|Wikileaks:||View 05TORONTO2705 at Wikileaks.org|
|Classification:||UNCLASSIFIED//FOR OFFICIAL USE ONLY|
|Tags:||EINV EFIN PREL CA US Finance|
|Redacted:||This cable was not redacted by Wikileaks.|
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 05 TORONTO 002705 SIPDIS STATE FOR EB A/S TONY WAYNE STATE FOR WHA/CAN, EB/IFD, INR STATE FOR WHA DAS WHITAKER USDOC FOR 3000/ITA U/S RHONDA KEENUM USDOC FOR 432/ITA/IAA/BASTIAN/RUDMAN/FOX TREASURY FOR U/S (INTERNATIONAL AFFAIRS) TIMOTHY ADAMS TREASURY FOR U/S (DOMESTIC FINANCE) RANDY QUARLES DEPT ALSO PASS USTR FOR J. MELLE AND S. CHANDLER DEPT PASS SEC - MARISA LAGO DEPT PASS FEDERAL RESERVE BOARD DEPT PASS CFTC WHITE HOUSE/NSC - KIM BRIER AND SUE CRONIN SENSITIVE E.O. 12958: N/A TAGS: EINV, EFIN, PREL, CA, US, Finance SUBJECT: Canadian Financial Services Sector: Capital Markets Align with the U.S., Deplore GOC Void Ref: (A) 04 Toronto 2007 (B) Toronto 1633 (C) 04 Toronto 2410 (D) Toronto 2638 (E) Toronto 2646 (F) Toronto 2697 (G) 04 Toronto 2528 Sensitive But Unclassified - Please Protect Accordingly. 1. (U) This cable contains a request for SEC guidance, see paragraph 14. 2. (U) This message is one in a series reviewing the Canadian financial services sector from a cross-border, North American integration issue perspective. In September 2005 the Toronto Financial Services Alliance sponsored roundtables for ConGen Toronto with industry sector experts in venture capital (ref (D)), banking (septel), securities, and insurance (ref (F)). Summary and Comment ------------------- 3. (SBU) The federal government has little understanding of Canada's provincially governed capital markets and, consequently, fails to represent the industry adequately on international and cross-border issues, senior representatives from the Investment Dealers Association (IDA) and the Investment Funds Institute of Canada (IFIC) argued at a September 19 roundtable for ConGen Toronto sponsored by the Toronto Financial Services Alliance. The industry believes that federal impetus will be key in establishing a single commission and welcomes federal Finance Minister Goodale's support as an overdue step forward. 4. (SBU) The IDA and IFIC support aligning Canadian capital market governance structures with changes in the U.S. The IDA confirmed that the securities industry has substantially harmonized with U.S.-style Sarbanes-Oxley (SOX) governance and disclosure requirements, although Canada had decided to postpone formal SOX 404 implementation past the financial year ending June 30, 2006. The securities industry welcomes new provincial legislation that will give Ontarians the right to sue companies and directors for violations of continuous disclosure obligations (taken for granted in the U.S.). 5. (SBU) The industry is confused, however, over how the SEC's recent adoption of a new category of issuers, termed "well-known seasoned issuers," applies to large Canadian firms listed in New York. Canada is coordinating adoption of what will eventually be a Straight-Through-Processing (STP) regime with U.S. industry. Given that Toronto is considered Canada's financial services capital, the NAFTA financial services committee may wish to consider holding one of its future meetings in Toronto. ConGen Toronto would be pleased to offer support. END SUMMARY AND COMMENT. GOC not Effective Spokesperson for Securities Industry --------------------------------------------- --------- 6. (SBU) As part of ConGen Toronto's "financial services month" in September, the Toronto-centered Canadian securities industry, represented by its main trade associations and prominent private sector stakeholders, offered its perspectives on key issues of capital markets governance in Canada. A Senior Vice- President of the Investment Dealers Association (IDA) complained, and others present agreed, that because the securities industry is provincially regulated, all the expertise resides in provincial Finance Ministries and Securities Commissions. "It's a considerable headache for the industry that Ottawa is `clueless' with respect to capital markets issues," he said. The industry believes it does not have an effective spokesperson on international and cross-border issues, where government- to-government communication is critical in setting the agenda and addressing industry concerns. 7. (SBU) Industry reps explained that a single securities regulator would go some way towards giving Canadian capital markets a national spokesperson (Ref (C)). They applauded federal Finance Minister Ralph Goodale's announced intention to issue a major economic strategy paper before the next election (widely expected by the spring of 2006), which will refer to the "single" (not necessarily "federal") securities regulator as a GOC goal under "smart regulation." They agreed that the main alternative - the provincially based passport system - would succeed in providing a single point of entry into Canadian capital markets. However, since the provinces would remain autonomous under this scheme, the passport system would amount to a "single point of entry into a market that would remain internally discordant/balkanized" and, above all, "would