The Privatization of Regulation: Five Models of Self-Regulation

      AUTHOR/AUTEUR:Margot Priest 
      SOURCE/SOURCE:Ottawa Law Review/Revue de droit d'Ottawa

      CITED/CITÉ:(1997-1998) 29 Ottawa L. Rev. 233-302 (1997-1998) 29 R.D. 
      Ottawa 233-302 

   
      Five models of self-regulation are described and classified according to 
ten characteristics and assessed according to public interest criteria. The 
legal structure of self-regulation is reviewed, including the implications of 
delegation of government power, the accountability for the exercise of power, 
and judicial review. Liability under the Competition Act and negligence are 
discussed, as are policies that complement the use of self-regulation. The paper 
concludes that self-regulation is most likely to work when certain conditions 
are present, such as: There are relatively few industry players; the exit costs 
are high; there is a history of cooperation; expertise and resources for 
regulation are available in the industry; noncompliant behaviour can be 
punished; consumers value compliance; fair dispute settlement mechanisms are in 
place; and, some role is available for public participation or oversight. There 
is untapped potential for the use of self-regulation, but evidence of regulatory 
failures indicates that government cannot completely abdicate responsibility 
when a regulatory problem requires a government response. 
*  *  * 
    
    Table of Contents 
I.   Introduction 
      II.Selected Forms of Self-Regulation
      A.   Overview of the Five Models
      B.   Codes of Conduct
      C.   Statutory Self-Regulation
      D.   Firm-Defined Regulation
      E.   Supervised Self-Regulation
      F.   Regulatory Self-Management

      III.Why Self-Regulate?
      A.   The Advantages of Self-Regulation
            1.   Practical Advantages
            2.   Political Advantages
            3.   Flexibility
            4.   Lower Costs
            5.   Higher Compliance Levels
            6.   The Building of an Ethic
            7.   International Competitiveness
      B.   The Disadvantages and Limitations of Self-Regulation
            1.   Self-Interest
            2.   Favouritism
            3.   Narrow Regulatory Concerns
            4.   Under-Regulation
            3.   Over-Regulation
            4.   Reduction in Accountability
            5.   Higher Costs to the Public
      C.   Discussion of the Advantages and Disadvantages
      IV.A Framework for Analysis of Self-Regulatory Models A.   The Analytical 
      Framework Applied to Self-Regulatory
            Models
            1.   Efficiency
            2.   Effectiveness
            3.   Openness
            4.   Fairness
            5.   Accountability
      V.The Legal Structure of Self-Regulation A.   Delegation and 
Accountability
      B.   Judicial Review of Self-Regulatory Organizations
      VI.Legal Liability of Self-Regulatory Organizations A.   Liability Under 
      the Competition Act B.   Liability for Negligence
      VII.Policies That Complement the Use of Self-Regulation A.   Creation of 
      Incentives to Improve Self-Regulatory
            Systems
            1.   Liability Rules
            2.   Duties of Care
            3.   Peer Pressure: "Hostages of Each Other"
            4.   Rewards for Adequate Compliance Systems
            5.   A Wide Range ofSanctions
            6.   Government Procurement or Contracting Practices B.   
      Complementary Policies

VIII. When Should Self-Regulation Be Used?
      A.   The Role of Government in Self-Regulation
      B.   The Choice of Voluntary Codes
      C.   The Delegation of Government Powers to Self-Regulate 
IX.  CONCLUSION 
The Privatization of Regulation:  Five Models
of Self-Regulation 

      I.  Introduction

¶ 1     Government regulation is undergoing a change. Modern governments are 
re-examining their roles as regulators of private sector behaviour.  Major 
industries have been deregulated or re-regulated with significant changes in 
their regulatory structures. [See Note 1 below] Governments are encouraging the 
private sector to take the initiative and responsibility for regulatory 
programs. [See Note 2 below] Some government programs are being privatized and 
transferred to the private sector; [See Note 3 below] others are being 
commercialized and being run as if they were private commercial corporations 
either by government or by private sector "partners." [See Note 4 below]  In 
some cases, the regulatory responsibilities of government, including rulemaking, 
inspections and enforcement, are being turned over to the private sector. [See 
Note 5 below] 



   Note 1: Primary examples can be found in the transport and telecommunications 
sectors, as well as in financial services. 
   Note 2: See, for example, "Ontario cuts off pollution programs" The [Toronto] 
Globe and Mail (10 February 1977) A8; Consumer and Corporate Affairs Canada (now 
Industry Canada) transferred the responsibility for pre-clearance against false 
and misleading advertising of food and nonalcoholic beverage commercials to the 
Canadian Advertising Foundation:  Canada, Regulatory Affairs Guide, Enlightened 
Practices in Regulatory Programs (Vol. 1)(May 1993). 
   Note 3: A recent example is the creation of NavCan, a private corporation 
responsible for the air navigation services in Canada: Civil Air Navigation 
Services Commercialization Act, S.C. 1996, c. 20. 
   Note 4: The popularity of "special operating agencies," such as the Passport 
Office, to provide government services is an indication of this approach. 
   Note 5: For example, Ontario, Ministry of Consumer and Commercial Relations, 
Approaches to Industry Self-Management (Toronto: September 1995). The Ontario 
Government has announced that a number of industries that had been licensed by 
the government and subject to the appeal jurisdiction of the Commercial 
Registration Appeal Tribunal, such as realtors, will be allowed to 
self-regulate.  The enabling legislation, the Safety and Consumer Statutes 
Administration Act, received Royal Assent on June 17, 1996. 



¶ 2     Governments, nonetheless, continue to intervene in many areas of private 
sector behaviour.  In some areas, this takes the form of classic command and 
control regulation. [See Note 6 below]  There is a growing awareness, however, 
of alternative forms of regulation and the choices of regulatory models that are 
available when the decision is made that regulation is the appropriate policy 
response to a problem. [See Note 7 below] Self-regulation is an increasingly 
popular policy approach, whether driven by a government philosophy to have 
minimal involvement in the structuring of the private sector or because it is 
chosen as an efficient method of regulation. [See Note 8 below] 



   Note 6: The proposed amendments to the Canadian Environmental Protection Act, 
Bill C-74, and the safety regime in the Canada Marine Act, Bill C-44, are 
examples of continued use of command and control regulation.  These bills died 
on the Order Paper in April 1997. 
   Note 7: Canada, Regulatory Affairs Guide, Assessing Regulatory Alternatives 
(May 1994); Canada, Treasury Board Secretariat, Industry Canada, and the 
Standards Council of Canada, Standards and Regulatory Reform Program (SARRP), 
Business Plan (June 1996) [hereinafter SARRP]. 
   Note 8: This enthusiasm is not universal.  The Manitoba Law Reform Commission 
in its study, Regulating Professions and Occupations (Report 84)(Winnipeg: 
Queen's Printer, 1994), recommended at 105 that neither certification nor 
licensing should be implemented unless its benefits exceed its costs and that 
"[b]ecause of its substantial costs, licensing should be used sparingly and 
cautiously."  The better choice may be no regulation at all. 



¶ 3     The term "self-regulation" covers a wide variety of regulatory systems.  
The degree to which government plays a direct role and the degree to which an 
industry or group has regulatory responsibility for its own actions varies.  In 
developing a model of self-regulatory structures, it is useful to have as a 
reference a regulatory structure of direct command and control regulation by 
government.  Direct government regulation has an internal structure that is 
mirrored in the various forms of self-regulation.  A complete regulatory system 
requires: 
      -rulemaking:  the establishment of the rules that will guide behaviour;
      -communication of rules:  making regulatees aware of the behaviour 
      expected or required;
      -monitoring:  oversight to ensure compliance with the rules;
      -enforcement:  taking action when noncompliance is identified;
      -adjudication:  official decision making about the consequences of 
      noncompliance or settlement of disputes;
      -sanctions:  negative consequences for noncompliance; and
      -evaluation:  the assessment and adjustment of the regulatory system.

¶ 4     Any or all of these functions can be performed by a private body or 
industry, although penal sanctions remain the preserve of government.  Indeed, 
an adequate compliance system at the firm level will require all these 
functions. [See Note 9 below]  At the same time, within a given regulatory 
system, certain functions may be performed by government, while others may be 
performed by a self-regulating body or industry.  In classic command and control 
regulation, government traditionally has a high level of involvement, perhaps 
the sole involvement, in all these functions.  In fact, the hallmark of a true 
regulation is that it is a rule, backed by the power of the state, intended to 
modify behaviour. [See Note 10 below] 



   Note 9: The emphasis in this paper is not on this second-level firm 
compliance system but on the more public regulatory system that might be 
developed and run by government, an industry, or an industry organization. 
   Note 10: M. Priest, W.T. Stanbury & F. Thompson, "On the Definition of 
Economic Regulation" in W.T. Stanbury, ed., Government Regulation: Scope, Growth 
and Process (Montreal: Institute for Research on Public Policy, 1980). 



¶ 5     The government's powers to perform these functions, however, can be 
exercised directly or delegated to a separate self-regulatory body or industry.  
The government can delegate all the regulatory functions, but more often, there 
is selective government involvement, especially in rulemaking and sanctioning.  
In some cases, the government may directly supervise or audit a self-regulatory 
organization's (SRO's) functions.  In some other cases, government may not play 
an active role, with an organization or industry carrying out the regulatory 
functions on its own.  Even in the latter case, however, the self-regulatory 
system often operates in the shadow of government intervention, receiving its 
impetus from the prospect of government action. 
¶ 6     It is also possible, of course, to have entirely voluntary systems of 
regulation in which the private sector, either at the firm level or through 
industry organizations, imposes rules on itself.  This may be done for a number 
of reasons, including a desire to increase consumer confidence, to allow for 
cooperation among firms on technical matters, to avoid government regulation, to 
forestall more restrictive regulation, or to reduce the costs of a regulatory 
regime. The proliferation of industry codes of conduct and the use of the 
National Standards System exemplify voluntary self-regulation. [See Note 11 
below] 



   Note 11: The Industry Canada-Treasury Board Secretariat Voluntary Codes 
Project and the SARRP, supra note 7, are evidence of the federal Government's 
increasing interest in these areas as alternative means of achieving government 
policy objectives. 



¶ 7     The self-regulation that is the primary focus of this paper falls 
somewhere between these two ends of the spectrum, with varying levels of 
government involvement in different functions.  These functions therefore 
provide an important departure point of analysis in determining the appropriate 
degree, if any, of government involvement in a self-regulatory system. 
¶ 8     This paper begins in Part II with an overview of five models of 
self-regulation, with examples drawn from different jurisdictions.  The five 
models are:  voluntary codes of conduct, statutory self-regulation, firm-defined 
regulation, supervised self-regulation, and regulatory self-management.  The 
models are drawn from a review of the literature and existing examples of 
self-regulation, with ten identifying characteristics used to analyze and 
classify them. 
¶ 9     Part III draws on the literature to identify the advantages and 
disadvantages of self-regulation to answer the question of why self-regulation 
is used.  In Part IV, a framework for analysis of the self-regulatory regimes 
according to public policy criteria (i.e., efficiency, effectiveness, openness, 
fairness, and accountability) is developed and applied to each of the five 
self-regulatory models. 
¶ 10     Part V examines the legal structure of self-regulation. The issues 
include the implications of the delegation of government power, the 
accountability for the exercise of power, and judicial review.  The legal 
liability under the Competition Act as well as that arising from negligence of 
self-regulatory organizations is examined in Part VI.  Part VII identifies 
several policies that can complement the use of self-regulation. 
¶ 11     Part VIII reviews the question of when self-regulation should be used.  
The paper argues that self-regulation can be an appropriate regulatory choice in 
certain circumstances and identifies those in which self-regulation is likely to 
be most effective. Self-regulation, even when involving minimal government 
functions, such as the use of voluntary codes, may require government action to 
encourage and complement the regulatory structure. The need for government 
action and recognition of the public interest function of delegated action may 
require changes in existing government attitudes toward self-regulation. 
¶ 12     The paper concludes, in Part IX, that self-regulation is likely to work 
best when certain conditions are present.  These include such factors as: 
      -there are relatively few industry players;
      -the costs of exiting from the industry are high;
      -there is a history of effective cooperation;
      -expertise and resources for regulation are available in the industry;
      -noncompliant behaviour can be punished;
      -consumers value compliant behaviour;
      -fair and adequate dispute settlement mechanisms are in place; and
      -some role is available for public participation or oversight.

¶ 13     There is untapped potential for the use of self-regulation to deal with 
policy problems that require action.  Self-regulation, however, should not be 
viewed as a panacea for reducing the regulatory burden of modern government.  
Self-regulation appears to work best in the "shadow" of government action and 
there is sufficient evidence of regulatory failures to indicate that government 
cannot completely abdicate its responsibilities to self-regulators when a 
regulatory problem indicates that a government regulatory response is required. 
      II.Selected Forms of Self-Regulation

A.   Overview of the Five Models 
¶ 14     Self-regulation can take a number of forms and there are variations 
within each form.  To complicate matters further, similar forms may be given 
different names; for example, supervised self-regulation is referred to as 
"audited self-regulation" by Michael and the Administrative Conference of the 
United States [See Note 12 below] and is similar to the "co-regulation" 
described by Ayres and Braithwaite. [See Note 13 below]  The "cooperative 
implementation" of Michael shares, in turn, many of the characteristics of the 
regulatory self-management organizations established by the Ontario and Alberta 
Governments. [See Note 14 below] 



   Note 12: D. Michael, "Federal Use of Audited Self-Regulation as a Regulatory 
Technique" (1995) 47 Admin. L. Rev. 171. 
   Note 13: I. Ayres & J. Braithwaite, Responsive Regulation: 
Transcending the Deregulation Debate (New York:  Oxford University Press, 1992). 

   Note 14: D. Michael, "Cooperative Implementation of Federal Regulations" 
(1996) 13 Yale J. Reg. 535; Ministry of Consumer and Commercial Relations, supra 
note 5. 



¶ 15     To provide a focus for analysis, five models have been identified from 
the literature dealing with self-regulation. These are, in ascending order of 
government involvement:  voluntary codes of conduct; statutory self-regulation; 
firm-defined regulation; supervised self-regulation; and regulatory 
self-management. These models are analyzed in Table 1 according to ten 
characteristics, which are used to identify and describe the models. The 
characteristics are: 
¶ 16     Government involvement:  This classifies the degree to which government 
plays a role in establishing the self-regulatory regime, setting policies and 
rules, monitoring for noncompliance, carrying out enforcement, adjudicating on 
noncompliance, imposing sanctions and generally being involved in the affairs of 
the regulatees.  The involvement ranges from "shadowing" voluntary regulatory 
regimes to actively setting rules and policies or imposing sanctions. 
¶ 17     Source of power:  The source of the power to impose rules, monitor 
behaviour, adjudicate, enforce and impose sanctions on the regulatees is 
identified.  The source may be the regulatees themselves who agree by contract 
to establish and abide by rules or, more commonly, the source of the power is 
government. 
¶ 18     Involvement of the public:  Some self-regulatory systems are relatively 
closed to input from the public; others make use of consultation with the 
affected public and clients or provide opportunities for influence and input 
from representatives of the "public," in contrast to only the regulated 
industry.  The "public" may include clients of regulatees, consumer groups, 
labour and other interest groups or individuals who are charged with 
representing a broader "public interest" perspective. 
¶ 19     Accountability to government; to regulatees; to the public:  Lines of 
accountability and mechanisms for accountability vary.  For some self-regulatory 
systems, the accountability is primarily to the other regulatees; in others, 
there is an important element of accountability to government or the general 
public.  Accountability mechanisms range from public reports to direct reporting 
and oversight relationships. 
¶ 20     Rulemaking:  In some self-regulatory systems, the regulatees themselves 
create the rules that are imposed upon them; in other systems, the rules are 
established by government or developed by regulatees with the approval of 
government.  The rulemaking process may be public or closed and involve varying 
degrees of input from regulatees, client groups or the general public. 
¶ 21     Adjudication:  The power and responsibility to make determinations 
about noncompliance with rules and settle disputes may be found within the 
industry (with or without public participation), in neutral third party 
arbitrators or mediators, in tribunals, or in the courts. 
¶ 22     Sanctions:  The range and strength of sanctions available in 
self-regulatory systems varies from peer disapproval to penal sanctioning, a 
range that also reflects the degree of government involvement. 
¶ 23     Offences (regulatory, civil, criminal):  The degree to which 
self-regulatory regimes rely on the powers of the state to create legal offences 
and punish contravening behaviour varies. 
¶ 24     Membership/Coverage:  Some self-regulatory regimes cover entire 
industries; in others, firms or individuals have choices about whether to submit 
to self-regulation.  The alternative to self-regulation may be no regulation (as 
with voluntary codes of conduct) or a more classic regulatory regime with 
heavier government involvement. 
¶ 25     Judicial Review; Charter; Ombudsman; Information and Privacy 
Legislation:  These are government mechanisms for imposing accountability, 
establishing standards of conduct and enhancing openness.  Whether or not they 
apply to a self-regulatory regime, or the stage at which they apply, varies.  In 
general, the higher the degree of government involvement in the regulatory 
structure and the greater the characterization of regulatory action as 
"government action," the more likely is the application of these mechanisms. 
¶ 26     Table 1 provides a matrix of the five models and the ten 
characteristics that can be used to analyze and identify the models. [Ed. Note:  
Please see paper copy for Table 1, Models of Self-Regulation.] 
B.   Codes of Conduct 
¶ 27     The first model examined is the self-regulatory regimes established by 
codes of conduct, which are often voluntary.  A number of industries have 
developed codes of conduct, often without any direct government supervision or 
active encouragement. [See Note 15 below]  In many cases, codes are developed to 
avoid the threat of potential government regulation.  In general, however, codes 
of conduct are a self-regulatory model with a low degree of government 
involvement.  They are based on agreements among industry members, which may be 
embodied in contracts, to adhere to the code.  The contracts may provide for 
sanctions for breach of the code and may provide mechanisms, such as mediation 
or independent third-party arbitration, to deal with disputes or noncompliance.  
There may even be provisions for independent auditors to aid in code 
enforcement.  The source of power to initiate and enforce a code is thus found 
within the industry, in contrast to the other models of self-regulation, which 
rely on the exercise or delegation of government power. 



