This blog post will provide a general overview of the regulatory frameworks that govern the securities and capital markets in both Canada and China.
In Canada, political authority is divided between the country-wide federal government and regionally within the ten provinces. Canada also has three northern territories that are subject to the federal government. There is federal legislation that affects the trading of securities, however securities regulation of Canada’s public entities falls primarily within a province’s “trade and commerce” powers under Canada’s Constitution Act and therefore are primarily subject to provincial regulation.
Each province has its own securities regulator which administers each respective province’s securities act, rules and regulations. Within Canada, there is a continuing trend for interprovincial cooperation in an effort “to avoid inconsistent requirements which would create impediments to the efficient functioning of the securities market”.
The provinces and territorial regulators work together to coordinate and harmonize regulation through the Canadian Securities Association (“CSA”). Established in 1937, the CSA develops uniform rules and guidelines for securities market participants, coordinates approval processes, develops national electronic systems for regulatory processing and filing and coordinates compliance and enforcement activities. For example, the CSA implements the “passport system” in Canada. Under the passport system, a decision can be rendered by a company’s principal regulator and the same decision deemed to be issued under the legislation of all other participating jurisdictions. It is worth noting that Ontario is the only province that has not adopted the passport system, as it prefers the creation of a national securities regulator, and as such, it works within a mutual reliance policy in which it is able to accept the decision of other principal regulators.
The topic of a national securities regulator has been debated for quite some time in Canada. Recently, the Supreme Court of Canada rendered a decision stating that the federal government’s proposed legislation to create a national regulator was unconstitutional. Finance Minister Jim Flaherty has publicly stated that the government will respect the Supreme Court of Canada’s decision and will not pursue a national regulator in the near future.
As mentioned above, the various securities acts and regulations act as a broad framework regulating the trading of securities. In addition to the various securities acts, there are a number of alternative sources which comprise the securities regulation framework. There are “instruments” developed and agreed to by various securities administrators across the country.
These instruments alone do not have a binding legal effect, however they can be adopted by each jurisdiction. When adopted by all securities administrators, the instrument is referred to as a national instrument and if some but not all administrators adopt the instrument, it is referred to as a multilateral instrument. Securities administrators intermittently issue policy statements, which are intended to illustrate each administrators interpretation of the legislation, regulation or rules and to ultimately provide guidance to market participants. In addition to policies, securities administrations may issue staff notices which are developing views or information of interest to the securities industry. From time to time, securities administrators may enter into a memoranda of understanding, which must be forwarded to a respective minister who must reject or approve the memoranda within sixty days. Finally, the decisions and rulings of securities commissions and administrators form another important source of securities law. Though the decisions and rulings of administrators are generally an application of the acts and regulations, there are also aspects of Canadian common law and criminal code provisions that are relevant.
In addition to the sources outlined above, there are rules, decisions and policies of self-regulatory bodies within the securities marketplace, which include, for example, stock exchanges, the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association and the Investment Dealers Association of Canada. Each securities commission has the power to review and make decisions respect a by-law, rule or other regulatory instrument or policy, or a direction, decision, order or ruling made under a by-law, rule or policy of a self-regulatory organization or stock exchange.
The securities acts of Alberta, British Columbia, New Brunswick, Newfoundland, Nova Scotia, Ontario and Saskatchewan are, for the most part, substantially similar in structure and wording.
These acts integrate the regulation of primary and secondary market trading through a concept known as the closed system, which means generally that a security may not be traded unless it meets certain requirements.
China’s political authority is divided amongst three bodies: the People’s Republic of China, the State Council, and the People’s Liberation Army. Under the People’s Republic of China constitution (the “PRC Constitution”), the Communist Party has ultimate political control as it has authority over the state, military and media. The Communist Party is controlled by the Politburo Standing Committee of the Communist Party of China (the “PSCCPC”), which is a committee consisting of top leadership within the Party. The PSCCPC is seen as the de facto highest power in China. Under the PRC Constitution, the National People’s Congress (the “NPC”) is the highest organ of state power in China. The NPC meets annually to approve policies, laws, the budget and significant personnel changes. Most initiatives are presented to the Standing Committee of the NPC by the State Council after endorsement by the PSCCPC. Governance of China’s public entities is divided into four areas: basic laws, administrative regulations, regulatory provisions and self-disciplinary rules.
Basic laws are comprised of fundamental laws or legislation created by the National People’s Congress or its Standing Committee and include the Company Law, the Securities Law, the Law on State-Owned Assets of Enterprises and the Accounting Law.
The Company Law is similar to provincial and federal legislation governing businesses, such as the Business Corporations Acts in Canada.
The Law on State-Owned Assets of Enterprises filled the gap of state-level legislation on state-owned assets in China’s legal regime and formalizes the mandatory administration and regulation of state-owned assets in China.
The Securities Laws was formulated for the purpose of regulating the issuance and transaction of securities, protecting the lawful rights and interests of investors, safeguarding the economic order and public interests of the society and promoting the growth of the socialist market economy.
The second area includes State Council administrative regulations and the third area involves departmental provisions formulated by the ministries, commissions, the People’s Bank of China and other agencies with administrative jurisdiction directly under the State Council. The fourth area of self-disciplinary rules refers to the rules and policies made by individual entities, such as stock exchanges.