not give Canada a single voice on capital markets issues." Significant Mutual Fund Governance Reform Likely --------------------------------------------- --- 8. (SBU) The President and CEO of the Investment Funds Institute of Canada (IFIC), Tom Hockin, said Canada's retail investors had returned to the market following the bursting of the tech bubble in 2000-01. He noted that net assets under mutual fund management had now surpassed their 2000 peak by some 25%. The industry currently manages C$549 billion in assets, up from the previous peak of C$427 billion in 2000. However, despite strong recent growth, the Canadian mutual fund industry is only 1/16 the size of the U.S. industry which, in per capita terms, amounts to about 75% the size of the U.S. industry. This reflects to some extent lower per capita income and greater reliance on public retirement plans, most notably the Canada Pension Plan (CPP). According to Hockin, 85% of Canada's mutual fund industry is concentrated in Ontario, measured by the value of funds under management. 9. (SBU) Hockin highlighted the virtues of Canadian mutual fund regulation, mentioning that Canada had avoided the fraudulent and illegal practice of "late- trading" (Ref (A)). He emphasized the successful policing function of FundSERV Inc., an independent capital markets institution, established by the industry, which time-stamps all mutual fund orders and enforces a "hard" 4:00 PM close of business. 10. (SBU) Hockin acknowledged wide-spread criticism of mutual fund governance in Canada, agreeing that the mutual fund industry had not done enough to restore investor confidence in the post-Enron era, hinting that significant reforms could be expected over the coming year. He deplored the fact that IFIC had never adopted a real mandate and said he had admonished the mutual fund industry to make investor protection its fundamental raison d'etre. He also emphasized the need for much tougher mutual fund regulation, specifically pointing to the need for better regulation of the fund manager (NOTE: The Canadian Securities Administrator's "national instrument 81-107" calls for mutual funds to be governed by an Independent Review Committee tasked to investigate potential conflicts of interest of fund managers. This proposal falls short of U.S.-style governance proposals where a board of independent directors would be tasked to stand up for investor interests would have the power to terminate the fund manager. (END NOTE.) Brokerage Industry Buoyant on Energy/Resources --------------------------------------------- - 11. (SBU) Senior officials from Canada's Investment Dealers Association (IDA), including the CEO Joe Oliver, explained that capital markets have recovered well from the high-tech sell-off at the beginning of the decade because of the boom in commodities prices, especially energy, driven by insatiable appetite for Canadian raw materials in China and India. The broad S&P/TSX index has staged a remarkable recovery since 2001, outperforming all other stock markets in the developed world. The IDA believed Canada's stock market boom was in part driven by record-high conversions of publicly traded companies into "income trusts" in recent years - a legal structure that allowed public companies to exploit federal tax advantages. The IDA projected that the federal decision of mid-September to all but freeze income trust conversions could significantly slow Canada's stock market boom in coming years (NOTE: Industry insiders believe that the federal government wants to dampen the conversion trend because of the significant fiscal impact of lost corporate income tax revenue. END NOTE). Brokerage Industry Wants More Harmonization with U.S. --------------------------------------------- ------- 12. (SBU) Oliver said Canada had largely harmonized with U.S. regulatory requirements while making some adjustments that take the small size of many Canadian companies into account (Ref (B)). He explained that Canada had decided to adopt a virtual carbon copy of U.S. SOX 404 requirements. (NOTE: SOX 404 directs companies to document their internal controls over financial reporting and to provide evidence in the form of detailed tests that their internal controls work and produce only accurate disclosure. SOX 404 also obliges external auditors to examine a company's internal controls and give an opinion as to their effectiveness. The needed tests are universally seen as tedious, time- consuming, and expensive, making SOX 404 the most controversial section of the Sarbanes-Oxley Act. END NOTE). 