   Note 15: L. Bernstein, The New Law Merchant: Private Commercial Law in the 
United States (Law and Economics Programme, Workshop Series, University of 
Toronto, 1995)[discussion paper]; L. Bernstein, "Opting Out of the Legal System: 
 Extralegal Contractual Relations in the Diamond Industry" (1992) 21 J. Legal 
Studies 115. 



¶ 28     Industries or industry organizations operating under a code are 
accountable to each other and, to some degree, to the public or consumers for 
compliance with the code.  This accountability operates because codes may take 
the form of promises to the public of ethical behaviour or customer service.  
Adherence to a code is thus enforced, at least in part, by peer pressure and 
public reputation. Consumer response can be a vital component of encouraging 
compliance and creating informal sanctions for noncompliance. As nongovernmental 
sources of rules, voluntary codes are not subject to such accountability 
mechanisms as judicial review or review by a provincial Ombudsman. 
¶ 29     While codes are numerous, examples include the code for Consumer Debit 
Card Service developed by the Canadian Payments Association and the code 
established by the Canadian Association of Internet Providers.  The Advertising 
Standards Council also administers a code of conduct for the Canadian 
advertising industry.  The Canadian Tobacco Manufacturers' Council established a 
code governing the advertising of tobacco products.  The Canadian Bankers' 
Association recently unveiled a new privacy code.  The Investment Funds 
Institute of Canada has developed a code of conduct for mutual fund dealers.  
Whale-watching operators have a code of ethics to minimize the impact of their 
activities on whales. 
¶ 30     Individual firms, especially those operating multinationally, have also 
developed codes of conduct. [See Note 16 below]  The Gap, Inc. has Sourcing 
Guidelines and Principles to ensure that its products are produced in an ethical 
manner. [See Note 17 below]  Internal codes of conduct for employees are 
becoming increasingly common and a number of companies are creating a new 
position, the ethics officer, who is responsible for compliance with the 
company's code of ethics. [See Note 18 below] 



   Note 16: B. Milner, "A case for corporate codes of conduct" The [Toronto] 
Globe and Mail (19 May 1996)  B7; H.L. Pitt & K.A. Groskaufmanis, "Corporate 
Codes of Conduct and Corporate Self-Regulation" in J.A. Sigler & J.E. Murphy, 
eds., Corporate Lawbreaking and Interactive Compliance: Resolving the 
Regulation-Deregulation Dichotomy (New York: Quorum Books, 1991); H.L. Pitt & 
K.A. Groskaufmanis, "Minimizing Corporate Civil and Criminal Liability:  A 
Second Look at Corporate Codes of Conduct" (1990) 78 Geo. L. J. 1559. 
   Note 17: Treasury Board Secretariat-Industry Canada, Voluntary Codes Project, 
The Gap, Inc. Sourcing Guidelines and Principles (Study) by G.T. Rhone (August 
1996). 
   Note 18: J. McFarland, "A company's conscience" The [Toronto] Globe and Mail 
(15 March 1996) B6; M.C. Deck, "Business Ethics: Corporate Codes and Ethics 
Programs" (Paper presented to the Conference on Business Practices Under NAFTA, 
University of Denver, 8-10 December 1994). 



¶ 31     Internationally, codes have been encouraged.  The United Nations 
Consumer Protection Guidelines issued in April, 1995 endorses codes of conduct 
as a means of achieving fair trading outcomes.  The U.N. itself produced two 
codes of practice aimed at securing voluntary compliance by manufacturers 
marketing their products worldwide:  the International Code of Practice for the 
Marketing of Infant Formulas [See Note 19 below] and the International Code of 
Conduct for the Distribution and Use of Pesticides.  The OECD Committee on 
Consumer Policy has put codes of conduct on its agenda as a priority issue.  The 
Australian Ministry of Consumer Affairs has published a Draft Guideline on 
Developing a Code of Practice, which is based on a similar draft guideline 
produced by the Australian Trade Practices Commission. [See Note 20 below] Both 
of these guidelines emphasize the need for effective internal or in-house 
compliance systems.  The Canadian federal government has initiated a Voluntary 
Codes Project to write a Canadian version of a guide for the development of 
codes of practice. [See Note 21 below] 



   Note 19: See J. Gerber, "Enforced Self-Regulation in the Infant Formula 
Industry: A Radical Extension of an 'Impractical' Proposal" (1990) 17 Soc. Jus. 
98.  The code has been subject to stress recently as one manufacturer, Ross 
Products (Abbott Laboratories Ltd.), has broken the code by advertising its 
infant formula product, Similac Advance, as being as good as mother's milk.  A 
competitor, Mead Johnson Canada, has asked a court to intervene on the grounds 
that the claims are misleading and false.  "Rivals in court over baby formula" 
The [Toronto] Globe and Mail (5 July 1996) B3; "Baby formula claims not new" The 
[Toronto] Globe and Mail (9 July 1996) B7; "Baby formula industry reneges on 
code" The [Toronto] Globe and Mail (12 July 1996) B3; "Mass mailing campaign 
heats up baby formula debate" The [Toronto] Globe and Mail (22 August 1996) B14. 

   Note 20: Australia, Draft Australian Fair Trading Codes of Conduct, A Guide 
Prepared by Commonwealth, State and Territory Consumer Affairs Agencies 
(November 1995);  Australia, Trade Practices Commission, Draft Guide to Fair 
Trading Codes of Conduct (August 1995).  The Report by the Trade Practices 
Commission, Self-Regulation in Australian Industry and Professions, vol. 1 
(Canberra: Australian Government Publishing Services, 1988) at 2, defines 
self-regulation as "the adoption of codes of practice embodying mutual 
obligations by competing members of an industry or profession. Such codes, 
usually adopted and administered as an industry initiative, normally complement 
both federal and State regulations." See also, New Zealand, Ministry of Consumer 
Affairs, Guideline on Developing a Code of Practice (Draft) (June 1993). 
   Note 21: Office of Consumer Affairs, Industry Canada and Regulatory Affairs, 
Treasury Board Secretariat, Voluntary Codes:  A guide for their development and 
use (Draft) (18 September 1997). 



¶ 32     Standards-setting bodies often, but not necessarily, play a role in the 
development of codes.  One code that has recently received considerable 
attention is the Canadian Standards Association (CSA) Privacy Code of Practice. 
[See Note 22 below]  Voluntary standards for privacy had been chosen as the 
policy instrument by the Canadian government in 1987 [See Note 23 below] 
following an evaluation of the federal Privacy Act [See Note 24 below] by a 
House of Commons committee that recommended extending coverage of the Act to the 
federally regulated private sector. [See Note 25 below] In fact, a number of 
associations of federally regulated companies, such as the Canadian Bankers' 
Association and Stentor, responded by developing privacy codes.  The debate 
about privacy regulation continued, however, spurred by the advocacy of the 
Federal Privacy Commissioner and the Report of the Information Highway Advisory 
Council. [See Note 26 below] A committee of the CSA, with representatives of the 
banking, insurance, telecommunications, cable and direct marketing industries, 
began to develop a Model Code for the Protection of Personal Information. [See 
Note 27 below] The Code was adopted by the CSA and published in March, 1996. 



   Note 22: C.J. Bennett, Implementing Privacy Codes of Practice, Plus 8830 
(Etobicoke: Canadian Standards Association, August 1995). 
   Note 23: Justice Canada, Access and Privacy:  The Steps Ahead (Ottawa:  
Supply and Services Canada, 1987). 
   Note 24: R.S.C. 1985, c. P-21. 
   Note 25: Canada, House of Commons, Standing Committee on Justice and the 
Solicitor-General, Open and Shut:  Enhancing the Right to Know and the Right to 
Privacy (Ottawa:  Supply and Services Canada, 1987). 
   Note 26: Connection, Community, Content:  The Challenge of the Information 
Highway (Ottawa:  Supply and Services Canada, 1995); Industry Canada, Privacy 
and the Canadian Information Highway (Ottawa: Supply and Services Canada, 1994); 
Ian Lawson, Privacy and the Information Highway:  Regulatory Options for Canada 
(Ottawa: Industry Canada, 1995). 
   Note 27: CAN/CSA-Q830-96. 



¶ 33     The Canadian Direct Marketing Association has requested legislation to 
make the CSA Privacy Code mandatory. This is partly in order to ensure wide 
coverage and acceptance of the code.  It has yet to be determined whether the 
CSA will play a role in registering data users to the standard. [See Note 28 
below]  Federal privacy legislation is promised, but has not been introduced at 
this time. [See Note 29 below] 



   Note 28: C.J. Bennett, Regulating Privacy in Canada:  An Analysis of 
Oversight and Enforcement in the Private Sector (Paper prepared for Industry 
Canada, May 1996). 
   Note 29: M. Bodnar, M.P., Speaking Notes (Symposium on Privacy Enhancing 
Technologies, 17 September  1996). Task Force on Electronic Commerce, Industry 
Canada, Justice Canada, The Protection of Personal Information: Building 
Canada's Information Economy and Society (January 1998). 



¶ 34     Another example of a standards body developing a code is the 
Sustainable Forest Management Certification System developed by the CSA. [See 
Note 30 below]  The forest companies became interested in developing a code 
following increased public concern about environmental issues and demands for 
environmentally conscious industry practices. [See Note 31 below]  In 1994, the 
companies formed a coalition to fund the development of a code by the CSA.  The 
result was the largest consultation process ever undertaken in Canada for 
standards development.  In addition to ensuring wide representation on the 
technical committee that was responsible for the creation of the code, the CSA 
invited about 450 nongovernmental organizations, such as environmental groups, 
to participate in consultation sessions held in Montreal, Toronto and Vancouver. 
 The process was funded by the forestry industry, including funding that was 
made available to the nongovernmental groups for participation in the 
consultation. 



   Note 30: Treasury Board Secretariat-Industry Canada, Voluntary Codes Project, 
CSA Sustainable Forest Management Certification System by G.T. Rhone (August 
1996). 
   Note 31: For example, the United Nations Conference on Environment and 
Development (the Earth Summit) had released four documents relating to forest 
management and, in March 1992, the Canadian Government issued Sustainable 
Forests:  A Canadian Commitment, which called for a system of national 
indicators to measure sustainable forest development; ibid. at D-4. 



¶ 35     The resulting code is a voluntary system that sets out broad 
value-based criteria, such as "Conservation of biological diversity" or 
"On-going local public participation in the type and use of sustainable forest 
practices."  These generalized values are given more concrete detail in the 
Guidance Document that accompanies the code.  When the criteria are applied to a 
specific "defined forest area," they are given even more detailed content.  The 
result is an individualized code or set of commitments that applies to a 
particular forest.  Before a company can be certified as complying with the 
code, it must also show that it meets all the relevant statutory guidelines 
(statutes, regulations, policies) governing the forest area. [See Note 32 below] 
The Sustainable Forest Management code will be enforced through third-party 
audits, the costs of which are borne by the company. [See Note 33 below] 



   Note 32: Governments were represented on the technical committee that 
developed the code. 
   Note 33: The code was released by the CSA on October 29, 1996 and approved by 
the Standards Council of Canada.  Canada and New Zealand, along with several 
other countries, have persuaded the International Standards Organisation (ISO) 
to develop an Environmental Management System specifically for the forestry 
sector.  An international standard would be part of the ISO 14000 series of 
Environmental Standards; supra note 30. 



¶ 36     One of the more extensive and sophisticated examples of industry codes 
is the Responsible Care program developed by the chemicals industry to improve 
its public reputation.  The program was originally developed in Canada by the 
Canadian Chemical Producers' Association (CCPA), all of whose members must 
adhere to the program.  It has since been adopted by the chemical producers of 
thirty-nine other countries. 
¶ 37     Responsible Care is intended to "reflect a total commitment to making 
the entire chemical life cycle safer, from research and development of new 
chemicals, to the use and disposal of existing chemicals." [See Note 34 below]  
There are guiding principles and six codes of practice relating to community 
awareness and emergency response (CAER); research and development; 
manufacturing; transportation; distribution; and hazardous waste management. 
[See Note 35 below] 



   Note 34: Canadian Chemical Producers' Association, Responsible Care:  A Total 
Commitment (March 1996). 
   Note 35: The Australian version contemplates eight codes of practice:  
transportation, community awareness and emergency response, waste management, 
warehousing and storage, community right-to-know, product stewardship, 
manufacturing, and research and development; N. Gunningham, "Environment, 
Self-Regulation and the Chemical Industry:  Assessing Responsible Care" (1995) 
17 Law & Policy 57 at 62. 



¶ 38     Responsible Care is an example of an industry initiative where the 
reputations of the individual members of the industry are highly interdependent; 
failure of one company's safety or environmental initiatives will have an effect 
on all.  In such industries, peer pressure is often an effective instrument of 
regulatory improvement and compliance. [See Note 36 below]  Large multinational 
industries are behind the Responsible Care program and they are acutely 
conscious of their corporate images.  Gunningham argues that "it is not possible 
to improve the corporate image without changing the reality through improved 
environmental performance." [See Note 37 below] 



   Note 36: Gunningham points out that "[t]he chemical industry has 
characteristics that could make Responsible Care one of the small minority of 
cases in which industry interest and public interest are sufficiently coincident 
for self-regulation to be a viable regulatory strategy."  Ibid. at 63.  For a 
discussion of peer pressure in the nuclear industry, see J.V. Rees, Hostages of 
Each Other:  The Transformation of Nuclear Safety since Three Mile Island 
(Chicago: University of Chicago Press, 1994). 
   Note 37: Gunningham, ibid. at 64. 



¶ 39     The transfer of expertise among companies is also encouraged in this 
environment. [See Note 38 below]  The chemical manufacturing industry is subject 
to extensive government regulation, but additional regulation may be threatened 
in the absence of a credible industry initiative to self-regulate. [See Note 39 
below]  Responsible Care is thus an attempt to retain the regulatory initiative 
within the industry. [See Note 40 below] 



   Note 38: There are six Regional Leadership Groups comprised of the CEOs of 
each member company.  These Groups act as a forum for the exchange of 
information and "best practices" as well as being a focus for peer pressure to 
ensure continual improvements in practices.  By involving the CEOs, the 
necessary commitment to the program of the senior management is shown; J. 
Braithwaite & B. Fisse, "Self-Regulation and the Control of Corporate Crime" in 
C.D. Shearing & P.C. Stenning, eds., Private Policing (Newbury Park, Ca.:  Sage 
Publications, 1987) 221. 
   Note 39: Some argue that the less intrusive form of the National Pollutant 
Release Inventory (NPRI) program, in comparison to the U.S. regulation, is due 
to the presence of the Responsible Care program, as well as the government's 
willingness to consider voluntary commitments instead of regulations for benzene 
emissions; Treasury Board Secretariat-Industry Canada, Voluntary Codes Project, 
Canadian Chemical Producers' Association Responsible Care Program by F. Bregha & 
J. Moffet (September 1996). 
   Note 40: Gunningham, supra note 35. 



