US embassy cable - 05TORONTO2705

Canadian Financial Services Sector: Capital Markets Align with the U.S., Deplore GOC Void

Identifier: 05TORONTO2705
Wikileaks: View 05TORONTO2705 at
Origin: Consulate Toronto
Created: 2005-10-17 12:26:00
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.

E.O. 12958: N/A 
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 
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 
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 
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 
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. 
--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 
--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. 
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. 
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. 

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