EDITOR: | February 1st, 2016 | 3 Comments

We’re from the Regulators – We’re Here to Help?

| February 01, 2016 | 3 Comments

Kermit_2The financial services sector has too many regulators. From maze-like regional securities legislation trying to operate on a consistent national basis, to the murky exempt market, to the seg fund industry that makes sense only to the seg fund industry, anyone trying to earn a living in the capital markets must answer to the SEC, IIROC, provincial and state securities administrators, FINRA, stock exchanges, FSCO, MFDA, bar associations, the auditors, the United Nations and every one else with a finger in the pie.

Paraphrasing Kermit, it ain’t easy earning the green.

Regulation is an absolute necessity. Every industry needs education, licencing, testing, protocols and discipline; without those the industry would rot from within. But excessive regulation starves it. The trick is in finding the balance.

The TSX Venture Exchange, part of the TMX Group, has had a challenging time over the past decade finding that balance. Last August in Zombies, Uranium and the Walking Dead we looked at the TSXV’s parallel and occasionally conflicting duties to generate revenue (by increasing the number of listed companies) and to manage the companies listed on the Exchange, even if it meant de-listing the underachievers (and therefore decreasing revenue). It’s a tough balancing act.

The TSXV doesn’t like to be seen as a regulator. We’re a stock exchange and data provider, they say, not a regulator. I disagree. As long as you control my access to something (the capital markets) and interfere with how we run our businesses in good faith (the Corporate Finance Manual), you’re a regulator. Same goes for all other stock exchanges.

The much reviled and since-repealed “Founder Share Policy” was one example of excessive regulation. You could go beyond that one policy and argue that any policy that second-guesses a good faith decision of a properly constituted directors’ meeting is excessive regulation, but for today let’s leave that issue aside. What we’re looking at is how the TMX Group is responding to its current revenue crisis and to the hollowing of Canada’s junior markets.

Take comfort that the TMX Group is very different from Mohammad Saeed al-Sahhaf. Remember him? He was the Iraqi Information Minister during the Gulf War. He would stand in front of the cameras, sort of smile, and say things like, “There are no American troops in Baghdad!” while you could hear many weapons firing in the background. Days before Suddam Hussein’s reign ended, al-Sahhaf said, “The infidels are committing suicide by the hundreds on the gates of Baghdad”, and at the same time you could see Coalition troops and vehicles storming through the city. He was one of the all-time great deniers.

The TMX Group is not denying the current crisis. To their credit, they have acknowledged it and have taken very public steps to address it.

Part of that response has been the perpetuating of the hashtag #RevitalizingTSXV. It’s a good marketing effort in support of the TSXV’s concepts and December, 2015 White Paper (see here for an earlier article on that).

If you’re in the financial services industry, you owe it to yourself and your clients to read the White Paper. We’re used to being served pablum from regulators – the White Paper is different. Its proposals are intelligent, aimed at near-term impact, and realistic. They are collectively aimed at achieving three goals:

  1. reduce the cost of compliance without compromising the integrity of Canada’s markets;
  2. increase access to capital and liquidity; and
  3. diversify the TSXV’s reliance upon the natural resource sector.

John McCoach, the TSXV President, said,“The strategies set out in the TSXV’s White Paper are designed to have both near- and long-term impact on early stage public companies while also revitalizing Canada’s public venture market. TSXV has hosted several town hall meetings across Canada in January, and we will continue to gather feedback from our clients and stakeholders as we put those strategies into action.”

If someone from your company didn’t attend one of those town halls or send in a comment, you’re part of the problem, not the solution, and you’ve lost your right to complain about the state of the markets.

Included in the White Paper’s details are the usual soft promises about “making things better”. What’s different this time, though, is there is an honest sense of urgency from the TSXV. The White Paper and the presentations at the town halls show these details are not meant to be bandages to cover up a market ouchie – some of these proposals will fundamentally change how The Street operates. Kudos to the Exchange for investing a great deal of capital into the research, development, marketing and finally birth of these proposals.

The one proposal that catches everyone’s eye is the goal to make it easier for US retail investors to access Canada’s markets. Roughly 15 years ago, the USA and Canada were mostly transparent to each other. Now, after Sarbannes-Oxley and rampant empire-building masquerading as AntiMoney Laundering protocols, investing into the Great White North is an exercise in frustration. Retail dollars left Canada and haven’t come back. The markets need those dollars.

Any healthy community, whether it’s a fish tank or an economy, requires fresh inputs to survive. The public markets need fresh capital to grow. Regaining access to the US markets is a great first step, to be achieved in co-operation with the Ontario Securities Commission and the Securities and Exchange Commission.

We’re from the Regulators – We’re Here to Help.” Usually, those words should send you running to see your lawyer. This time it’s different.Yes, I’m feeling awkward being a cheerleader for the Exchange, but the TSXV has earned our goodwill by identifying some of the problems and laying out a realistic road map to addressing them. Time will tell if this round of regulation ultimately has the impact we all hope it can.

Peter Clausi


Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>

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  • Dr. Mike Hirschberger

    Excellent article Peter-and long overdue. Speaking from Miami and having lived with Regulators all my life-being Ex-Big Phama Exe… It is simply amazing how many times the same lesson needs to be re-learned over and over again. .

    Regulation kills innovation: like medical devices the same case can be made that regulations kills exploration-regrettably. The Junior Sector has belatedly realized that the cost of compliance with the TSX regs. often exceeds the exploration budgets. The heavy handed Reg requirements now stacked at the front door of Juniors only favors large cap integrated producers that have floors of lawyers compared to a parttime rent-a-CFO/Compliance Officer.

    Yes, this makes it particularly difficult to buy a Junior Vancouver stocks-especially with a headline of Term Sheet stating -NOT TO BE DISTRIBUTED to USA..

    At a time when Canadian retail looks like the Bikini Islands after a nuclear test, maybe the idiotic regulators in Toronto should wake up like Snowflake and realize that all companies are equal, but some are more equal than others. .

    February 2, 2016 - 9:18 AM

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