¶ 40     The industry is proud of its Responsible Care efforts, but some critics 
maintain that the program is merely a public relations sham. [See Note 41 below] 
 The American program, run since 1988 by the Chemical Manufacturers' Association 
(CMA), has polled the public and found that the program, at best, has merely 
stopped the slide of negative public opinion about the industry.  The public 
rates chemical producers only slightly above tobacco manufacturers.  Bregha and 
Moffet point out that participation in the Responsible Care program does not 
mean that the companies are always in compliance with the law. [See Note 42 
below]  The companies have been prosecuted for environmental violations.  Nor 
does a successful prosecution mean that the company will be decertified, but 
that each case will be dealt with individually.  To date, no company has lost 
its membership in CCPA, [See Note 43 below] although a company has terminated 
its relationship with CCPA in order to avoid the requirements of Responsible 
Care. [See Note 44 below]  There is also no government policy relating to 
enforcement discretion when dealing with a Responsible Care company; for 
example, there is no policy that will provide enforcement benefits for companies 
that have Responsible Care compliance systems in place. [See Note 45 below]  In 
light of experience with compliance incentives, the full range of benefits that 
might be derived from Responsible Care has not been explored. 



   Note 41: L.R. Ember, "Responsible Care:  Chemical Makers Still Counting on It 
to Improve Image" Chemical & Engineering News (19 May 1995). 
   Note 42: Bregha & Moffet, supra note 39. 
   Note 43: Gunningham states that there is no documented case in any country of 
a membership being terminated; supra note 35 at 69. 
   Note 44: Bregha & Moffet, supra note 39. 
   Note 45: A full range of incentive benefits is discussed in Michael, supra 
note 14 at 545-6, and below in the discussion on cooperative implementation and 
complementary government policies. 



¶ 41     Although codes are often voluntary, governments may mandate the 
establishment or adoption of an industry code. Legislative backing is usually 
called for when it is necessary to ensure sufficient coverage of an industry or 
to provide for enforceable sanctions.  For example, bankruptcy trustees are 
required to follow a Code of Ethics that has been established, after wide 
consultation, by the Superintendent of Bankruptcy. In the United States under 
the Insider Trading and Securities Fraud Enforcement Act, [See Note 46 below] 
brokers and dealers must establish and enforce written policies and procedures 
to deter insider trading. 



   Note 46: 15 U.S.C.A., [section]78o(f) (1997). 



¶ 42     Voluntary codes are an integral part of Australian fair trading 
legislation. [See Note 47 below]  The Australian Competition and Consumer 
Commission (formerly the Trade Practices Commission) encourages industry codes 
that do not inhibit competition.  The Commission found that "self-regulation 
should be acknowledged positively as one of the options in the available 
regulatory 'mix'." [See Note 48 below]  The major role of the Commission has 
been to authorize industry codes that would be, absent authorization, in 
violation of the Trade Practices Act. [See Note 49 below]  The Commission has a 
statutory duty to weigh the advantages of a code against any possible 
anticompetitive disadvantages that might arise as a result of the code.  In 
practice, the Commission will become involved in the development of a code when 
it is satisfied that the industry has the capacity to self-regulate and the 
result will be fair trading. [See Note 50 below]  The Commission has no direct 
role in the enforcement of industry codes, which are generally enforced by an 
industry association.  When a code has been authorized by the Commission, 
however, a violation of the code could also be a violation of the Trade 
Practices Act. 



   Note 47: Treasury Board Secretariat-Industry Canada, Voluntary Codes Project, 
Codes of Practice: The Australasian Experience" by N. Gunningham (August 1996). 
   Note 48: Supra note 20. 
   Note 49: (1974) 798,033. An analogous function is performed by the British 
Director of Fair Trading. 
   Note 50: Australia, TPC Guide to Codes of Conduct:  Draft for comment 
(Canberra: 1992) quoted in Australia, Law Reform Commission, Report No. 68, 
Compliance with the Trade Practices Act, 1974 (Sydney:  National Capital 
Printing, 1994) at 21. 



¶ 43     Self-regulation may involve activities undertaken under the 
supervision, but not direct regulation, of government.  The Fair Trading Act, 
1973 in the United Kingdom, for example, requires the Director of Fair Trading 
to "encourage relevant associations to prepare and disseminate to their members, 
codes of practice for guidance in safeguarding and promoting the interests of 
consumers in the United Kingdom." [See Note 51 below]  A number of codes have 
been developed, including codes dealing with launderers and dry cleaners, shoe 
repairers, electrical goods sale and repair, and funerals. 



Note 51: Fair Trading Act, 1973 (U.K.) 1973 c. 41, s. 124. 



¶ 44     The role of the Director General, Fair Trading under the U.K. Fair 
Trading 1976 Act goes beyond encouraging the development of codes.  Under the 
terms of the Act, any agreement by a trade association about the terms and 
conditions under which the trade association members will do business is a 
restraint of trade.  If the Director General believes that an industry code will 
not restrict competition, he may seek the consent of the Secretary of State not 
to refer the matter to the Restrictive Trade Practices Court.  In practice, 
then, the Director General has a veto or passive approval power over voluntary 
industry codes. [See Note 52 below] 



   Note 52: Scope, Report 2, Chap. II, Part 3, 
http://www.strath.ac.uk/Departments/Law/diglib/res/scope/repor t2/ 
report2_2_3.html [hereinafter Scope]; see also I. Ramsay, "The Office of Fair 
Trading: Policing the Consumer Marketplace" in R. Baldwin & C. McCrudden, eds., 
Regulation and Public Law (London:  Weidenfeld and Nicolson, 1987) 177. A 
similar function is performed by the Australian Competition and Consumer 
Commission, which must authorize behaviour that would otherwise be in restraint 
of trade. See discussion, below, at Part VII A. 



¶ 45     The U.K. Consumer Protection Act 1987 [See Note 53 below] also allows 
the Secretary of State, after consultation with the Director General of Fair 
Trading and other appropriate persons, to approve a code.  A contravention of an 
approved code does not in itself give rise to liability, but a contravention may 
be relied upon to establish that a person committed an offence and compliance 
may also be relied upon to show that an offence has not occurred. [See Note 54 
below] 



   Note 53: (U.K.), 1987, c.43. 
   Note 54: Scope, supra note 52 at 2. 



¶ 46     In some instances, codes developed by an industry may become legally 
binding; for example, privacy codes developed by industry in New Zealand and 
Australia.  Breaches of codes that are approved by the New Zealand or Australian 
Privacy Commissioners are considered to be breaches of the relevant Privacy 
Principles. [See Note 55 below] 



   Note 55: New Zealand developed an extensive Health Information Privacy Code 
in 1994 that is legally enforceable. 



¶ 47     In most cases, breach of an industry code will not be an offence, 
although it may be used as evidence of an offence.  Similarly, compliance with 
an industry code cannot generally be used as a defense to liability for an 
offence. Industry or firm codes of conduct may be used, however, to establish 
evidence of an adequate due diligence defense to a regulatory offence, [See Note 
56 below] or reduce penal sentences in the event of a conviction. [See Note 57 
below] Compliance or noncompliance with codes may also be important in 
determining the normal standards of an industry.  For example, it may become 
increasingly common for a firm to argue that it had exercised due diligence 
because it has put in place ISO 14000 standards for environmental management. 
[See Note 58 below]  Internal conduct codes may thus be an important part of a 
firm's internal compliance system, although the actual workings of the internal 
compliance system will be the ultimate determinant of a successful due diligence 
defense.  The use of codes by the courts to define a due diligence defense, 
however, may have the effect of extending the contents of a code throughout an 
industry, even to those firms that do not formally adhere to the code. 



   Note 56: R. v. Bata Industries Ltd. (1992), 70 C.C.C. (3d) 349, 9 O.R. (3d) 
329 (Prov. Div.) [hereinafter Bata cited to O.R.]; R. v. Crown Zellerbach 
Properties Ltd., [1988] 1 S.C.R. 401, 49 D.L.R. (4th) 161; R. v. Toronto 
Electric Commissioners, 6 C.E.L.R. (N.S.) 301 (Ont. Gen. Div.); R. v. Courtaulds 
Fibres Canada (1992), 76 C.C.C. (3d) 68, 9 C.E.L.R. (N.S.) 304 (Ont. Prov. 
Div.). 
   Note 57: U.S. Organizational Sentencing Guidelines, U.S.S.G., [section] 
8C2.5(f) provides that the existence of an "effective" compliance program 
reduces a firm's "culpability score." See D.K. Webb, et al., "Understanding and 
Avoiding Corporate and Executive Criminal Liability" (1994) 49 Bus. Law. 617 at 
647.  The Australian Law Reform Commission did not recommend that compliance 
with a code should be required to be considered by a court determining a penalty 
since the status of codes was uncertain; the matter should be left to the 
discretion of the courts. 
   Note 58: Implementation of ISO 14000 has already been used by one court in 
sentencing;  R. v. Prospec Chemicals Ltd., (25 January 1996), (Alta. Prov. 
Ct.)[unreported][hereinafter Prospec].  See B. Daisley, "Could ISO 14000 
certification become environmental due diligence standard?" The Lawyers Weekly 
(9 August 1996) 11. 



C.   Statutory Self-Regulation 
¶ 48     The second model involves a high degree of delegation by the state to a 
self-regulatory organization to carry out regulatory functions.  The 
self-regulatory organization is often established by statute, which delegates a 
range of regulatory powers to the SRO.  At one extreme, these can include a 
complete range of regulatory powers, including rulemaking, monitoring, 
enforcement and sanctions. This full form of delegation is generally limited to 
the regulated occupations commonly known as the professions. [See Note 59 below] 
 The Law Society of Upper Canada, the Ontario College of Physicians and 
Surgeons, and the Ontario Dental College are prominent examples in Ontario. [See 
Note 60 below] The actions of these bodies have a sufficiently public character 
that they are subject to judicial review [See Note 61 below] and, in some 
circumstances, to the requirements of the Canadian Charter of Rights and 
Freedoms. [See Note 62 below] 



   Note 59: For example, the self-regulatory regimes created by the Architects 
Act, R.S.O. 1990, c. A.26; the Law Society Act, R.S.O. 1990, c. L.8; the 
Professional Engineers Act, R.S.O. 1990, c. P.28; and the Public Accountancy 
Act, R.S.O. 1990, c. P.37.  The Manitoba Law Reform Commission, supra note 8 at 
123, found there were 156 occupational groups subject to regulation in Manitoba; 
36 of these were self-governing.  This is an area where self-regulation has 
increased; when the McRuer Report was published in 1968, there were 22 
occupations and professions in Ontario that were delegated the statutory power 
to license, govern, and control their members; Royal Commission, Inquiry into 
Civil Rights (Report No. 1, vol. 3) Section 4 "Self-Governing Professions and 
Occupations" (Queen's Printer for Ontario, 1968) at 1160 [hereinafter McRuer 
Report].  Currently there are 21 professional colleges (and 24 professions) 
subject to the Regulated Health Professions Act, S.O. 1991, c.18 alone. 
   Note 60: Strictly speaking, the College of Physicians and Surgeons and the 
Ontario Dental College are hybrid examples, being partly supervised by the 
Province in their complaint functions through appeals to the Health Professions 
Board pursuant to the Ontario Regulated Health Professions Act, S.O. 1991, c. 
18.  Nonetheless, their high degree of autonomy and their control over their 
discipline committees indicates that they are to be categorized as statutory 
self-regulatory bodies. 
   Note 61: For example, Venczel v. Ontario Ass'n of Architects (1989), 42 
C.L.R. 8, 74 O.R. (2d) 755 (Div. Ct.); Khan v. College of Physicians and 
Surgeons (Ontario) (1992), 94 D.L.R. (4th) 193, 9 O.R. (3d) 641 (C.A.); Spring 
v. Law Society of Upper Canada (1988), 50 D.L.R. (4th) 523, 64 O.R. (2d) 719 
(Div. Ct.). 
   Note 62: Part I of the Constitution Act, 1982, being Schedule B of the Canada 
Act, 1982 (U.K.), c. 11. See Black v. Law Society Alberta, [1989] 1 S.C.R. 591,  
58 D.L.R. (4th) 317; Knutson v. Sask. Registered Nurses Ass'n (1990), [1991] 2 
W.W.R. 327, 75 D.L.R. (4th) 723 (Sask. C.A.). 



¶ 49     Unlike the supervised self-regulation model, discussed below, the SROs 
in the statutory self-regulation model are not subject to the continuous 
oversight of a government agency.  The statutory SROs are responsible for 
enforcement and sanctions.  Government control is primarily found in the 
structuring of the statute that delegates power to the SROs, and is often found 
in the power to approve regulations or bylaws established by the SRO.  The 
hallmark of statutory self-regulation is the relatively large degree of autonomy 
delegated to the SRO to regulate its individual members. 
¶ 50     Occupations are subject to a variety of statutory self-regulatory 
regimes.  Occupational regulation ranges from licensure to certification to 
registration.  The strictest regime is licensure; entry is controlled and a 
member of the occupational group cannot practice the profession without a 
professional licence.  In most cases, the licensing regime is controlled by an 
SRO to which has been delegated the power to control entry into the profession.  
Thus, a lawyer cannot practice law for money unless she is a member of the Law 
Society and a doctor cannot practice unless he is licensed by the College of 
Physicians and Surgeons.  Similarly, a registered nurse must be a member of the 
College of Nurses, an architect must be a member of the College of Architects, a 
chartered accountant must be a member of the Institute of Chartered Accountants, 
and a psychologist must be a member of the College of Psychologists. 
¶ 51     There are differences among the licensure regimes; for example, only a 
doctor in Ontario can perform certain types of medical procedures while other 
health professionals are limited to other identified procedures.  The 
limitations may be by client, activity, or by relationship (e.g., paid or 
unpaid).  In some jurisdictions or occupations, the regulated individuals cannot 
form a corporation to offer their services; in other jurisdictions, 
"professional corporations" or "professional service corporations" are 
permitted. 
¶ 52     Under a licensing regime, there are likely to be strict admission 
requirements, usually with competency tests and educational qualifications 
attached.  Once a member is admitted to the profession, most licensing regimes 
also include provisions for regulation of professional behaviour through a code 
of ethics or regulations and for disciplining for violations of required 
behavioural codes.  The sanctions for noncompliance may include fines, remedial 
action, restitution, and expulsion from the profession.  The licensing system is 
backed by quasi-criminal sanctions against those who offer a service to the 
public without a licence or without being members of the SRO. 
¶ 53     Certification is not as strict as licensing in the sense of creating a 
monopoly over the occupation as whole. [See Note 63 below]  Under a 
certification system, anyone may carry out the occupational activity, but only 
those individuals who have been certified by a professional body may use a 
particular title.  Thus a person may be a certified management accountant or a 
certified interior designer.  The state delegates to the professional body the 
power to confer title and, often, to establish the qualifications that will 
allow certification to be granted.  There are sanctions against using the title 
without being certified. 



   Note 63: Certification may also be referred to as "title restriction" or 
"title reservation." 



¶ 54     The professional body that certifies the member ensures that the member 
meets certain qualifications of education or experience and thus indicates to 
the public that minimum entry standards have been met.  The certification is a 
form of shorthand or credentialing signal for the public, indicating a certain 
background or educational level.  The public is still free to choose to use a 
certified or uncertified supplier of services, but is given more information on 
which to base a choice. 
¶ 55     Brockman points out that certification can become, in practice, a form 
of licensing. [See Note 64 below] Where governments or corporations or other 
extensive users of a service insist upon certification as a condition of hiring, 
the effect is a form of licensure since the certified group is given a monopoly 
over the provision of the service.  A similar result can be achieved in a 
collective agreement if an employer agrees to hire only certified workers. [See 
Note 65 below]  In both cases, of course, the buyer of the service has 
voluntarily agreed to limit use to those who are certified. 



   Note 64: J. Brockman, "Fortunate Enough to Obtain and Keep the Title 
'Professional'" (Paper presented at the annual meeting of the Canadian Law and 
Society Association, June 1997) [unpublished]. 
   Note 65: Economic Council of Canada, Regulation Reference, Reforming 
Regulation (Final Report)(Ottawa:  Minister of Supply and Services Canada, 1981) 
at 114. 



