Of Regulatory Reform and Enforcement Effectiveness: Models for a Common Enforcement Agency for Canada
Professor Poonam Puri
June 30, 2008
Executive Summary
Improving enforcement in securities regulation and the need for a national regulator are two topics that have been the subject of much debate in both legislative and academic circles. This study proposes four options to improve enforcement in Canada through various structural changes.
The first option involves severing the Integrated Market Enforcement Team (IMET) from the RCMP. The new IMET would ideally be able to function more efficiently, without being imbedded in the hierarchy of a much larger organization and have its own resources for investigations and prosecutions as well as new tools. The new body would require its own governance and accountability structures as well as a separate budget.
The second option that is proposed in this study is the possibility of combining the adjudicative structure of Canada’s 13 securities commissions into one national adjudicative tribunal. As things currently stand in most provinces and territories, a perception of bias is created by the embedding of the adjudicative function within the organizational structure of securities commissions. This option would remove such a perception and create the opportunity to allow for improved consistency in sanctioning principles across the country. It would also allow the tribunal to access the most talented candidates for the adjudicative function. The potential governance structure of the new tribunal has yet to be addressed and this option is somewhat lacking insofar as it does not address many of the other criticisms surrounding enforcement effectiveness in Canada.
The third option would combine the investigation and prosecution functions of the provincial and territorial securities commissions into one national agency. Under this option, resources would be used more effectively, because they would be put towards substantive enforcement, instead of co-ordination and harmonization amongst the securities regulators and duplicative functions would also be removed. There are, however, a number of significant issues that need to be addressed under this option, including the overall governance and accountability structure, budget, and the power and scope of the local and regional offices. This option would also be the most difficult to implement.
All of the options discussed in this study would improve enforcement effectiveness Canada. The options are not mutually exclusive and it is entirely possible for them to work in conjunction with each other. A fourth option suggested by this study would be to combine options 1 and 3 to create a national agency to perform criminal, quasi-criminal and regulatory enforcement actions.
All of there these options should also be assessed against several factors, including constitutional validity and accountability to stakeholders, and be subject to a participatory debate amongst all stakeholders.
TABLE OF CONTENTS
Executive Summary
1.Introduction
2.Options for Reform
Option 1 – A New Separate Federal Policy Agency
Key Description
Challenges under the Current System
Opportunities under this Option
Challenges and Further Issues to be Considered
Option 2 – A National Adjudicative Tribunal
Key Description
Challenges under the Current System
Opportunities under this Option
Challenges and Further Issues to be Considered
Option 3 – Combine the investigation and prosecution functions of the provincial securities commissions into one pan-Canadian agency.
Key Description
Challenges under the Current System
Opportunities under this Option
Challenges and Further Issues to be Considered
3. Conclusion
Of Regulatory Reform and Enforcement Effectiveness: Models for a Common Enforcement Agency for Canada
Professor Poonam Puri[1]
1.Introduction
A common securities regulator for Canada has been a debated and contested issue for decades.[2] Numerous proposals have been made but none appear to have brought significant regulatory change on the issue, despite the inefficiencies associated with our current fragmented system (see table below for the current structure of the securities enforcement framework in Canada).
Certain recent reports and proposals for a common regulator, as well as the academic literature, implicate securities enforcement as one of the major concerns prompting the call for such a regulator.[3] This paper addresses the issue of structural changes pertaining to enforcement separate from other factors that favour a common regulator. That is not to say that I thereby wish to derogate from the importance and need for such a common securities regulator. Nonetheless, dealing with enforcement may be a way forward while a resolution of the remaining issues that surround the debate on a common securities regulator continue to be negotiated. In light of the intense criticisms facing governments and regulators on this issue, there is likely greater political and regulatory will to deal with enforcement as a stand-alone issue. This is true even under our current system of securities regulation, with 13 separate regulators and a passport system.
Current Securities Enforcement Framework in Canada
This paper advances several options which might be considered in redesigning our enforcement regulatory apparatus. Independent of any larger structural regulatory change, these options can be considered under both the passport model and a common regulator model. Option 1 would separate IMET from the RCMP and create a new, separate federal agency to investigate capital markets offences of a criminal nature. Option 2 would carve out the adjudicative function from the 13 provincial and territorial securities commissions and combine into one pan-Canadian adjudicative tribunal. Option 3 would carve-out the investigation and prosecution functions from the provincial securities commissions and combine them into one pan-Canadian agency that would investigate and prosecute regulatory and quasi-criminal offences.
