Draft Federal Securities Act Released

The proposed federal securities act is available at http://www.fin.gc.ca/drleg-apl/csa-lvm-eng.asp. It has been tabled in Parliament for information only as it will be referred immediately to the Supreme Court for a ruling on its constitutional validity.

I'll be commenting on it after I've had an opportunity to digest it.

British Columbia Introduces Framework for Regulating Credit Rating Agencies

The B.C. Finance Statutes Amendment Act, 2010 contains provisions to amend the Securities Act to provide a framework to regulate credit rating agencies (CRAs). The Act has received Royal Assent, but the new provisions have not yet been proclaimed in force. The Act is as interesting for what is missing as for what it contains.

The Act provides the building blocks for a regulatory regime but does not require or even permit CRAs to be recognized. It contains provisions

• preventing any person from representing that the Commission approves or endorses a CRA (amending s. 55 of the Act);
• allowing the Commission to order a CRA to produce records (amending s. 141(2)), submit to a review of its practices and procedures or to change its practices and procedures (amending s. 161(7);
• empowering the executive director to conduct a compliance review of a CRA (amending s. 141.1(1)) and the Commission to conduct an examination of a CRA's financial affairs (amending s. 153(1);
• allowing the Commission to collect information from and share information with a CRA (amending s. 169(1)); and
• allowing the Cabinet to enact regulations concerning CRAs (amending s. 183 - the Commission has a plenary power to enact rules regulating the securities industry other than certain categories reserved to the Cabinet under s. 184(4). That section is not being amended to preclude the Commission from enacting rules for CRAs.).

A more comprehensive regime for regulating CRAs is expected when new National Instrument 25-101 Designated Rating Agencies is released for comment, expected later this month.

The legislation does not contain an express prohibition on the Commission the substance of credit ratings or the procedures and methodologies by which credit ratings are determined, similar to the provisions of s.15E(c)(2) of the Securities Exchange Act of 1934. Perhaps the legislature was influenced by developments in the United States to require the SEC to do just that. The following is the provision from the House bill (H.R. 4173), the (1706 page!) Wall Street Reform and Consumer Protection Act of 2009:

[New] 15A(3) REVIEW OF INTERNAL PROCESSES FOR DETERMINING CREDIT RATINGS.—

(A) IN GENERAL.—The Commission shall examine credit ratings issued by, and the policies, procedures, and methodologies employed by, each nationally recognized statistical rating organization to review whether—

(i) the nationally recognized statistical rating organization has established and documented a system of internal controls, due diligence and implementation of methodologies for determining credit ratings, taking into consideration such factors as the Commission may prescribe by rule;

(ii) the nationally recognized statistical rating organization adheres to such system; and

(iii) the public disclosures of the nationally recognized statistical rating organization required under this section about its credit ratings, methodologies, and procedures are consistent with such system.