¶ 56     Registration is the least restrictive form of occupational regulation.  
All members of an occupational group who register may offer their services to 
the public. Generally, registration is done with a government agency, not an 
SRO, and it does not qualify as a form of self-regulation. The purpose of 
registration is to maintain an information bank or to collect business taxes.  
There are usually no preconditions such as education or experience for 
registration.  Related to registration is a system of permits; anyone who 
obtains a permit can provide a service.  Permitting allows information 
collection, but it is also a system of taxation since there is a fee for the 
permit.  There may be a numerical restriction on entry for permits; for example, 
a city may allow only a limited number of street vendors or street musicians.  
The city does not guarantee the talent, repertoire or training of the musicians, 
however. 
¶ 57     An important rationale for professional regulation is derived from the 
asymmetry between information and expertise of the consumer and the 
professional.  The asymmetry of information means that those offering the 
service have a significantly greater degree of knowledge about their product or 
service than their clients.  In the classic areas of professional 
regulation--law and medicine--the subject matter of the professional expertise 
is complex or arcane. The average consumer is in a poor position to assess the 
need for work or the quality of work performed.  The penalties for error may be 
high (even death in the case of the health professions or liberty for the legal 
profession) and the consumer may have limited opportunities for choosing and 
learning by mistakes.  The service is likely to be highly personalized, in 
addition to expert, so "word of mouth" may be a poor basis for choice. 
¶ 58     The market cannot function efficiently without the consumer's being 
able to make knowledgeable choices.  In some cases, certification provides the 
client with sufficient knowledge about the educational or practice background of 
the certified professional to aid in the making of an informed choice.  In other 
areas, where the client is unable to evaluate information about the service or 
products and the risks associated with an error are high, this is not a 
regulatory problem where information disclosure by itself is an adequate method 
of consumer protection.  Other regulatory means must be found to protect the 
consumer from incompetent or unscrupulous practitioners, such as limiting entry 
to those practitioners who meet educational and experience qualifications. 
¶ 59     The need for consumers or clients to rely on the judgement of the 
professional is high.  This leads to another hallmark of the professional-client 
relationship; it is an agency relationship. [See Note 66 below]  The client must 
trust the professional.  The professional becomes an agent of the client with 
respect to decision making, application of judgment, and taking of action.  This 
is not to say that the professional is not required to explain matters and 
obtain "informed consent" from the client, but it does mean that a high degree 
of trust and reliance must be exhibited by the client and that this places the 
professional in a fiduciary relationship with the client.  Essentially there is 
a power imbalance that requires the professional to operate with a high degree 
of disinterestedness and maintain the primacy of the client's welfare. 



   Note 66: In fact, there is a double agency relationship for the 
self-regulated professions since the SRO is also acting as an agent of the state 
in exercising regulatory power over the members; C.J. Tuohy & A.D. Wolfson, 
"Self-regulation: who qualifies?" in P. Slayton & M. Trebilcock, eds., The 
Professions and Public Policy (Toronto: University of Toronto Press, 1978) 111; 
see discussion below at Part VII. 



¶ 60     An additional rationale for professional regulation is the protection 
of third parties or the limitation of externalities. [See Note 67 below]  The 
public interest may not be satisfied without additional protections, even if the 
client is happy with the type and quality of work done by the professional.  For 
example, investors rely on the competence and accuracy of work done by 
accountants and the public at large is interested in the safety and stability of 
structures designed by architects or built by engineers. 



   Note 67: J.K. Lieberman, "Some Reflections on Self-Regulation" in Slayton & 
Trebilcock, eds., ibid., 89 at 91. 



¶ 61     Under a scheme of statutory self-regulation, the state does not 
regulate directly, but rather delegates the regulatory functions to the SRO.  
Professions have traditionally been self-regulated because the state, like the 
consumer, appears to lack the expertise to judge the behaviour of professionals, 
although a state body may play a role in professional regulation, e.g., setting 
entry standards.  Only the professionals themselves are thought competent to 
apply their judgment to the behaviour of their peers. [See Note 68 below] 



   Note 68: The Manitoba Law Reform Commission, supra note 8 at 9, rejects the 
view that only professionals can regulate professionals.  Governments can hire 
experts and nonpractitioners can consider expert evidence.  This therefore does 
not in itself provide a sufficient rationale for the delegation of regulatory 
powers to a professional SRO. 



¶ 62     There are disadvantages associated with professional self-regulation.  
Licensing, in particular, reduces competition.  The result will be: 
      ...higher prices, less efficient use of resources, discouragement of new 
      developments and a tendency toward rigidity in the structure and trading 
      methods of those businesses.  Such collective restrictions tend to reduce 
      the pressures upon those observing them to increase their efficiency.  
      They may also dely the introduction of new forms of service and 
      elimination of inefficient practitioners. [See Note 69 below]



   Note 69: United Kingdom, Monopolies Commission, Part I: The Report (1970), 
quoted in Manitoba Law Reform Commission, ibid. at 15. 



Since certification regimes allow consumers to use uncertified practitioners, 
they are generally less restrictive of competition than licensing regimes.  
Research has indicated that licensing regimes increase the price to consumers. 
[See Note 70 below]  The Manitoba Law Reform Commission points out that 
licensing drives up prices not only by restricting the supply of practitioners, 
but also by increasing the costs of obtaining or maintaining a licence. [See 
Note 71 below] Practitioners will charge higher prices to recoup the costs of 
their training.  The result of higher prices is a transfer of income to the 
professional, but there may be other harmful effects.  Benham and Benham, for 
example, discovered that fewer people purchased eye glasses in jurisdictions 
where there was restrictive licensing for the dispensing of glasses. [See Note 
72 below] 



   Note 70: L. Benham & A. Benham, "Regulating Through the Professions: A 
Perspective on Information Control" (1985) 18 J. L. & Econ. 421 [hereinafter 
Information Control]; L. Benham & A. Benham, "Prospects for Increasing 
Competition in the Professions" in Slayton & Trebilcock, eds., supra note 66. 
   Note 71: Supra note 8 at 16. 
   Note 72: Information Control, supra note 70. 



¶ 63     Because certification does not restrict the number of practitioners in 
the market, it does not have the same anticompetitive problems as licensing.  
Certification, however, may also have its disadvantages. [See Note 73 below] 
Consumers may not be aware of what is implied by certification and fail to make 
informed decisions regarding the qualifications of practitioners.  Certification 
does not protect against third-party harm or mitigate the risk of severe harm.  
Certification may be also only a step on the way to the more restrictive regime 
of licensing. 



   Note 73: Manitoba Law Reform Commission, supra note 8 at 17-18. 



¶ 64     The Manitoba Law Reform Commission describes the path to 
professionalization. [See Note 74 below]  A voluntary group of practitioners 
bands together to raise the standards of the profession.  Efforts are made to 
establish a university program of training and continuing education programs are 
offered.  A code of conduct is written and members are expected to adhere to it. 
 Membership in the organization may become prestigious and an important asset in 
job-hunting.  The members begin to lobby government for regulation and 
self-government. 



   Note 74: Ibid. at 5-6. 


      It [the organization] emphasizes that, unlike other occupations, its 
      members act on the basis of a body of knowledge which has been organized 
      into a systematic theory and is taught at a university.  It also stresses 
      its members' commitment to high standards of competence and ethics and 
      points to its own efforts in this regard.  In other words, it makes the 
      case that it is similar to other groups which have already been given 
      professional status and is dissimilar to mere occupations. [See Note 75 
      below]



   Note 75: Ibid. The assumption is, of course, that the organization will 
evolve into the SRO; there is the possibility of competing organizations; P. 
Dare, "Teachers' regulatory agency a hard sell" The [Ottawa] Citizen (30 
December 1995) A4. 



The success in achieving professional status has led governments to question the 
criteria by which the status is granted. [See Note 76 below] Some governments 
take the view that licensing should only be used when it can substantially 
reduce the threat of harm to the public. [See Note 77 below] Other governments 
appear to be more open to the request for professional status by various 
occupations. [See Note 78 below]  Touhy and Wolfson point out that granting 
professional status means that the state is allowing the self-governing 
professions to be agents of the state; the delegation of regulatory functions 
allows a self-regulatory body to act for the state and use the powers of the 
state. [See Note 79 below] Governments should be sure that other instruments, 
such as defining liability or granting subsidies for training, would not suffice 
to protect the public.  The existence of large numbers of individual agency 
relationships between the practitioner and the client also influences the choice 
of self-regulatory model.  Numerous individual relationships increase the cost 
of monitoring and enforcing standards of practice; professional ideology is more 
likely to make the SRO an efficient vehicle for enforcement. 



   Note 76: McRuer Report, supra note 59; Ontario, Professional Organizations 
Committee, Report (Toronto:  Queen's Printer, 1980); Ontario, Health Professions 
Legislative Review, A Blueprint for the Regulation of Ontario's  Health 
Professions (Toronto: Queen's Printer, 1989); Quebec, Castonguay Commission, 
Report on the Professions and Society (1970); Quebec, Report of the Commission 
of Inquiry on Health and Social Welfare, vol. 1 [Castonguay-Nepveu 
Report](1980); see also reports cited in Manitoba Law Reform Commission, supra 
note 8 at 7 footnote 29. 
   Note 77: Manitoba Law Reform Commission, ibid. at 20; R. Dussault & L. 
Borgeat, "La réforme des professions au Québec" (1974) 34 R. Du Barreau 140; C. 
Castonguay, "The Future of Self-Regulation: A View from Quebec" in Slayton & 
Trebilcock, eds., supra note 66 at 61. 
   Note 78: The Ontario government's invitation to self-management appears to be 
directed both at those who are already regulated but seek self-regulated status 
and those who may seek to be regulated in a self-regulatory structure; supra 
note 5. 
   Note 79: Supra note 66. 



¶ 65     Trebilcock points out that, where regulation of inputs (e.g., entry 
standards) is considered desirable, direct regulation by the state "seems most 
appropriate where the industries, trades or occupations are not highly cohesive, 
long-established groups, with a well-settled consensus on relevant training, 
service and ethical norms." [See Note 80 below]  Self-regulation is also not 
thought desirable in industries with a small number of large firms, such as 
banks, where the self-regulatory structure could increase the risk of collusion 
or the formation of a cartel. Where there are well-established ethical and 
educational norms and where there are high levels of expertise found in the 
group, self-regulation may be appropriate.  The self-regulatory structure, 
however, should be designed to limit the opportunities for abuse by antisocial 
forms of collusion or cartelization. [See Note 81 below] 



   Note 80: M. Trebilcock, "Critical Issues in the Design of Governance Regimes 
for the Professions" (Faculty of Law, University of Toronto, May 
1994)[unpublished]. 
   Note 81: Ibid. at 7. 



D.   Firm-Defined Regulation 
¶ 66     In the third model, firm-defined regulation, the private sector 
regulated firm takes on regulatory responsibilities such as developing rules, 
enforcing rules, and even imposing sanctions.  The rules are tailored to the 
firm.  In some cases, the government may, by statute, require that such 
regulatory activity take place.  In other cases, it may be permitted by statute 
but not required and a more traditional regulatory regime may be available as an 
alternative.  Individual firms, therefore, are either required or invited to 
take responsibility for developing individualized rules that will apply to their 
activities. Unlike either statutory or supervised self-regulation, there is no 
SRO playing a regulatory role.  The government retains the power to approve 
rules and, in effect, deems them to be regulations (the practical techniques can 
vary) that are enforceable as laws.  The government can also be responsible for 
"major" rules, while requiring the firms to develop rules of specific 
application to ensure policy objectives are met within a particular workplace. 
¶ 67     The firms remain accountable to government for compliance with rules 
and can be subject to sanctions that are enforced and imposed by government 
authorities for noncompliance.  In general, however, firm-defined regulation not 
only will rely on the resources and expertise of the firms to develop tailored 
rules, but also will place great reliance on firm-level compliance systems and 
labour-management discipline systems to ensure compliance and deal with many 
instances of noncompliance.  In this, firm-defined regulation is similar to the 
cooperative implementation and mandatory self-regulation techniques discussed in 
the self-management model, below.  It differs from self-management in the use of 
the firm (rather than the government) to write legally enforceable rules of 
specific application. 
¶ 68     The most important example of firm-defined regulation in the literature 
is the "enforced self-regulation" developed by Ian Ayres and John Braithwaite.  
The focus in enforced self-regulation is on negotiation by the firm with the 
state to produce "flexible, particularistic standards and enforcement." [See 
Note 82 below]  The regulatory structure is based on two elements:  the public 
enforcement of privately written rules, and the publicly mandated and publicly 
monitored private enforcement of those rules.  Under the enforced 
self-regulation model, the government and the firm negotiate to produce a set of 
rules that are particular to the firm; these custom-tailored rules must not 
result in any less protection than would the otherwise applicable public rules. 
Internal firm inspectorates and compliance groups would be responsible for 
monitoring and enforcement; where the recommendations of the internal compliance 
group were ignored by the firm, the group would report its findings to the 
government regulator.  The firm-level self-regulation is "enforced" because the 
state requires the firm to do the self-regulation and because the rules can be 
publicly enforced. [See Note 83 below] 



   Note 82: Supra note 13.  See also J. Braithwaite, "Enforced Self-Regulation:  
A New Strategy for Corporate Crime Control" (1982) 80 Mich. L. Rev. 1466; the 
Ayres and Braithwaite model is focused on firm-level regulatory activity, but 
industry organizations often play a significant role in developing rules as 
well. 
   Note 83: Public enforcement of private law is not unknown. For example, an 
official of the Vanhoose Coal Company was sentenced to 60 days in jail for 
failing to comply with a roof plan developed by the company and approved by the 
U.S. Department of Labor; supra note 13 at 117. 



¶ 69     The rationale for enforced self-regulation is derived from Ronald 
Coase's theory of the firm; government should only internally produce public 
goods (i.e., regulation) when it is cheaper than external contracting. [See Note 
84 below]  The premise is that a number of government functions--rulemaking, 
monitoring, and enforcement--can be carried out effectively by the private firm 
in a self-regulatory structure.  Companies would be required to write rules that 
met their own needs and would maintain an inspectorate.  Government would not 
ratify the private rules unless they were consistent with legislative minimum 
standards. 



   Note 84: Ibid. at 102-03, referring to R. Coase's "The Nature of the Firm" 
which suggested that firms are organized to produce goods and services when 
internal production is cheaper than external transactions.  Ayres and 
Braithwaite also envision enforced regulation as a level in a possibly 
escalating government regulatory response, ranging from voluntary 
self-regulation to direct regulation.  What level would be chosen would depend 
partly on the nature of the problem to be dealt with, and partly on the response 
of the firms or industry. 



¶ 70     Ayres and Braithwaite point out, however, that "[D]elegation of 
legislative functions need not imply delegation of executive or adjudicative 
functions." [See Note 85 below]  All adjudication can continue in the public 
courts and as much of the monitoring and enforcement functions as necessary can 
remain in public hands.  Enforced self-regulation does not mean that government 
necessarily abdicates its responsibilities for ensuring enforcement, but only 
that it takes a more strategic approach to enforcement. [See Note 86 below]  
Ayres and Braithwaite argue that it may even be easier to obtain convictions 
under enforced self-regulation because the rules would be more precise and less 
complex. [See Note 87 below]  The government regulator would also have access to 
the reports of the internal compliance groups when their reports were not acted 
on by the firm. 



   Note 85: Ibid. at 103. 
   Note 86: In contrast, Sigler and Murphy's model of "interactive compliance" 
ties the level of government regulation to the level of a company's voluntary 
efforts to comply with the law; J. Sigler & J. Murphy, eds., Corporate 
Lawbreaking and Interactive Compliance, Resolving the Regulation-Deregulation 
Dichotomy (New York:  Quorum Books, 1991). 
   Note 87: Supra note 13 at 115. 



¶ 71     The advantages of enforced self-regulation are the advantages of 
self-regulation in general:  flexibility, lower costs for the firms, commitment 
to the rules, and more comprehensive rules. [See Note 88 below]  In addition, 
the more individualistic and tailored rules could foster innovation.  There are 
more internal inspectors in firms (usually for quality control) than any 
government inspectorate could hope to muster, and internal inspectors may have 
powers (such as entrapment) that government inspectors lack. Incentives are also 
available to an internal inspectorate that are lacking for government.  
Braithwaite mentions a pharmaceutical company's regulations about the treatment 
of lab animals; anyone who did not follow the protocols would simply be denied 
more animals.  The person in charge of supervising the treatment of lab animals 
was also the person with the control over a resource the researchers required; 
the result was a simple enforcement system. [See Note 89 below] 



   Note 88: For a more complete discussion of the advantages and disadvantages 
of self-regulation, see below. 
   Note 89: Supra note 82. 



¶ 72     There are disadvantages to enforced self-regulation. [See Note 90 
below]  Ayres and Braithwaite note that there is concern that particularistic 
rules, and their approval by government regulators, could be more costly to 
produce and consume more resources than a standard set of regulatory rules.  
Small companies might find it burdensome to self-regulate, either for rulemaking 
or enforcement.  The co-option of the regulatory process could be worsened.  On 
a more philosophical level, there is concern that it might be difficult to 
accord privately written rules the status of publicly enforceable laws and that 
particularistic laws might weaken the moral force of laws that are more 
typically universal.  There may be practical objections as well: companies may 
not be able to guarantee the independence of their compliance or enforcement 
groups and the companies may require the outside impetus of governmentally 
mandated action in order to command compliance. 



   Note 90: Ayres & Braithwaite, supra note 13 at 120-128 passim. 