The key criteria to evaluate the options include:
- Ability to deal with key criticisms of enforcement;
- Constitutionality validity;
- Stability of structure;
- Cost effectiveness;
- Transition path and costs
Each of these options would present several benefits for enforcement effectiveness in Canada. Option 1 would be the easiest to implement. Option 2 would be an improvement over the current system, but primarily by removing the perception of bias. Option 3 would be the most difficult to implement, given the negotiation that will be required to effect it, but it will have the greatest impact on enforcement effectiveness.
The three options presented are not mutually exclusive. In fact, they could be pursued concurrently, or they could be combined. Options 1, 2 and 3 could be combined under what could be called Option 4. Under this option, IMET would be separated from the RCMP and the 13 provincial/territorial investigative and prosecutorial functions would be separated from the commissions. Their functions could be placed into one pan-Canadian agency that deals with both criminal and regulatory enforcement actions. Option 2’s Adjudicative Hearing tribunal could have a broader mandate - to hear regulatory matters as well as criminal and quasi-criminal matters.
The options presented in this paper as well as the factors against which they are measured should be subject to scrutiny and input from a participatory discussion involving all relevant stakeholders.
The remainder of the paper proceeds as follows. Part 2 presents and analyzes the three options for reform. Part 3 concludes.
2.Options for Reform
Option 1 – A New Separate Federal Policy Agency
Key Description
Option 1 would separate IMET from the RCMP and create a separate, new federal agency to investigate capital markets offences of a criminal nature. The new agency could house specialized investigators (as well as a cadre of specialized prosecutors who work closely with investigators) to achieve efficient, timely and fair investigations and prosecutions.
Challenges under the Current System
The RCMP and IMET have been subject to considerable criticism in recent past. The Task Force chaired by David Brown focused on governance and cultural change within the RCMP. Justice Cory and Marilyn Pilkington’s recommendations focused, in part, on improving the effectiveness of investigations that are conducted by IMET. They noted human resource concerns, information sharing concerns and accountability and management issues. Nick LePan, who was appointed a special advisor to the RCMP/IMET in 2007, also released a report that raised concerns similar to those expressed by Cory/Pilkington. LePan made a number of recommendations, including enhanced leadership for IMET, clarifying accountability within the RCMP, more discipline and results-oriented management, and specific human resources measures to address pay scales, high vacancy rates, staff turn-over, promotions and other opportunities.
Opportunities under this Option
Option 1 would allow the IMET a better chance of thriving as opposed to trying to re-invent itself within the confines of the RCMP structure and hierarchy. The reality is that IMET is comprised of about 150 people in a RCMP force which is 26,000 strong. Given those numbers as well as other constraining factors, IMET cannot realistically change much within the constraints of RCMP structure. The new agency could structure its own pay and promotion scale without regard to RCMP’s rigid structures. During the course of a lengthy investigation, an officer would stay put within a separate IMET agency; he/she could not be diverted to perform other duties within the RCMP which the existing structure permits and encourages. The new agency would allow for a greater likelihood that officers/investigators can build their careers and earn promotions, without moving out of this specialized agency.
The new agency could enforce existing Criminal Code offences. Alternatively a new piece of federal legislation could be created, carving out the existing capital markets offences from the Criminal Code and creating any new ones as necessary or appropriate. If new federal legislation were crafted, this would provide an opportunity to create new tools for investigators and prosecutors, such as the power to compel third party witnesses which, rightly so, is a hotly debated topic.[4] The reason for this is because Canadian securities regulators have the power to subpoena testimony from third-party witnesses, while the police cannot compel such testimony. As such, the police are constrained in fighting white-collar crime.
In terms of the factors that are important in assessing this option, I believe that removing the Integrated Market Enforcement Team (IMET) from the RCMP into a separate structure will allow the IMET senior management to more effectively manage cases through investigation. As things currently stand, IMET is composed of a highly specialized team of investigators who are directly embedded in the overall structure of the RCMP. If a new agency were formed with prosecutors as a part of it, this would help to address current criticism that prosecutors do not have the resources or the interest to handle capital markets offences. Since Option 1 would move IMET from one federal structure to another federal structure, constitutional concerns should not arise. In terms of budget for the new structure, the starting point should be the current funds that are allotted to IMET under the RCMP being transferred to the new entity. Given the small size of the IMET – at about 150 staff – the transition should be terribly painful or difficult.