13. (SBU) Oliver explained that Canada's Securities Administrators decided in August 2005 to postpone for a full year the implementation of the Canadian Securities Administrator's "multilateral instrument 52-111" (the Canadian equivalent of SOX 404). He said that several aspects of SOX 404 implementation in the U.S. had caused widespread confusion, forcing the SEC to issue clarifying guidance to U.S. firms in May 2005. Canada wanted to stand back and watch the debate over SOX 404 unfold in the U.S., draw lessons from the U.S. experience, and then proceed with implementation in Canada. As currently proposed, Canada's equivalent of SOX 404 applies only to TSX-listed companies (the senior exchange) and not to companies listed on the Canadian Venture Exchange (the junior exchange). Canada plans to start implementation of SOX 404 with the financial year ending on or after June 30, 2006, we were told. Request For Guidance: "Well-Known Seasoned Issuers" --------------------------------------------- ------ 14. (SBU) A representative from one of Canada's large financial institutions explained that the SEC, in the summer of 2005, established a process designed to ease and quicken public offerings for "well-known seasoned issuers," listed on U.S. exchanges, effective December 1, 2005. (NOTE: Well-known seasoned issuers are large companies with a market capitalization of over US$700 million, which are closely monitored by financial analysts. END NOTE). Large Canadian companies that list their stock on U.S. exchanges are unclear whether and how they might qualify as "well-known seasoned issuers" and would appreciate SEC guidance. Other Regulatory Hot Topics of Cross-Border Interest --------------------------------------------- ------- 15. (SBU) Roundtable participants touched on several other issues of cross-border interest in Canada-U.S. relations: --Civil liability for continuous disclosure violations: Ontario passed provincial legislation, effective December 31, 2005, giving investors the right to sue an issuer, its directors and certain other officers for continuous disclosure violations. This measure is a significant step forward for Ontario in toughening enforcement and giving small investors more options for restitution. The legislation caps liability at 5% of a defendant's market capitalization and includes features to discourage frivolous lawsuits. The industry believes that the legislation will help appease small investor advocates who have campaigned tirelessly for more restitution options (ref (G)). It is also seen as contributing to an enforcement environment that compares in every respect to the U.S., where the right to sue for continuous disclosure violation is taken for granted; --Straight-Through-Processing (STP): Spurred by the need to compete with U.S. markets, Canada's securities industry is working thought the Canadian Capital Markets Association (CCMA) to reduce the time it takes to clear and settle trades. Currently, it takes up to three business days (T+3) to settle trades. The ultimate goal - straight-through-processing (i.e., real- time settlement) - is proving elusive. But, the industry hopes to move to T+1 (24 hour settlement) by 2007. This project is comparable in scope and complexity to measures taken by the financial sector to overcome computer Y2K incompatibility in the late 1990s, and will likely cost as much. Several self- imposed deadlines for 2004 and 2005 have lapsed on both sides of the border. Comment ------- 16. (SBU) The securities industry's overriding concern remains to harmonize the regulatory environment with U.S. governance structures in order to encourage the further integration of Canada-U.S. capital markets. One goal, widely accepted in Canada and currently an agenda item under the Security and Prosperity Partnership (SPP), is to move to free-trade in securities by 2007 without compromising investor protection. In the past, the Ontario Securities Commission (OSC) has readily responded to industry demands for coordination and has pushed the country as a whole in that direction. Following David Brown's resignation (Ref (E)), Scotia Capital's Chairman David Wilson (who also holds the position of Vice-Chair for the Scotiabank Group as a whole) will take the top job at the OSC, effective November 1, 2005. We expect the new OSC Chair to follow in the footsteps of David Brown and will report in detail on developments in the coming months. Given that Toronto is considered Canada's financial services capital, the NAFTA financial services committee may wish to consider holding one of its future meetings in Toronto. ConGen Toronto would be pleased to offer support. Attendees --------- 17. (U) The roundtable included the trade associations of Canada's securities industry, the IDA and IFIC, the Bank of Canada, and prominent industry stakeholders: Joe Oliver, President and CEO, IDA; Ian Russell, Senior Vice-President Capital Markets, IDA; Jon Cockerline, Director, Capital Markets, IDA; Morag MacGougan, VP Industry Relations, IDA; Tom Hockin, President and CEO, IFIC; Susan Yellin, Director of Public Affairs and Communications, IFIC; Ross MacKinnon, Director of Financial Markets Department, Toronto Office, Bank of Canada; Roman Dubczak, Canadian Imperial Bank of Commerce; Tom Smee, Senior VP and Deputy General Counsel, Royal Bank of Canada. Represented from the Toronto Financial Services Alliance were its President, Janet Ecker (former Finance Minister of Ontario) and Susan Viegas, City of Toronto, Economic Development Bureau. Represented on the U.S. side were Consul General Jessica LeCroy, Pol/Econ Consul Sherri Holliday, Pol/Econ Officer Tom Boughter, and Pol/Econ Specialist Colin White. LECROY
Latest source of this page is cablebrowser-2, released 2011-10-04