¶ 73     Ayres and Braithwaite argue that these concerns should not be 
overstated; for example, experience with mining safety indicates that, after 
gaining experience in evaluating and approving a small number of roofing plans, 
later plans proceed quite quickly.  Smaller companies might reduce their costs 
of developing rules by adopting a model regulation set out by government to 
indicate the necessary standards or by "borrowing" from another company's 
particularized regulation. [See Note 91 below] 



   Note 91: Of course, if a company miscalculates the applicability of 
standards, the "borrowing" may be more expensive than original rule development. 




¶ 74     Some of the examples of firm-defined regulation can be seen as 
"incipient manifestations" of the enforced self-regulation model.  The Canadian 
Railway Safety Act [See Note 92 below] authorizes the Minister to require a 
railway company to formulate engineering standards governing the construction 
and alteration of railway works.  The U.S. Mine Safety and Health Act of 1977 
and regulations allow mine operators to submit their own plans for ventilation, 
dust control and roof supports for the agency's approval.  The U.S. 
Environmental Protection Agency requires companies involved in the production, 
distribution or storage of oil to prepare a Spill Prevention Control or 
Countermeasure Plan, and the U.S. Clean Water Act authorizes civil penalties of 
up to $5000 per day for deviations from these privately written rules.  The U.S. 
Food and Drug Administration (FDA) developed a code of Good Laboratory Practices 
(i.e., the rules were publicly written), but monitors the internal enforcement 
of those rules by requiring each drug testing laboratory to have a Quality 
Control Unit.  The Unit's reports are regularly placed before the senior 
management of the company, who cannot plead ignorance of any violations.  The 
FDA, however, does not have access to all the reports of the Units. [See Note 93 
below] The U.S. Department of Defense requires contractors to develop internal 
control systems to "promote high standards of business conduct, to facilitate 
the timely discovery and disclosure of improper conduct in connection with 
Government contracts, and to assure that corrective measures are promptly 
instituted and carried out." [See Note 94 below] 



   Note 92: R.S.C. 1985 (4th Supp.), c. R-4.2, s. 7. 
   Note 93: This raises the question of the access by the regulator to 
compliance audits.  These audits are increasingly being performed by or under 
the supervision of corporate counsel who will plead solicitor-client privilege 
on the contents of audits.  P. Edwards, "Environmental Audits and Privilege:  
The Courts Make Their Debut" (1993) 3 JELP 204; C.M. Price & A.J. Danzig, 
"Environmental Auditing:  Developing a 'Preventive Medicine' Approach to 
Environmental Compliance" (1986) 19 Loyola of L.A. L. Rev. 1189.  Recognizing 
that maintaining the confidentiality of audits was probably a good incentive to 
producing timely and accurate audits, the Ontario Ministry of Environment and 
Energy recently determined that environmental audits would be considered 
confidential; Policy and Guideline on Access to Environmental Evaluations 
(November 1995) at 3. 
   Note 94: 48 C.F.R. [section]2003.7000. 



¶ 75     It may also be noted that a number of court or regulatory agency 
decisions have required the implementation of internal compliance systems as a 
term of sentencing.  U.S. Federal Trade Commission examples are numerous. [See 
Note 95 below]  Other examples can be found in the securities [See Note 96 
below] and environmental areas. [See Note 97 below] 



Note 95: L.D. Solomon & N. Nowak, "Managerial Restructuring: 
Prospects for a New Regulatory Tool" (1980) Notre Dame Law 120 at 122. 
   Note 96: For example, the Ontario Securities Commission has required changes 
to internal compliance systems in Gordon Capital Corporation, (1993) 16 O.S.C.B. 
5581; Queensbury Securities Inc., (1993) 16 O.S.C.B. 3423; Seakist Overseas 
Ltd., (1993) 16 O.S.C.B. 1959; and Sanwa McCarthy Securities Ltd., (1994) 17 
O.S.C.B. 129. 
   Note 97: For example, Bata, supra note 56; a recent Alberta decision required 
a company to institute ISO 14001 standards, which mandate internal environmental 
management systems: Prospec, supra note 56. 



¶ 76     The Canadian Federal Government introduced Bill C-62, the Regulatory 
Efficiency Act, [See Note 98 below] which would have provided for a form of 
enforced self-regulation. [See Note 99 below]  Under this proposed legislation, 
firms would be able to develop their own rules, which would have to meet minimum 
regulatory objectives and be approved by government, and be responsible for 
enforcement.  The firms could be prosecuted for failure to comply with their own 
rules.  The Bill was subject to strong criticism, particularly by environmental 
groups, who were not convinced that the proposed regulatory scheme would ensure 
adequate protection of the environment. [See Note 100 below]  In fact, the 
criticisms of the Bill reflected the potential disadvantages of enforced 
self-regulation, noted above. [See Note 101 below] 



   Note 98: Bill C-62 was introduced on December 6, 1994 by the President of the 
Treasury Board as part of a regulatory reform package.  It died on the Order 
Paper when the House prorogued almost a year later.  The Alberta government 
introduced a similar bill, which also was not passed.  The Australian state of 
Victoria has been examining "regulatory efficiency" and proposed to introduce 
legislation that the government believes will avoid the Canadian experience; see 
Law Reform Committee, Parliament of Victoria, Regulatory Efficiency Legislation: 
 A Discussion Paper (May 1997). 
   Note 99: The terms--and many of the concepts in the proposed Act--come from 
the article by J. Braithwaite, supra note 82. 
   Note 100: For example, M.C. Cochrane, "Legislated safeguards recommended for 
self-regulation" Law Times (5-11 February 1996) 8. 
   Note 101: F. Savage, "Bill 62, The Regulatory Efficiency Act: Reform Denied 
or Delayed?" (1997) 10 C.J.A.L.P. 251. 



E.   Supervised Self-Regulation 
¶ 77     Supervised self-regulation is the fourth model of self-regulation. [See 
Note 102 below]   Like statutory self-regulation, supervised self-regulation 
involves the delegation of powers to an SRO, which is comprised of members of 
the industry.  Membership is usually mandatory for participation in the activity 
being regulated.  Unlike statutory self-regulation, however, in the supervised 
self-regulation model there is continuous oversight by a specialized government 
body, often a quasi-judicial tribunal. 



   Note 102: Supervised self-regulation may also be referred to as "audited" 
self-regulation; see Michael, supra note 12. 



¶ 78     Rules can usually be made by both the SRO (with approval) and by the 
supervising agency.  SRO member firms are usually required to maintain adequate 
firm-level compliance systems, but are not responsible for developing rules (as 
in firm-defined regulation), which are the primary responsibility of the SRO 
and, secondarily, of the supervising agency. 
¶ 79     There are a number of points at which the supervisory body can exert 
control, including approval of certain decisions, investigations, appeals, 
reports and imposition of legally binding rules.  There are also a number of 
points where more subtle influence can be brought to bear on the SRO by the 
supervising agency, such as informal consultation, exchanges of personnel, and 
formal or informal exchanges of information. 
¶ 80     The other regulatory functions, such as monitoring and enforcement, are 
also usually shared, although the oversight body generally performs an appellate 
function in dealing with enforcement and sanctions.  The oversight body may be 
more or less active in its supervision, and it may concentrate on certain parts 
of its mandate, such as approval of rules.  Supervised self-regulation involves 
a strong role for the SRO, but the parallel supervisory activity of the agency 
means that less emphasis is placed on the initiative and powers of the SRO in 
comparison to the statutory SROs, which may have a relatively high degree of 
autonomy and deference to their decisions. 
¶ 81     The primary examples of supervised self-regulation are found in the 
securities industry. Although the structure of securities self-regulation has 
not proven to be the widely adopted model it was originally intended to be, it 
is an example of a mature, well-established self-regulatory structure that 
highlights both the advantages and pitfalls of statutory self-regulation. 
¶ 82     The Toronto Stock Exchange and the Ontario branch of the Investment 
Dealers' Association are both recognized self-regulatory organizations 
supervised by the Ontario Securities Commission. [See Note 103 below]  In the 
United States, the Securities and Exchange Commission supervises the various 
U.S. stock exchanges and the National Association of Securities Dealers; the 
Commodity Futures Trading Commission supervises the various commodities 
exchanges.  The SROs govern their members and set their rules, which are 
approved (or "nondisapproved") by the supervising agency.  Their discipline 
decisions can be appealed to the supervising agency. 



   Note 103: Securities Act, R.S.O. 1990, c. S.5., as am. by Financial Services 
Statute Law Reform Act, S.O. 1994, c. 11, s. 21. 



¶ 83     The initial decisions to self-regulate in the securities industry were 
essentially pragmatic.  There were established organizations, the stock 
exchanges, through which thousands of individual brokers did business.  It was 
believed that a bureaucracy regulating at the individual level would be too 
large, unwieldy, and probably expensive.  In Ontario, there was also a desire to 
maintain a light regulatory hand so that mining and exploration would not be 
subject to undue restraints.  Although the periodic scandals in the industry 
have shown that the temptations of immediate personal advantage have proven 
overwhelming from time to time and required the elaboration and tightening of 
the regulatory structure, the self-regulatory structure has on the whole been 
remarkably successful.  This can be attributed in large part to the overwhelming 
self-interest that industry players have in maintaining investor confidence in 
the market.  It might go too far to say that the individual brokers and firms 
are "hostages of each other," [See Note 104 below] but the welfare and 
reputation of each are affected by the actions of others. There is a mutual 
interest in assuring that each complies with ethical and regulatory standards. 



   Note 104: To use a term used in reference to safety in the nuclear industry. 
See Rees, supra note 36. 



¶ 84     The regulator, however, has had to play a role from time to time to 
reinforce ethical standards (e.g., institute insider trading legislation) or to 
shift the balance in SROs when self-interest becomes dominant.  It is open to 
question whether there is a natural momentum of life cycle of SROs that pushes 
them, or allows them to drift, into a complacency that turns into 
self-interested passivity. [See Note 105 below]  The role of the supervising 
regulator may be to ensure that this does not happen.  This supervision is both 
ex post and ex ante, with rules being approved (or not disapproved) by the 
regulator, critical information being filed with the regulator, and disciplinary 
decisions being subject to review.  In fact, however, the regulator's role has 
been frequently to react to problems that develop within the SRO and then 
"rachet up" the regulatory requirements. Ideally, there is a mutual respect 
between the SRO and the supervising agency that justifies any deference granted 
to the SRO's decisions while leaving the agency free to act in the public 
interest. 



   Note 105: The life cycle of agencies, it has been hypothesized, is that they 
move from an infancy of reformist zeal for their public interest role to a 
senility of capture. See M.H. Bernstein, Regulating Business by Independent 
Commission (Princeton:  Princeton University Press, 1955).  In fact, the process 
is more subtle, complicated and indirect. In the case of established SROs, the 
infancy of self-interest may progress to a maturity of regulating in the public 
interest, with a series of mid-life crises involving infidelity to its 
regulatory role. 



¶ 85     The now-defunct Administrative Conference of the United States (ACUS) 
referred to this form of supervised self-regulation as "audited" self-regulation 
to emphasize the monitoring and oversight role of the government agency. [See 
Note 106 below]  It is essentially supervised self-regulation and the primary 
examples relied on by ACUS are found in the securities industry.  ACUS 
recommended that Congress and agencies should consider audited self-regulation 
when designing, revising or reevaluating regulatory programs. 



   Note 106: Administrative Conference of the United States, Recommendation 
94-1, adopted June 16, 1994, Appendix to paper by Michael, supra note 13at 251. 



¶ 86     Audited self-regulation, according to the ACUS recommendation, should 
be used more broadly than in the securities industry, but only where it would be 
effective and meet certain requirements.  The ACUS requirements were that the 
substantive regulatory standards must be clearly stated and capable of objective 
application, even if judgments must be made in applying them.  The SROs must 
have the ability and incentive to apply the substantive standards.  Ability 
would be determined by expertise, experience, authority and commitment to 
effective compliance measures.  Incentive requires motivation, which could be 
provided by members' common incentives, effective monitoring by groups that may 
be harmed by noncompliance, potential legal liability of the SRO or its members, 
or the potential for direct government regulation. 
¶ 87     In order to implement audited self-regulation effectively, ACUS 
believed that the agency responsible for supervision or auditing must also have 
the ability and incentive to implement the substantive regulatory standards 
through a self-regulatory program.  The ability of the agency is reflected in 
adequate statutory authority, substantive expertise, knowledge of the 
organizational behaviour and internal control practices of the SRO and its 
members, and sufficient resources that include adequate auditing capability.  
The agency must also have the incentive to ensure that a self-regulatory program 
works. 
¶ 88     ACUS recommended that the self-regulatory program should also be 
expressly authorized by legislation that includes an explicit statement of the 
scope of permitted delegation and a statement that the agency, in promulgating 
its own rules or reviewing the rules of the SRO, consider the effects of the 
rules on competition.  Fairness must also be considered; the rules of the SRO 
must ensure that decision makers are unbiased and informed.  Procedures for 
adjudication by the SRO should generally follow the requirements that would 
exist if the adjudication were being performed by the agency; in Canadian terms, 
the rules of natural justice and fairness must be followed.  The agency's review 
powers should be used to provide parties in SRO proceedings with a right of 
appeal. 
¶ 89     Both Congress and the public should have access to the records of the 
SRO relating to the organization's regulatory activities, to the extent that 
such records would be available under the U.S. Freedom of Information Act if the 
SRO were an agency.  Congress and the agency should also consider whether any 
nonadjudicatory proceedings of the SRO should be open to the public.  The SRO's 
rules should also provide for alternative dispute resolution. 
¶ 90     It has been suggested by Michael and recommended by ACUS that agencies 
should consider self-regulation as an alternative to more direct regulatory 
action in developing regulatory analyses of potential government action. [See 
Note 107 below]  Although the SEC and other financial self-regulators were 
considered at their inception to be models for subsequent self-regulation, they 
have not fulfilled their promise in this area.  Michael's study of audited 
self-regulation found that self-regulatory structures have often developed in an 
ad hoc fashion and that it is possible that a more systematic government-wide 
analysis of the potential for self-regulation could yield significant benefits. 
[See Note 108 below] 



   Note 107: Michael, ibid. at 246.  The checklists of questions to be asked 
when considering regulation in several countries also required the conscious 
consideration of self-regulation as an alternative; see, M. Priest & E.A. 
Milligan, The Design and Use of Regulatory Checklists in OECD Countries, OECD 
Regulatory Management and Reform Series, Occasional Paper No. 4 (Paris: 
Organisation for Economic Co-operation and Development, 1993). 
   Note 108: Michael, ibid. 



F.   Regulatory Self-Management 
¶ 91     The fifth self-regulatory model emphasizes the involvement of the 
industry in the attainment of regulatory objectives.  The regulatory 
self-management initiative of the Ontario and Alberta governments gives the 
responsibility for the delivery of regulatory programs to the industry. 
Rulemaking and policy making remain the responsibility of the government, which 
also retains a residual enforcement and sanctioning capacity.  Implementation of 
the regulatory program through the application of rules and monitoring of 
compliance is carried out by an industry self-management organization, which is 
a nonprofit corporation formed to fulfill the self-management responsibilities.  
The arrangements between the government and the self-management organization are 
contractual (and authorized by statute), but the organization does not have the 
same broad range of responsibilities and powers found in the SROs operating in 
statutory self-regulatory and supervised self-regulatory regimes. 
¶ 92     In September, 1995 the Ontario Ministry of Consumer and Commercial 
Relations published a document, Approaches to Industry Self-Management, that was 
essentially an invitation to various industries to apply for a type of 
self-regulatory status. [See Note 109 below]  Self-management is defined by the 
Ontario Government as "industry taking the lead in initiatives to control 
business practices (or to influence them for the better), or to educate the 
public toward good consumer or safety habits." Several industries responded to 
the request to take greater regulatory responsibility. 



   Note 109: Ministry of Consumer and Commercial Relations, supra note 5. 



¶ 93     The Safety and Consumer Statutes Administration Act [See Note 110 
below] sets up a structure that allows the government to delegate certain 
functions to new nonprofit, self-funded organizations.  Real estate agents, 
travel agents and wholesalers, motor vehicle dealers and cemetery operators will 
be establishing organizations and participating in self-management agreements 
that will allow them to take on such services as registration and accreditation 
of members, investigations of consumer and business complaints, suspension or 
revocation of registrations, prosecutions of violations, and recommendations for 
new or revised market place rules and standards. [See Note 111 below]  The 
government will continue to be responsible for standards-setting and defining 
policy, as well as for monitoring industry performance and conduct. [See Note 
112 below]  It is the delivery of government functions that has been delegated 
to the new self-management organizations.  The government intends to ensure 
accountability by requiring the organizations to provide business plans, which 
will include performance measures and service standards, and annual reports, 
which will be tabled in the Legislature.  Third party audits will also be 
required. 