China’s business landscape is quite different from that in Canada and it may be beneficial to provide a quick overview of its development. Prior to China’s accession into the World Trade Organization (“WTO”) announced in 2001 and effective in 2003, China’s economy was figuratively “closed” and heavily regulated. It’s membership into the WTO included commitments from China to open and liberalize its regime to better integrate itself in the world economy and to offer a more predictable environment for trade and foreign investment in accordance with WTO rules.
This was an important development as prior to this, foreigners were restricted to traditional equity joint ventures, contractual joint ventures and wholly foreign-owned enterprises.
In addition to the previous restrictions to foreign investment and ownership, China has a system of state-owned enterprises (“SOEs”) as well as private and public companies. Initially in the 1980s, SOEs were not viewed as independent enterprises but as a branch of the government. The purpose of the SOEs were to ensure the smooth operation of China as a whole and it was very successful in its early years. However, the SOE system of equal distribution of wealth provided little incentive for workers and eventually China began to decentralize the SOE framework and enlarge its enterprise autonomy. China’s business landscape is now viewed as more of a market economy system and the previous SOE regime has less emphasis. Currently, the State-owned Assets Supervision and Administration Commission oversees China’s SOEs.
The Shanghai Stock Exchange and Shenzhen Stock Exchange were established in 1990. Governing the stock exchanges, the China Securities Regulatory Commission (the “CSRC”) is authorized and directly under the State Council. Pursuant to relevant laws and regulations and similar to the securities landscape in Canada, the CSRC regulates China’s securities and futures markets with an aim to ensure their orderly and legitimate operation through full, true and plain disclosure of information. Investor confidence is an objective of the CSRC. The CSRC consists of 18 departments, a general force of enforcement, three centres and a public offering review committee. The CSRC also has 36 regional bureaus throughout the country and two commissioner offices in Shanghai and Shenzhen, where the two stock exchanges of China are located.
With respect to listed companies, the CSRC established a local supervision responsibility system which is administered through the local branches of the CSRC with a goal of “local supervision, clear responsibilities, individual accountability and mutual cooperation”.
China’s capital markets are in its early stage of development. Due to regulatory barriers, between 2003 and 2007, the average amount of inward portfolio investment was 0.7 percent of total portfolio investments globally.
At the middle of 2009, eighty-seven foreign financial entities were entitled to the qualified foreign institutional investor status, which entitled them to purchase and trade renminbi denominated A-shares on secondary markets.
In addition, transaction and regulatory costs are higher in China as compared to mature capital marketplaces worldwide. According to a study done by the CSRC, the Shanghai and Shenzhen stock exchanges have an average cost of 50 basis points, as compared to the average of 21 basis points in most mature markets.
Despite these barriers, China’s development has drawn the world’s attention and it will be interesting to observe how China capital markets mature.
As of late, there has been an increased focus on corporate governance and accounting standards since allegations of fraud against China-based companies Sino-Forest Corporation (TSX: TRE.TO) and Focus Media Holding Limited (Nasdaq: FMCN). This topic will be explored in my next blog.
The above is intended to provide a brief overview of the regulatory frameworks that govern pubic companies in Canada and China. If you have any questions or would like further information regarding the above, please do not hesitate to contact the author.
1 The Canadian Securities Institute, The Canadian Securities Course (The Canadian Securities Institute, 1995) at vol. 2, Chapters 5, 6, 7, and 8.
2 Mark R. Gillen, Securities Regulation in Canada, 3d ed. (Toronto: Thomson Canada Limited, 2007) at 101.
3 Ibid. at 106.
4 Ibid. at 109.
5 Ibid. at 109.
6 OECD-China Policy Dialogue on Corporate Governance, “Governance of Listed Companies in China, Self-Assessment by the China Securities Regulatory Commission (Preliminary Version)” (Paris, OECD Publishing, 2011), online <http://www.oecd.org/dataoecd/47/10/48444985.pdf>.
7 Promulgated by the Standing Committee National People’s Congress, 27 October 2005, effective 1 January 2006.
8 Promulgated by the Standing Committee of the National People’s Congress, 29 December 1998, revised 28 August 2004 and revised 27 October 2005.
9 Promulgated by the Standing Committee of the National People’s Congress, 28 October 2008 and effective on May 1, 2009.
10 Promulgated by the Standing Committee of the National People’s Congress, 21 January 1985, revised 29 December 1993 and revised 31 October 1999.
11 See for example, the Business Corporations Act (Alberta), RSA 2000, c. B-9.
12 Su Zheng and Hu Ping, “Guarding State-owned Assets – the PRC Enterprise State-owned Assets Law” (March 2009), online: <www.kingandwood.com>.
13 Supra note 8 at Article 1.
14 World Trade Organization, “WTO Successfully Concludes Negotiations on China’s Entry” (17 September 2001), online: <http://www.wto.org/english/news_e/pres01_e/pr243_e.htm>.
15 China Securities Regulatory Commission, online: <www.csrc.gov.cn>.
16 Supra note 6 at 25.
17 Friedrich Wu, “The Renminbi Challenge – The Future Role of the Chinese Currency” International Economy (Fall 2009), online: <http://www.international-economy.com/TIE_F09_Wu.pdf>.
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