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BC securities regulation

From scam central to principled pioneer: how B.C. turned its reputation around by championing a simple new idea. Once known as the stock-market scam capital of North America, it appears B.C. is now being held up as a paragon of smart regulation. And formerly a staunch defender of provincial securities regulators, the province is going turncoat, now supporting the idea of a national scrutineer. When it comes to refereeing the stock market, ironies abound in B.C. – and it all has something to do with an approach to policy called principles-based regulation. The idea of replacing Canada’s current mix of 13 provincial and territorial securities regulators with a single national equivalent has been scotched a half-dozen times in 30 years by protective provinces. But federal finance minister Jim Flaherty floated the idea again in the Conservative government’s January budget, and this time around B.C. is backing the plan, a shift that many feel might just swing the scales. When asked about the government’s one-eighty, B.C. finance minister Colin Hansen tells BCBusiness it’s all about the feds’ attitude this time around: instead of trying to impose an Ontario-style system on the rest of the country, the feds are proposing a flexible, regionally sensitive system. And instead of a prescriptive, rule-heavy approach to regulation, the federal government is favouring a principles-based system, a school of thought where many see B.C. as a North American pioneer. The fact that the idea is being discussed at all on the federal level owes much to Doug Hyndman, chair of the B.C. Securities Commission (BCSC). Back in 2001, he recalls in an interview with BCB, the new B.C. Liberal government mandated a provincewide cut to regulations, including those governing the stock market. Forced to trim rules the commission started looking at what other jurisdictions were doing, eventually focusing on a promising approach pursued in the U.K. that was being hailed by academics. And so, on Oct. 1, 2001, the BCSC kicked off a project to implement a rule-trimming principles-based system. About six weeks later, the Enron scandal broke. “We found ourselves being a voice in the wilderness,” Hyndman recalls, “arguing for more principles-based regulation while the rest of North America was saying, ‘We need more rules.’” In contrast to such ever-growing rule books, a principles-based system defines a few broad top-level rules – one of the best being, essentially, thou shalt not commit fraud. To a certain degree, the interpretation of these principles is subjective – and it does create confusion, Hyndman admits. He recalls that in the early days of B.C.’s current system, companies would often call the commission asking whether this piece of information or that now needed to be disclosed. Hyndman says BCSC staff were constantly reminded to avoid giving straight yes-and-no answers. The whole point, he says, is that business leaders and brokers have to make a judgment call, that the regulator is not going to make those decisions for them. While many worry this approach creates too much uncertainty, Hyndman argues that this is just a short-term symptom and that the problems with a rules-based system are far more damaging. When a regulator attempts to block every sin with a new commandment, it creates a culture of loophole hunting, he says, with new investment schemes constantly being invented for which no rules apply. “Then you’re constantly on this treadmill. When something new comes up, ‘Oh, now we need yet another new rule.’” Policy-makers like the idea of principles-based systems because they’re realizing how easy it is to “game” the rules of a prescriptive approach, agrees Christie Ford, an assistant professor in law at UBC. But she says one of the most pervasive misunderstandings is that principles-versus-rules is an either-or argument. Any regulatory system uses both principles and rules, she explains; the trick is to intelligently decide which works best in which areas. And there, in the details, is the real issue. If done well, a principles-based system can better protect investors and better serve companies than one based on a checklist of rules, Ford concludes. But if not done well, it does a worse job on both fronts. “If there’s one thing that I firmly believe about principles-based regulation at this point,” she warns, “it’s that how it’s done is essential. As to the best way to build such a system, one thing is certain: Canada is watching B.C.