   Note 110: S.O. 1996, c. 19 (proclaimed in force 22 July 1996). 
   Note 111: The first self-management agreement was signed with the motor 
vehicle dealers on January 6, 1997. 
   Note 112: Ministry of Consumer and Commercial Relations, Self-management: 
what is it--and how does it work? (undated). 



¶ 94     The statute also established a new Safety Organization, which was based 
on a similar organization recently established in Alberta. [See Note 113 below]  
The Safety Organization will be responsible for the management of the regulation 
of boilers and pressure vessels; elevating and amusement devices; hydrocarbon 
fuels and equipment; and upholstered and stuffed articles.  It will register and 
certify tradespeople, establish training programs, review engineering designs, 
carry out inspections, and be responsible for enforcement.  In the safety area, 
the government will also continue to be responsible for establishing regulatory 
standards and require accountability through a business plan, audit and annual 
report.  The Board of the Organization will be composed of representatives from 
industry, government and nonindustry stakeholders.  Industry representatives 
would be drawn from each of the self-managed industries so that no one industry 
dominates the Organization.  Since the Organization, like all self-management 
organizations, is nonprofit, any surplus revenue would have to be reinvested in 
activities such as public education. 



   Note 113: C. Bruce & D. Woytowich, Delegated Administrative Organisations:  
Alberta's "Third Option" (Alberta: Department of Economics, University of 
Alberta, July 1996). 



¶ 95     The administrative agreements between the government and the 
self-management organizations that must be established before delegation is 
permitted cover a variety of items, including the specification of liability of 
the administrative authority (the self-management organization) and the 
requirement to carry insurance to cover liability. They would also cover the 
right, if any, of the administrative authority to purchase, use or have access 
to government assets, including information, records and intellectual property.  
At this time, the administrative authorities are not covered by the Ontario 
Freedom of Information and Protection of Privacy Act. [See Note 114 below]  
There is also no requirement in the Safety and Consumer Statutes Administration 
Act that the discipline or enforcement functions be carried out through an open 
transparent process and the Statutory Powers Procedure Act does not apply. [See 
Note 115 below] 



   Note 114: R.S.O. 1990, c.  F.31.  The first self-management agreement, which 
was signed with the motor vehicle dealers, includes a code of conduct dealing 
with privacy and public access to information. See Ontario Motor Vehicle 
Industry Council, "Schedule K, Access and Privacy Code." 
   Note 115: R.S.O. 1990, c. S.22.  The common law rules of natural justice and 
fairness remain and there is probably a sufficiently governmental character to 
the organizations to allow for judicial review. 



¶ 96     The rationale for the establishment of the new organizations was to 
allow government to "focus on achieving results, rather than providing services 
and programs that can be more effectively delivered by the private sector." [See 
Note 116 below]  It is argued that service quality will improve since industry 
will be able to pay for the level of service it desires and the organization 
will be more responsive to industry priorities than a government department 
would be. [See Note 117 below]  In some cases, this may be a reduced level of 
service but one that the industry believes is appropriate and is willing to pay 
for.  Costs will be reduced since the industry has an incentive for efficiency, 
and cooperation from the industry should increase. 



   Note 116: Ministry of Consumer and Commercial Relations, Backgrounder (16 May 
1996). 
   Note 117: See Bruce & Woytowich, supra note 113.  This leaves open, of 
course, the question of whether the level of service desired by the industry is 
the level that might be desired by the public or is "appropriate" to the public 
interest.  "Level of service" relates, of course, to compliance and enforcement. 




¶ 97     Disadvantages that have been noted [See Note 118 below] include concern 
about reduced levels of enforcement since, historically, safety legislation was 
implemented because it was believed that industry would underinvest in safety.  
This concern is countered in this regulatory model by the fact that the 
standards continue to be set by the government (with advice from the industry) 
and the government continues to be responsible for auditing the industry's 
self-regulatory performance.  The threat of legal liability for regulatory 
negligence if enforcement is lax may also act as an incentive to prevent the 
industry from relaxing regulatory enforcement.  An additional disadvantage is 
that the self-management structure may be used to enforce anti-competitive 
behaviour, through selective or overly rigorous enforcement, "grandparenting" 
provisions and restrictions on entry.  Without regular contact with the 
industry, the government may also find that its monitoring and audit function 
becomes increasingly less meaningful. [See Note 119 below] 



   Note 118: Ibid. 
   Note 119: See discussion of audited self-regulation as recommended by the 
Administrative Conference of the United States, supra note 106. The continuing 
expertise of the government agency is a precondition for successful audited 
self-regulation. 



¶ 98     It remains to be seen whether the quality of enforcement remains 
adequate, although in the light of declining government resources, it should not 
be assumed that government regulation is "adequate."  Indeed, concerns about 
increasing regulatory liability, [See Note 120 below] particularly in safety 
areas, may be as much a rationale for self-management as a philosophy of smaller 
government.  There may be an attempt to clarify liability through the management 
agreements and the government, through the legislation, has disavowed any 
responsibility for actions taken by the organizations which are neither the 
agents nor the employees of government. [See Note 121 below]  There also appears 
to be a reduction in accountability and transparency of certain functions. The 
use of annual reports does not replace the accountability mechanisms available 
when functions are performed by a Ministry and an independent tribunal, such as 
the Commercial Registration Appeal Tribunal. [See Note 122 below] 



   Note 120: See discussion below, Part VII B. 
   Note 121: Administrative agreements negotiated under the Safety and Consumer 
Statutes Administration Act, supra note 110, will require that the organizations 
maintain "adequate" liability insurance:  paragraph 4(2)(h). 
   Note 122: In the short term, the Commercial Registration Appeal Tribunal will 
continue to hear appeals on disciplinary matters.  The legislation allows 
amendment by regulation of appeal provisions in the designated statutes so that 
the administrative organizations can handle appeals in the future. The 
organizations have been invited to develop dispute settlement mechanisms that 
will replace the statutory appeals. 



¶ 99     The importance of industry-level compliance and self-regulatory systems 
is stressed in the system of "cooperative implementation," which is a term used 
by Douglas to describe reliance by government on regulated entities to interpret 
and enforce regulations. [See Note 123 below] Regulation often uses third 
parties, such as auditors, to do the work of the regulators. [See Note 124 
below]  In cooperative implementation, the third parties are agents or employees 
of the regulated entity itself.  Transport Canada makes extensive use of 
cooperative implementation:  Company Check Pilots are employed by commercial air 
carriers to carry out most of the checks of aircraft pilot competence.  There is 
also a delegation of design approval authority for aeronautical products to 
aviation industry manufacturers or air carriers and their designated employees. 
[See Note 125 below] 



   Note 123: Michael, supra note 14. 
   Note 124: Delegated enforcement of regulation is fairly common. Industry 
Canada relies on certified nongovernmental inspectors to ensure compliance for 
weights and measures; Fisheries Canada relies on certified private companies to 
monitor landed catches and fishing activities at sea; and Transport Canada 
authorizes delegated flight test examiners to conduct flight tests for private 
and commercial pilot licenses.  Similarly, the U.S. Department of Agriculture 
certifies veterinarians to make various inspections and the U.S. Federal 
Aviation Administration certifies individuals to conduct tests, inspections and 
training in various areas of pilot and aircraft certification. See Michael, 
ibid. at 539. 
   Note 125: Canada, supra note 2. 



¶ 100     There are several additional examples of cooperative implementation, 
primarily in the health and safety area. [See Note 126 below]  One of the more 
successful is the Hazard Analysis Critical Control Point (HACCP) system.  HACCP 
is: 



   Note 126: Michael, supra note 14. 


      ...a conceptually simple system by which meat and poultry establishments 
      can identify and evaluate the hazards that could affect the safety of 
      their products, institute controls necessary to keep they hazards from 
      occurring, monitor the performance of these controls, and maintain records 
      of this monitoring as a matter of routine.
      The role of the regulatory agency under HACCP is verification that the 
      establishment is controlling its processes and consistently producing 
      complying products. [See Note 127 below]



   Note 127: Pathogen Reduction:  Hazard Analysis and Critical Control Point 
(HACCP) Systems, 60 Fed. Reg. 6774 at 6784 (1995), quoted in Michael, ibid., at 
568 footnote 163. 



A similar technique has been used in Canadian seafood processing plants.  All 
fish processing plants in Canada must employ a Quality Management Program that 
focuses on critical control points.  Those whose plans and practices meet 
Fisheries and Oceans Canada's approval are permitted to use a special logo.  The 
Department limits itself to primarily a monitoring role, with inspection being 
the responsibility of the processing plant. [See Note 128 below]  Meat 
processing in Canada is also being subject to the HACCP system. 



   Note 128: Canada, supra note 2 



¶ 101     Cooperative implementation has the greatest potential where more 
standard enforcement techniques are bound to fail, i.e., where traditional 
inspections will not detect violations or where it is more important to prevent 
harm than to punish after harm has occurred.  The visual inspections of meat or 
fish cannot ascertain bacterial contamination, which is the most likely cause of 
illness or even death from tainted products.  Rules established by government 
cannot take into account all the risk factors in the production processes of all 
the meat or fish processing companies in the country. Effective regulation must 
focus on the process of production rather than the visual inspection of end 
products.  The record-keeping part of HACCP allows the regulator to spot trends 
that could lead to problems and require remedial action even when the product is 
not actually unsafe. [See Note 129 below] 



   Note 129: Michael, supra note 14. 



¶ 102     Cooperative implementation requires the regulatees to have expertise 
in rule interpretation and compliance.  Incentives for compliance are an 
inherent part of the regulatory structure, as is a credible government program 
of monitoring and enforcement.  The primary examples of cooperative 
implementation are found in the health, safety and environmental areas, but the 
basic principles have broader application.  As Michael notes:  "The regulatory 
program that would be a good candidate for cooperative implementation is one in 
which complex regulations are applied to complex organizations in order to 
prevent harms from occurring, rather than merely to identify and punish 
violations." [See Note 130 below] 



   Note 130: Ibid. at 598. 



¶ 103     Mandatory self-regulation, a third variant of regulatory 
self-management, represents a hybrid of direct government regulation and 
voluntary self-regulation.  Rule communication, enforcement and sanctions are 
carried out privately, at the firm level; the government is not directly 
involved in these functions.  Government involvement comes about through the 
legal requirement that firms self-regulate and, generally, the establishment of 
the rules of the regulatory regime.  Mandatory self-regulation operates as both 
a direct complement to and a part of a government system of regulation. 
¶ 104     Joseph Rees describes mandatory self-regulation as: 
      ...a governmental strategy for strengthening private regulatory 
      systems....[I]t is a strategy of institutional design whose purpose is to 
      build into the social structure of the regulated enterprise a sustained 
      and effective commitment to insecure or precarious values--such as 
      environmental protection, affirmative action, occupational safety. [See 
      Note 131 below] [emphasis in original]



   Note 131: J.V. Rees, Reforming the Workplace: A Study of Self-Regulation in 
Occupational Safety (Philadelphia: University of Pennsylvania Press, 1988). 



¶ 105     Mandatory self-regulation therefore explicitly recognizes the 
importance of the firm's internal compliance systems.  Simple pragmatism may 
compel this recognition, particularly in such areas as workplace safety where it 
is recognized that it is impossible for government to inspect, monitor, and 
closely enforce safety in every workplace in the country.  Reliance must be 
placed on the firm's own safety systems and on creating incentives for 
improvements in internal compliance systems. 
¶ 106     Christopher Stone has pointed out that improving a compliance system 
means making the corporation behave more like a responsible individual. [See 
Note 132 below]  The questions to be asked include what does it mean to be a 
responsible individual and then, how can that behaviour be institutionalized 
into the corporation? [See Note 133 below] Improving the information-collection 
and decision-making functions of the corporation are crucial to creating a 
successful corporate behavioural analogue to that of a perceptive, aware 
individual.  The corporation that is successful in instituting compliance 
systems has senior management backing  the compliance system, as well as focused 
accountability and an information system that is directed to senior managers. 
[See Note 134 below] 



   Note 132: C.D. Stone, "Corporate Regulation:  The Place of Social 
Responsibility" in B. Fisse & P.A. French, eds., Corrigible Corporations and 
Unruly Law (San Antonio: Trinity University Press, 1985) 13; C.D. Stone, "The 
Place of Enterprise Liability in the Control of Corporate Conduct" (1980) 90 
Yale L.J. 1; C.D. Stone, Where the Law Ends: The Social Control of Corporate 
Behavior (New York: Harper and Row, 1975). 
   Note 133: Rees, supra note 131. 
   Note 134: Ibid.; J. Braithwaite, To Punish or Persuade: 
Enforcement of Coal Mine Safety (Albany: State University of New York Press, 
1985); Braithwaite & Fisse, supra note 38. 



¶ 107     Most examples of mandatory self-regulation are in the health and 
safety area.  The U.S. Occupational Health and Safety Administration Cooperative 
Compliance Program that was established in 1979 in California was a forerunner 
of many of these programs.  The use of health and safety committees under the 
Canada Labour Code  and various provincial labour safety legislation also use 
internal enforcement mechanisms. The U.S. Mine Safety and Health Act of 1977 
allows mines to come forward with alternative plans for safety that will provide 
no less protection than the statutory requirements. 
¶ 108     Mandatory self-regulation requires a mature (though not necessarily 
long-established) industry where there are some exogenous incentives for 
compliance, such as widespread publicity and strong consumer response to 
noncompliance.  Unlike supervised self-regulation or co-regulation, mandatory 
self-regulation does not require the existence of an industry organization that 
can fulfill the responsibilities of an SRO.  Mandatory self-regulation has 
particularly strong advantages with respect to flexibility and adjustments to 
the individual circumstances of the firm; by definition, it is tailored to the 
processes and procedures at the firm level.  There is no need for compromise of 
standards of regulatory procedures to suit the circumstances of all the industry 
members while, in fact, not suiting any individual firm well. 
¶ 109     The firm-level emphasis in mandatory self-regulation does not mean 
that there is no role for industry organizations to play.  Associations can help 
individual firms maintain a focus on the long-term benefits of compliance, [See 
Note 135 below] can help in sharing best practices, and can apply peer pressure 
where the reputation of the entire industry will suffer from individual 
misfeasance. [See Note 136 below] 



   Note 135: In the short term for any specific incident or industry process 
(e.g., just this one chicken or just this one time without a safety helmet), it 
may often appear (and be) cheaper to the firm or the individual not to comply 
when noncompliance is balanced against the odds of an accident or otherwise 
"getting caught."  Even in industries such as food processing, where the 
advantages are in favour of compliance, it is a longer term calculation. 
   Note 136: An example of the role industry associations can play is the 
Canadian Chemical Producers' Association in the Responsible Care program, 
discussed supra note 34; and the Institute of Nuclear Power Operations: Rees, 
supra note 36. 



¶ 110     Mandatory self-regulation also changes the role for government 
regulators; it does not necessarily diminish or reduce the importance of the 
role, however.  There is general agreement that a regulatory presence is 
required, particularly to deal with noncompliers. [See Note 137 below]  The 
regulator may also require a higher than usual degree of expertise since the 
focus of the regulation is on risk management and industry processes. [See Note 
138 below]  The importance of the rarely used enforcement mechanisms as both 
symbolic and actual deterrents can place greater emphasis on the use of creative 
sanctioning.  For example, the fact that self-management focuses on industry 
processes can make corporate probationary orders appropriate and the negative 
effects of public opinion for noncompliance can make publicity a powerful 
sanction. [See Note 139 below] 



   Note 137: The classic example is the one given by Chester Bowles on his 
experience with price controls during the Second World War.  In his view, 20 
percent of the regulated population would comply simply because it was the law; 
5 percent would attempt to evade the law; and the remaining 75 percent would go 
along with the law and comply if they thought the noncompliant 5 percent would 
be caught and punished; E. Bardach  & R.A. Kagan, Going by the Book:  The 
Problem of Regulatory Unreasonableness (Philadelphia:  Temple University Press, 
1982) at 65-66.  Justice William O. Douglas, speaking of his experience as 
Chairman of the SEC, put it another way: "[The role of the government is to] 
keep the shotgun, so to speak, behind the door, loaded, well oiled, cleaned, 
ready for use but with the hope it would never have to be used."  From W.O. 
Douglas, Democracy and Finance (Port Washington: Kennikat Press, 1940) at 82; 
quoted in Silver v. New York Stock Exchange (1963), 373 U.S. 341 at 352. 
   Note 138: T.P. Grumbly, "Self-Regulation:  Private Vice and Public Virtue 
Revisited" in E. Bardach & R.A. Kagan, eds., Social Regulation:  Strategies for 
Reform (San Francisco: Institute for Contemporary Studies, 1982) 93 at 95-96; 
Michael, supra note 12. 
   Note 139: B. Fisse & J. Braithwaite,  The Impact of Publicity on Corporate 
Offenders (Albany: State University of New York Press, 1983); C. Kennedy, 
"Criminal Sentences for Corporations: Alternative Fining Mechanisms" (1985) 73 
Calif. L. Rev. 443. 



