. It appears the evidence presented by Lortie is selectively chosen, leading to an inaccurate assessment of the literature. He claims that his conclusions in opposing a national securities regulator are “inescapable.” But, upon examination, it is clear that they are largely unsupportable.

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