Published in the Western Standard, October 9, 2006, p. 19. (Also available in a pdf scan.)

 

Capital's punishment
by
Pierre Lemieux

One thing to watch this fall is what the federal government will do regarding its intention, announced in the May budget, to move toward a "single securities regulator." This idea of a securities regulation monopoly has been recycled from the previous Liberal government and its Wise Persons' Committee. The report of the committee, published in December 2003, endorsed the idea with much speechwriter-talk: "The call for change". . ."The world has changed". . ."Those days are gone". . ."Canada must keep pace". . ."Canada cannot afford to stand still". . ."It's time to act." The argument looks plausible: replacing 13 securities commissions by a single one will reduce cost and improve output, including enforcement. But appearances are deceptive. Centralization is often an illusion, and nearly always so in the hands of governments. Grand centralized plans seldom reduce costs or, when they do, they don't provide what the user wants. Think about our health care system. Centralization, planning, integration, rationalization (the last two words are favourites of the Wise Persons) always come up as the solution to any problem submitted to the government apparatus because they are in the logic of state expansion. These concepts are natural to politicians and bureaucrats. That's what the system rewards them for. There is an important body of economic literature arguing that financial markets don't need to be regulated any more than other complex markets--say, microchips, computers, or books. Insider trading, for example, was not illegal in the U.S. until the 1960s, nor in most European countries until the 1980s. In Canada, it was not seriously hunted, and not criminal, until a few years ago. In fact, insider trading is still not illegal in non-financial markets (like art or real estate, for example). Fraud is, of course, illegal, but insider trading does not need to involve fraud against identifiable persons, as the Martha Stewart case has shown. The Wise Persons' Committee, which was especially weak on economic analysis, ignored these arguments, and many others. Assuming that regulation is impossible to avoid or to roll back, it's better to entrust it to many competing jurisdictions. The benefits of regulatory competition are quite obvious in the field of U.S. corporate law, where a company can, as it were, choose its corporate laws (except for federalized securities law) by deciding in which state to incorporate. Regulatory competition allows for innovation and emulation, besides better accounting for local circumstances. This line of arguments explains why there is more than one country in the world. It also circumscribes the advantages of federalism within a country. Federalism is about decentralization, not about command and control from the centre. All provincial governments, except Ontario's, are opposed to a securities regulation monopoly in this country, and for very good reasons, indeed. Moreover, financial markets aren't under-regulated; they are over-regulated. Regulators' prescriptions not only apply to companies listed on stock exchanges, but also to non-listed companies that have more than a few shareholders (typically over 50) and are thus considered "issuers." The Ontario Securities Commission, the most important, and the securities regulation bully in Canada, has been much criticized for assuming growing arbitrary power in the name of an undefined "public interest." The U.S. Securities and Exchange Commission is the ideal of many proponents of a monopolistic security regulator here, but it is not an example to follow. American over-regulation is now pushing some large issuers to greener pastures, like the less regulated London market. Former Federal Reserve chairman Alan Greenspan and the CEO of the New York Stock Exchange are among those who have expressed concern about this development. In London, some fear that the participation of Nasdaq in the London Stock Exchange could introduce detrimental U.S. regulations through the back door. The federal government should stop pursuing the Holy Grail of regulation in all corners of the world. Once created, a Canadian SEC would be impossible to tame. In fact, there is a great opportunity to attract the demanders and suppliers of capital who are frustrated by the U.S. type of regulatory stranglehold on financial markets.