III. Why Self-Regulate? 
¶ 111     There is widespread agreement in the literature on the advantages and 
disadvantages of self-regulation, although some factors are given more emphasis 
than others by particular authors.  [See Note 140 below]  In general, those in 
favour of self-regulation stress the flexibility and commitment of industry to 
self-regulation, while those who are concerned about its use stress the 
potential for favouritism and under-regulation. 



   Note 140: The advantages and disadvantages of self-regulation are widely 
discussed in the literature, including:  United Kingdom, Cmnd  9125, Report, 
Part I, Review of Investor Protection (Gower Report) (January 1984); Michael, 
supra note 12; Manitoba Law Reform Commission, supra note 8; Securities and 
Exchange Commission, Report of Special Studies of Securities Markets, House Doc. 
No. 95, Part 4, 88th Cong., 1st Sess. (1964) [hereinafter Special Study]. 


      A.The Advantages of Self-Regulation

      1.   Practical Advantages 
¶ 112     There are practical advantages for government in choosing 
self-regulation as its mode of regulatory control. Self-regulation permits 
government to influence behaviour without becoming intimately involved in an 
industry.  It allows for regulation that would not otherwise be possible in 
practical terms due to restraints on resources, whether financial, personnel or 
expertise.  The regulator leverages its regulatory power and resources by using 
the resources of the regulated industry. Thus the Ontario Securities Commission 
uses the resources of The Toronto Stock Exchange or the Investment Dealers' 
Association to fulfill its broader mandate.  The Ontario Government uses the 
resources of the Law Society of Upper Canada or the College of Physicians and 
Surgeons in an attempt to ensure that the public is protected against 
incompetent or fraudulent practitioners. 
¶ 113     Some self-regulation has evolved through the years, such as the Law 
Societies. [See Note 141 below]  In contrast, the decision to use 
self-regulation as the technique to control the stock exchanges in the United 
States during the New Deal was deliberate and pragmatic.  It was impossible for 
the U.S. federal government to marshal sufficient resources to effectively deal 
with abuse and fraud in the securities markets; it had no choice but to rely on 
the resources and expertise that were available in the securities community. 
[See Note 142 below]  There was a lower sense of urgency surrounding the 
Canadian decision to use self-regulation in securities markets, but the decision 
was also a practical one. [See Note 143 below] 



   Note 141: P. Aucoin, Public Accountability in the Governing of Professions:  
A Report on the Self-Governing Professions of Accounting, Architecture, 
Engineering and Law in Ontario (Ontario: Professional Organizations Committee, 
1978). 
   Note 142: R.W. Jennings, "Self-regulation in the Securities Industry:  The 
Role of the Securities and Exchange Commission" (1964) 29 Law & Contemp. Prob. 
663; J. Seligman, The Transformation of Wall Street (Boston:  Houghton Mifflin, 
1982). 
   Note 143: P. Dey & S. Makuch, "Government Supervision of Self-Regulatory 
Organizations in the Canadian Securities Industry" in Consumer and Corporate 
Affairs Canada, Proposals for a Securities Market Law for Canada, vol. 3, 
Background Papers (Ottawa: Supply and Services Canada, 1979); E. Waitzer, The 
Advent and Evolution of a Regulatory Process:  Ontario's Securities Industry 
(LL.M. Thesis, Faculty of Law, University of Toronto, December 1981); J.C. 
Baillie, "The Protection of the Investor in Ontario" (1965) 8 Can. Pub. Admin. 
232; J.P. Williamson, Securities Regulation in Canada (Toronto: University of 
Toronto Press, 1960). 



¶ 114     When the United Kingdom in the 1980s re-examined its self-regulated 
financial services industry, it chose not to embrace a more direct form of 
regulation, including the supervised self-regulation of the exchanges and 
dealers employed by the U.S. Securities and Exchange Commission (SEC). Instead, 
the policy choice was to continue to rely on industry self-regulation with an 
increased role for regulators; policy-makers believed this to be the more 
effective and practical choice.  Gower, in his report on the issue concluded 
that: 
      [R]eliance on direct regulation by a Government agency is both more costly 
      and less effective....[T]he role of the Government regulator should be to 
      ensure that self-regulatory organisations are doing their job; i.e., to 
      'provide the grit which enables the oyster to produce the pearl of 
      effective self-regulation.' [See Note 144 below]



   Note 144: Supra note 140 at 10. 



¶ 115     There are also practical advantages for the regulated industry in 
being self-regulated.  Self-regulation may confer status on an industry and may 
limit entry into an occupation or activity.  In a number of cases, the 
consequences of self-regulation can confer positive economic benefits on the 
self-regulated industry. [See Note 145 below] By limiting entry, for example, 
the regulated industry can extract monopoly rents from the public.  The 
cartel-like arrangements of self-regulatory bodies can work against the public 
interest by raising prices, limiting choice, and hindering innovation. 



   Note 145: G. Stigler, "The Theory of Economic Regulation" (1971) 1 Bell J. 
Econ. 3; R.A. Posner, "Theories of Economic Regulation" (1974) 5 Bell J. Econ. 
335; S Peltzman, "Toward a More General Theory of Regulation" (1976) 19 J.L. & 
Econ. 211. Note that this is an advantage for the government and the regulated 
industry; it may be considered a disadvantage by the rest of the populace. 



      2.   Political Advantages 
¶ 116     Self-regulation can be politically attractive. It allows a government 
to reassure critics that an area is being regulated (and the public interest 
thus protected), while not having to take direct responsibility for the 
regulatory regime.  The regulation is "off the books" of government and there 
are no additional civil servants assigned to regulatory tasks.  Self-regulation, 
like most regulation, confers benefits on certain segments of society and 
imposes costs that are dispersed across the population. [See Note 146 below]  
The beneficiaries may be politically grateful for their benefits, while those 
who bear the costs rarely complain.  It can be politically rational to choose 
self-regulation.  Furthermore, self-regulation can allow the government to 
transfer potential liabilities for regulatory actions to the self-regulating 
organizations. [See Note 147 below] 



   Note 146: Ibid. 
   Note 147: See discussion, below, at Part VI. 



      3.   Flexibility 
¶ 117     One of the arguments in favour of self-regulation is that it is 
flexible.  The rules can be quickly and easily adjusted to meet changing 
circumstances, in contrast to the relatively slow and ponderous legislative 
process of government.  The industry and its SRO are not subject to some of the 
other constraints of government, including budget and personnel controls.  The 
SRO can therefore reorganize or respond quickly by hiring staff as needed and 
paying competitive salaries to retain long-term expertise. [See Note 148 below] 



   Note 148: The current concerns  of the Ontario Securities Commission about 
its funding levels and its loss of experienced staff to the SROs and industry 
organizations confirm this point. 



      4.   Lower Costs 
¶ 118     It is argued that self-regulation is cheaper than a similar level of 
government regulation. [See Note 149 below]  Whether or not the self-regulatory 
system is supervised by government, the costs to government are probably less 
than they would be if government took on the bulk of regulatory 
responsibilities.  This is one of the major attractions of self-regulation to 
today's governments.  The combined "regulatory burden" of the social costs of 
self-regulation and the costs of government oversight may not be less, however, 
than the costs of direct regulation by government alone. [See Note 150 below]  
If the SRO "over-regulates" (see below at B (5)), the costs may also be higher 
than if the government regulated alone. [See Note 151 below] 



   Note 149: The U.S. SEC estimated a savings of $400,000 from the transfer in 
1983 of direct regulation of the remaining broker-dealers to the National 
Association of Securities Dealers; the U.S. Commodity Futures Trading Commission 
estimated that the creation of the National Futures Association created an 
initial $3.5 million in direct savings and over $16 million in additional costs 
over the first three years of the program; Michael, supra note 12. 
   Note 150: Australian Trade Practices Commission, Self-Regulation in 
Australian Industry and the Professions: Report by the Trade Practices 
Commission, vol. 1 (Canberra: Australian Government Publishing Service, 1988) at 
31. 
   Note 151: S.S. Miller, "Self-Regulation in the Securities Market: A Critical 
Examination" (1985) 42 Wash. & Lee L. Rev. 853. 



      5.   Higher Compliance Levels 
¶ 119     The involvement of the regulated firms in self-regulation is said to 
result in a higher level of compliance.  Some of this is derived from the 
psychological "buy in" to regulation that they have had a hand in developing and 
for which they are responsible. [See Note 152 below] Regulatory compliance is 
also likely to be higher where there is a clear understanding of both the 
rationale for regulation and the rules themselves. [See Note 153 below]  In a 
self-regulatory structure, the regulated firms are more likely to be conscious 
of the goals of regulation and be aware of its advantages, such as a level 
playing field for industry participants or the elimination of "bad actors." [See 
Note 154 below] 



   Note 152: Bardach & Kagan, supra note 137; Braithwaite, supra note 82.  A 
similar argument, of course, can be made for the involvement of industry in 
direct regulation by government through consultation or co-development of 
regulations through such mechanisms as regulatory negotiation; P. Harter, 
"Negotiating Regulations" (1982) 71 Geo. L.J. 1. 
   Note 153: D. Miller, Psychological Factors Influencing Compliance, Study for 
the Federal Statutes Compliance Project (Ottawa: Department of Justice, mimeo, 
1985). 
   Note 154: Joseph Kennedy, a former pool operator and the first Chairman of 
the U.S. SEC, was an example of those recognizing the need for financial market 
regulation.  He was heard to say that "he would be willing to part with half his 
fortune if he could be sure of keeping 'under law and order' the other half."  
R.F. De Bedts, The New Deal's SEC, The Formative Years (New York: Columbia 
University Press, 1964) at 89. 



      6.   The Building of an Ethic 
¶ 120     It will be argued below that an industry is unable to successfully 
self-regulate unless it has already achieved a sense of ethical behaviour.  The 
experience of self-regulation, however, is thought likely to nurture that 
ethical sense.  Justice William O. Douglas, the third Chairman of the SEC, 
believed that: 
      Self-regulation can be pervasive and subtle in its conditioning influence 
      over business practices and business morality.  By and large, government 
      can operate satisfactorily only by proscription.  That leaves untouched 
      large areas of conduct and activity; some of it susceptible to government 
      regulation but in fact too minute for satisfactory control; some of it 
      lying beyond the periphery of the law in the realm of ethics and morality. 
       Into these larger areas self-government, and self-government alone, can 
      effectively reach. [See Note 155 below]



   Note 155: Speech to the Bond Club of Hartford, Conn. (7 January 1938), quoted 
in Miller, supra note 151 at 858. 



      7.   International Competitiveness 
¶ 121     There is currently great concern that Canadian industry be competitive 
in world markets.  This is a major rationale for regulatory reform and includes 
the shift to self-regulation from direct government regulation. [See Note 156 
below]  The other advantages of self-regulation, including lower cost and 
greater flexibility, are believed likely to reap benefits in competitiveness.  
In the area of financial markets, Gower, for example, argued that 
self-regulation and reduction in regulatory burden (while maintaining a 
reputation for integrity) is more hospitable for investment than direct 
government regulation, which may be less flexible and more costly.  This belief 
played an important role in the U.K. financial services reforms of the 1980s. 
[See Note 157 below] 



   Note 156: Canada, Treasury Board Secretariat, Regulatory Affairs Guide, 
Competitiveness and the Design of Regulations (1992). 
   Note 157: Gower Report, supra note 140 at paragraph 7.01; A.C. Page, 
"Financial Services: The Self-Regulatory Alternative?" in R. Baldwin & C. 
McCrudden, eds., Regulation and Public Law (London:  Weidenfeld and Nicolson, 
1987) at 305-09. 


      B.The Disadvantages and Limitations of Self-Regulation

      1.   Self-Interest 
¶ 122     The processes of government regulation should be, in general, 
impartial and fair. [See Note 158 below] Where regulation is intended to protect 
the "public interest" and, in particular, to protect the public from some harm, 
it should also be effective.  Some commentators express concern that 
self-regulation is incapable of conforming to these principles and is tantamount 
to "putting the fox to guard the henhouse." [See Note 159 below] There may be 
inherent limitations in expecting an industry to regulate itself. Industry 
members may seek self-regulation only to avoid more stringent forms of direct 
regulation. [See Note 160 below] They may become adept at using the 
self-regulatory structure as a façade, a Potemkin village, to hide the reality 
of lack of regulatory enthusiasm and protection of their own interests.  
Self-regulation may be used as an anti-competitive device by limiting entry 
(e.g., raising standards accompanied by "grandparenting" of existing members) or 
restricting competition among members (e.g., by restricting advertising). [See 
Note 161 below] 



   Note 158: Government decisions that affect individual rights are often 
subject to the requirements of natural justice and fairness; this is 
particularly true when a regulatory decision is being made by a regulatory 
tribunal.  See, generally, D. Jones & A. de Villars, Principles of 
Administrative Law (Toronto:  Carswell, 1985); R. Dussault & L. Borgeat, 
Administrative Law:  A Treatise, vol. 4 (Toronto:  Carswell, 1990).  This is not 
to say that regulation is itself impartial; see references, supra note 145.  
Regulation may confer benefits on certain players to the disadvantage of other 
players.  Even in these cases, the process generally must be characterized by 
fairness. 
   Note 159: For example, M.G. Cochrane, "Buyer beware:  The new regulatory 
reality in Canada" Law Times (September 1996). 
   Note 160: For example, "Internet providers develop code to head off 
government" The Financial Post (2 November 1996) 17. 
   Note 161: See, for example, Benham & Benham (1985), supra note 70. 



      2.   Favouritism 
¶ 123     The self-regulatory structure, usually an SRO, is likely to be 
dominated by larger or long-established firms. It is those firms that have the 
resources to organize and run the SRO.  The SRO may pursue the interests of 
those firms and not the membership at large, let alone the public interest. [See 
Note 162 below]  The controlling members may be immune from the enforcement and 
discipline activities of the SRO and may even use them against dissident members 
who seek a greater role.  The structure may therefore discriminate against 
certain industry members, particularly smaller firms or practitioners in certain 
areas (e.g., floor traders or medical general practitioners).  The purported 
advantages of flexibility and swift response to changing conditions may be lost 
because the controlling group has a vested interest in preserving the status 
quo. 



   Note 162: An example of this behaviour was recently found in the National 
Association of Securities Dealers; Securities and Exchange Commission, Report 
Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the 
NASD and the Nasdaq Market (8 August 1996); see also, R.N. Katz, "Industry 
Self-Regulation: A Viable Alternative to Government Regulation" in R.N. Katz, 
ed., Protecting the Consumer Interest (Cambridge, Mass.:  Ballinger, 1976) at 
165.  The question of whether primary loyalty is owed to the public interest or 
the profession is still a matter of debate within the Law Society of Upper 
Canada:  R. Westhead, "Who should the Law Society of Upper Canada serve?" Law 
Times (24 November 1996) 1; R. Westhead, "Benchers must serve public first, 
professions second" Law Times (1 December 1996)  1; C. Harper, "Angry Ontario 
lawyers debate law society's role" The Lawyers Weekly (29 November 1996) 5. 



      3.   Narrow Regulatory Concerns 
¶ 124     Successful self-regulation must consider more than the immediate 
concerns of the regulated industry.  The ultimate objective is the protection of 
the public interest, even if this be indirect through the stabilization or 
protection of a particular industry.  Securities self-regulation, for example, 
is aimed at protecting the public from fraudulent or abusive practices; 
professional self-regulation is aimed at protecting the public from incompetent 
or dishonest practitioners.  Self-regulation, however, may tend to consider only 
the interests of the industry or that portion of the industry governed by an 
SRO. This, of course, is closely aligned to the failing of favouritism, noted 
above. 
      4.   Under-Regulation 
¶ 125     Self-regulation may result in "under-regulation" because of lack of 
enthusiasm on the part of industry members. Self-regulation often develops in 
order to avoid more direct government regulation and the protective aspect may 
dominate. The foxes may be more interested in the chickens than they are in 
controlling the other foxes.  Indeed, self-regulation may be thought of as the 
ultimate form of regulatory agency "capture." 
¶ 126     There may also be under-regulation because of the self-regulatory 
body's reliance on the involvement of industry members who have other business 
interests.  Many SROs rely on professional staff, not volunteers, for their 
work. Nonetheless, the governing bodies of SROs, the discipline committees, and 
the individuals who are responsible for setting the direction for the 
organization tend to be volunteer members from industry.  Because only the 
larger firms can afford to use their people in this way, this tends to 
perpetuate the control in the hands of a select few. 
      5.   Over-Regulation 
¶ 127     While lack of enthusiasm and part-time personnel may lead to 
under-regulation, there is also an incentive to over-regulate by 
self-regulators.  An SRO may try to justify its existence, its growth, its 
influence, and its increased professionalization by expanding its regulatory 
role.  It may also be trying to fend off an increasingly interested government 
regulator. As the SRO uses more paid professionals and fewer volunteers, it may 
become a structure that competes with government regulation.  It can become 
vulnerable to all the ills of a bureaucracy:  rigid hierarchies, desire to 
expand territory, and placement of the interests of the organization before its 
mandate. [See Note 163 below]  The resulting over-regulation, especially the 
artificial inflation of entry requirements, can result in an overall reduction 
in the access to or increase in the cost of service available to the public.  
When the number of practitioners is reduced or the price is increased, some 
consumers will do without the service, obtain it from unqualified practitioners 
or, in some cases, do it themselves.  This reduces the overall service level. 
[See Note 164 below] 



   Note 163: A. Downs, Inside Bureaucracy (Boston: Little Brown, 1967); G. 
Morgan, Images of Organization (Newbury Park, Ca.: Sage, 1986). 
   Note 164: Manitoba Law Reform Commission, supra note 8. 