Challenges and Further Issues to be Considered
The key criticism of this option is that a separate police force for capital markets offences will be costly given that it will have to establish its own infrastructure for human resources, information technology, and related police services. This concern may be addressed by devising a structure which would allow the new agency to piggy back off of the existing infrastructure of the RCMP or another entity. The Canadian Police College and the Criminal Intelligence Service of Canada are two institutions that are separate from the RCMP but draw on the strengths and infrastructure of the RCMP as needed.
This paper has not addressed the particular governance structure, accountability and transparency mechanisms and detailed budgeting issues for this option. They are important features that need to be analyzed further for this option.
Option 2 – A National Adjudicative Tribunal
Key Description
Option 2 would focus on enforcement by the provincial and territorial securities commissions. This option would carve out the adjudicative function from the 13 provincial and territorial securities commissions and combine into one pan-Canadian adjudicative tribunal.
Challenges under the Current System
A key concern with the current system is that the adjudicative function is embedded within the organizational structure of the securities commissions, creating a reasonable perception of bias. The only exception is Quebec where there is a separate provincial securities adjudicative tribunal. There have been many calls in the last several years for adjudication to be independent of the securities commissions.[5]
Opportunities under this Option
Three key opportunities present themselves with this option. The first is that it would address the independence issue head-on, by separating the hearing tribunal from commission. The second is that this structure would allow for greater consistency in the interpretation of our substantive laws and sanctioning principles, because there would only be one panel which hears cases across the entire community. The third is that it would allow the tribunal to find the absolutely best qualified candidates to adjudicate on securities law matters across the country.
Under this option, a roster of expert commissioners would be created, drawing on retired judges, industry participants, lawyers, and other professionals, who would be available to hear cases across the country. These individuals would not be involved in the securities commissions in any way. Using the same group of individuals to hear cases across the country would allow for greater consistency in the principles that are used to decide cases and lay sanctions, which is a major criticism of some of the recent research and reports on securities regulatory structure and enforcement effectiveness.[6] Greater consistency in the application of the law is particularly important in light of the federal government and regulatory interest in moving towards more principles based regulation.[7] A common adjudicative panel should allow for more consistency in decision-making than under the current system with multiple provincial or territorial hearing panels.
At the time that option 2 is implemented, a mechanism could be created to make sanctions apply across the country, again addressing another challenge with the current fragmented system of enforcement. Studies have shown that there is a lack of consistency in sanctioning across the country.[8]
Challenges and Further Issues to be Considered
This paper has not analyzed the detailed governance structure of a common adjudicative tribunal. Would it be created by provincial agreement, or provincial and federal agreement? Would this process involve or require MOUs, delegation, agreement, or legislation? Who would nominate and/or appoint the commissioners or members of the hearing panel? How would this panel be funded and who would pay the commissioners/members and staff? These are important issues that need to be addressed in designing this option. In part, the governance, accountability and funding structures would depend on whether this option is coupled with another option, such as option 3, and whether there is federal involvement in the structure or whether it created exclusively by provincial agreement.
There appears to be some political will for this option. The Council of Ministers responsible for Securities Regulation noted in its 2007 Progress Report that it is examining the potential benefits of establishing an independent securities tribunal.[9]
One concern with this option is that other than the perception of bias issue and some of the benefits associated with consistency of application, it does not address the other key criticisms of enforcement efficiency and effectiveness that have been lodged against securities regulators and criminal enforcement investigators in this country. While this option is worth pursuing, it should be coupled with another option rather than being pursued on its own.
Option 3 – Combine the investigation and prosecution functions of the provincial securities commissions into one pan-Canadian agency.
Key Description
Option 3 also focuses on the provincial and territorial securities commissions. This option would carve out the investigation and prosecution functions from the provincial securities commissions and combine them into one pan-Canadian agency that would investigate and prosecute regulatory and quasi-criminal offences. It would leave the other substantive areas including policy making, corporate finance, mergers and acquisitions, etc to existing commissions. Actual investigations would continue to take place through local offices, a strength of our current system.