      6.   Reduction in Accountability 
¶ 128     In a number of cases, self-regulation is being carried out to fulfill 
responsibilities delegated by government and using powers delegated by 
government.  When government exercises these powers directly, it is subject to a 
number of accountability regimes, including ministerial responsibility, judicial 
review, oversight by an ombudsman, and the transparency of decision-making 
required by access to information legislation.  These mechanisms may be lost 
when the regulatory function is being carried out by a private body, the 
self-regulatory organization. 
      7.   Higher Costs to the Public 
¶ 129     Whether or not self-regulation is less costly than direct government 
regulation is debatable. [See Note 165 below]  It must be recognized, however, 
that the cost of administering a particular self-regulatory regime may be only a 
small part of the total cost of regulation.  The cost of regulation is often 
borne by the general public in the form of higher prices caused by both the 
pass-through of regulatory costs and the economic rents that are attributable to 
restricted access to the regulated service.  Regulation that limits competition 
can also raise prices and have distributional consequences that place a 
disproportionate burden on poorer and disadvantaged consumers. [See Note 166 
below] 



   Note 165: See section A (4), above. 
   Note 166: There are a number of studies that indicate that licensing and 
certification raise prices and can reduce the overall quality of service by 
restricting service.  For example, Benham & Benham (1985), supra note 70; R.J. 
Gaston, "A Study of the Economic Impact of Occupational Licensing" in M. Greer, 
ed., A New Direction in Occupational Licensing (University of Kentucky Press, 
1979). 



C.   Discussion of the Advantages and Disadvantages 
¶ 130     While there may be a general agreement on what constitutes the 
advantages and disadvantages of self-regulation, the literature is less precise 
on whose point of view is being considered in outlining these factors that 
affect the choice of self-regulation as a policy instrument. In fact, a number 
of viewpoints are represented.  The regulatees themselves have different 
interests and a different viewpoint than bureaucrats, politicians, or the public 
benefitting from regulation.  Indeed, different groups within a regulated 
industry may have different points of view. 
¶ 131     Take a factor such as costs.  The reduced cost to government of 
self-regulation may be an advantage to politicians and general taxpayers; it may 
not be an advantage to bureaucrats who wish to increase their ambit of 
influence. Reducing government costs may increase costs to industry and may 
disproportionately affect a segment of the industry based on size, product, 
region or other factors.  The cost of regulation may be passed on to consumers, 
which may also disproportionally affect certain classes of consumers. 
¶ 132     Flexibility is also often identified as an advantage of 
self-regulation.  Quick regulatory responses may be possible only where broad 
industry or consumer representation or consultation is sacrificed.  Flexibility 
may also imply vagueness or the exercise of discretion that can favour certain 
interests.  It may also favour those members of the industry without large sunk 
costs or who are on the verge of new capital investment. 
¶ 133     One possible viewpoint to consider is the so-called "public interest" 
viewpoint.  This too may constitute many things, [See Note 167 below] but one 
general thrust is a balancing of interests or consideration of "higher" 
interests rather than those of a special group or segment of the population.  In 
the next part, the five self-regulatory models will be analyzed from the point 
of view of a public interest perspective.  It is possible to prepare similar 
analyses based on the perspectives of other players, such as politicians or 
large regulated firms or small regulated firms, but the public interest 
perspective captures many of the broader considerations that should play a role 
in the choice of self-regulation as a policy instrument of government. 



   Note 167: D.G. Hartle, Public Policy Decision Making and Regulation, Appendix 
D, prepared by W.T. Stanbury (Montreal: Institute for Research on Public Policy, 
1979). 



¶ 134     It should also be noted that it is difficult to fully articulate the 
advantages and disadvantages of a self-regulatory system in the abstract.  The 
choice of self-regulation as a policy instrument, and the choice of the 
self-regulatory model, must be taken in the context of the regulatory problem at 
hand.  An analytical framework, however, provides a tool for applying a model to 
a problem requiring a regulatory response. 
     IV.  A Framework for Analysis of Self-Regulatory Models 
¶ 135     The discussion in Part II indicates the range of institutional models 
that can be considered to be self-regulatory.  A number of potential advantages 
and disadvantages have been identified in Part III.  Each model has its 
strengths and weaknesses, however, and it is helpful to apply a standard public 
policy framework, using such criteria as efficiency, effectiveness, openness, 
fairness and accountability. 
      -Efficiency: deals with achieving regulatory objectives at the  lowest 
      attainable cost given the prices of all inputs and the state of knowledge.
      -Effectiveness: deals with such questions as whether regulatory objectives 
      are obtained, whether there are incentives to achieve compliance with 
      rules, and what are the mechanisms to enforce compliance.
      -Openness: deals with the accessibility and transparency of the regulatory 
      system to regulatees, clientele, and the interested public.
      -Fairness:  deals with whether duties, rights, benefits and obligations 
      are equitably assigned and whether decisions are made with due process 
      protections.
      -Accountability: deals with whether players in the regulatory system can 
      be held responsible for their actions and decisions.

The five regulatory models are summarized according to these criteria in Table 
2, below. [Ed. Note:  Please see paper copy for Table 2, Policy Analysis of 
Self-Regulatory Models.] 
      A.The Analytical Framework Applied to Self-Regulatory Models

      1.   Efficiency 
¶ 136     Industry codes can be efficient if industry expertise is harnessed in 
the development of a code.  Codes can be more flexible than legislation and can 
be quickly adjusted to reflect the realities of a changing marketplace. By 
dealing with potential market failures on an industry-wide basis, codes can 
enhance inter-firm competition.   They can, however, embody anti-competitive 
practices. [See Note 168 below] 



   Note 168: A discussion of the advantages and disadvantages of codes can be 
found in Treasury Board Secretariat-Industry Canada, Voluntary Codes Project, 
Legal Aspects of Voluntary Codes by K. Webb & A. Morrison (August 1996); 
Australia Law Reform Commission, supra note 50; Australian Trade Practices 
Commission, supra note 20 at 7-8; Canada, supra note 7 at 51-3; and Gunningham, 
supra note 47. 



¶ 137     In a federal state, industry codes for matters under provincial 
jurisdiction can provide for a uniform national policy environment where 
provincial regulation would result in a balkanized regime.  A federal government 
can take action to encourage the implementation of codes in areas where it does 
not have regulatory jurisdiction by, for example, publishing guidelines for the 
development of industry codes or sponsoring the development of standards that 
incorporate codes of practice. 
¶ 138     Statutory self-regulation can be efficient in that the expertise of 
the regulated industry (profession) is used in the development and enforcement 
of rules.  Rule development can be relatively rapid and flexible, responding 
easily to changing industry conditions or regulatory crises. The costs of 
regulation are generally borne by clients who benefit from regulation.  In some 
cases, however, there is evidence that regulation raises the costs to the 
consumers by raising prices, limiting choices, and stifling innovation. The 
regulated profession itself may benefit by appropriating monopoly rents. 
¶ 139     Firm-defined regulation can be efficient when specifically tailored 
rules reduce the costs of firm compliance.  The firm bears a significant portion 
of the costs of rule development; this internalizes some of the costs of risks 
imposed by the firm's activities when the regulation is in the health, safety or 
environmental area.  The firm also bears the major responsibility for compliance 
assurance, which may avoid the duplication of a necessary internal compliance 
system and government enforcement efforts.  The combined firm and government 
costs of rule development and compliance enforcement may not necessarily be less 
than traditional regulatory structures.  Efficiency may also be compromised by a 
more complex individuated regulatory regime. 
¶ 140     Supervised self-regulatory organizations have incentives to be 
efficient  in their use of resources; the costs of regulation are usually borne 
in the first instance by the regulated industry.  These costs are largely passed 
on to the industry's clientele, however, and historically, there has been little 
price competition among industry members. Limitations on entry and lack of price 
competition have ensured that benefits accrued to the members.  There is a 
potential duplication of effort by the SRO and the supervising regulatory agency 
and it can be difficult to maintain a complementary rather than duplicative 
regulatory structure. Generally, it is thought to be more efficient to allow the 
SRO to deal with day-to-day regulatory issues, including surveillance and 
enforcement, and involve the agency in policy and appeal functions. 
¶ 141     There are incentives for efficiency in regulatory self-management 
structures since the costs of operational management are borne by the regulated 
industry. In many cases, however, the costs are likely passed on to clients.  
The costs to government are decreased, but the total costs of regulation 
(government residual rulemaking and auditing functions plus the firm 
self-management structures and organizations) may not be reduced.  In fact, it 
may be difficult for government to retain adequate expertise to perform its 
functions, although the model relies on the expertise of industry to carry out 
operational responsibilities. 
      2.   Effectiveness 
¶ 142     In some circumstances, voluntary codes can be highly effective.  They 
may be more specific than government regulations and may be tailored to an 
industry--an advantage that may be important when it is clear that a segment of 
market behaviour needs to be addressed in a more particular way or when an 
emerging industry, product or service presents problems that have not been 
addressed in legislation.  The industry, by developing the code, gains 
"ownership" over the code that will increase the commitment to making it work. 
¶ 143     Where a code is effective, it can provide a "best practice" benchmark 
for industry members and serve as a benchmark in settling customer disputes.  
Industry codes can also establish mechanisms for the public to deal with 
complaints.  Many codes have some provision for dispute resolution, and a number 
of codes provide for an independent arbitration or complaint resolution 
mechanism. [See Note 169 below]  Industry ombudsmen may look not only to the law 
in settling disputes, but to the provisions of a code and industry "best 
practice."  On the other hand, there may be few incentives for compliance and 
where provisions for dispute resolution are lacking, voluntary codes can be 
ineffective in achieving their objectives.  They may be inadequately enforced or 
biased in their enforcement.  They may not be effective if all industry 
participants do not adopt the code.  The relative informality and "user 
friendly" language of a code may make violations difficult to prove.  Most codes 
lack provisions for independent third party audits for compliance or 
requirements for effective internal audits.  Effective sanctions may also not be 
available to enforce a code. 



   Note 169: The recent  creation  of Canadian Banking Ombudsman Inc. by 
Canada's chartered banks to deal with complaints from small businesses is an 
example of the trend, although the position does not involve the power to 
formally determine disputes; S. Feschuk, "Banks Could Influence Ombudsman:  MPs" 
The [Toronto] Globe and Mail (13 June 1996) B4; J. McFarland, "Bank Ombudsman 
Says He's No 'Toothless Tiger'" The [Toronto] Globe and Mail (15 June 1996); B. 
Evenson, "Ombudsman Says Banks Will Listen, But Clients Aren't So Sure" The 
Ottawa Citizen (16 June 1996). 



¶ 144     Statutory self-regulation can be effective when rules are tailored to 
the needs of the profession by knowledgeable rulemakers.  Compliance may be 
increased because of "buy in" by the regulated profession and high levels of 
understanding about the content and rationale of rules. Effectiveness can be 
undermined, however, when self-regulators under-regulate or favour certain 
groups.  The delegated structure of statutory self-regulation and the relatively 
modest role played by government may be seen to increase the potential of 
"capture" of the regulatory process by certain groups within the profession 
(e.g., specialists or urban practitioners). 
¶ 145     The effectiveness of firm-defined regulation can be enhanced by the 
application of specific rules to the individual workplace, thereby taking into 
account both general and idiosyncratic risks.  The firm's involvement in rule 
development is likely to increase "buy in" and improve compliance levels.  The 
firm is certainly familiar with the rules, which should also improve compliance. 
 While government approvement of rules to ensure that baseline regulatory 
objectives are met should result in a minimal level of effectiveness, 
difficulties in assessing individualistic rules may result in less effective (or 
less stringent) rules.  The reliance on the firm's internal compliance systems 
is likely to result in higher compliance levels, but co-option of the regulatory 
regime by the firm is possible. 
¶ 146     A supervised self-regulatory structure can be effective in setting 
rules, monitoring behaviour and imposing sanctions.  Expertise is harnessed in 
rulemaking, close involvement of the regulated industry can result in a "buy in" 
of the regulatory system, peers can monitor each other, and the ultimate 
sanction of exclusion from the industry can be more effective in enforcing 
behaviour than most regulatory or quasi-penal penalties.  The activities of the 
supervising agency provide additional incentives for compliance; in most cases, 
the supervisory agency will have the power to take over the regulatory functions 
where the SRO's performance is unsatisfactory.  The regulatory agency, however, 
may lose expertise to the SRO (which often has more flexible and generous pay 
and personnel policies) and have a reduced knowledge of the industry and 
regulatory issues because of lack of "hands on" experience. 
¶ 147     There is little experience to date with self-management organizations 
to indicate whether they are effective in achieving regulatory policy 
objectives.  The HACCP system appears to be highly effective in harnessing firm 
expertise and using the firm's reputation as a compliance incentive. 
      3.   Openness 
¶ 148     Voluntary code development may suffer from a lack of openness or 
transparency, although there is no necessary reason why public interest groups 
(or even government) cannot be involved.  When codes are developed through a 
consensus process, a wide range of interests may be represented.  The existence 
and contents of a code are usually well publicized when it involves interactions 
with the public, but internal codes are also common.  The public is rarely 
involved in enforcement, but there may be a dispute resolution mechanism (e.g., 
an industry ombudsman or mediation/arbitration) available to deal with public 
complaints about noncompliance. 
¶ 149     With respect to openness or transparency, the public usually plays a 
limited role in statutory self-regulation of the professions in Canada, although 
information about the regulatory process is often public.  Lay members of the 
governing body may be appointed to represent the "public interest" and meetings 
may be open to the public. Disciplinary hearings, however, are often closed, 
although the results are usually public.  Usually anyone can consult registers 
to ascertain membership in a professional organization.  The bylaws and rules of 
professional organizations are public and, in some cases, are regulations 
approved by the provincial Lieutenant Governor in Council.  In British Columbia, 
the provincial Freedom of Information and Protection of Privacy Act  and the 
Ombudsman Act apply to professional regulatory bodies, but they are exempt from 
similar legislation in other provinces. 
¶ 150     Rules that are developed by firms are less likely to be developed 
through an open consultative process than government regulations, although there 
is no inherent reason this should be so.  It is quite likely, for example, that 
labour unions play an important role in occupational safety rule development 
(e.g., mine roofs) and it may be appropriate to involve community groups in 
other areas (e.g., environmental rules).  The rules may be approved by a 
government regulator, and the transparency of this decision and process can be 
variable.  Enforcement is primarily a private matter with emphasis being laid on 
labour dispute and grievance mechanisms to deal with employee noncompliance; 
public enforcement is seen as a rare, back-up procedure.  In theory, the 
enforcement mechanisms of firm-defined regulation are less likely to place 
information about the firm, and its compliance activities, in government hands. 
¶ 151     The regulatory processes of supervised SROs are usually not as open as 
those of modern government.  For example, the OSC is required to go through a 
public rulemaking process for certain rules, while the TSE rules are not subject 
to the same forms of public consultation.  Enforcement by supervised SROs tends 
to be private, although the results may be published.  If a disciplinary 
proceeding is appealed to the agency, it then becomes a public proceeding of the 
agency. The supervisory agency is subject to access to provincial access to 
information and privacy legislation. 
¶ 152     The overall rules under which self-management organizations and firms 
using the HACCP approach to risk management operate are legislative and publicly 
available. Self-management agreements are also public documents, although there 
is no requirement (such as access to information legislation) that policy 
manuals and other internal documents about the regulatory regime be made public. 
 The self-management organizations may implement, however, codes that deal with 
these matters.  The disciplinary functions of the self-management organizations 
are not sufficiently developed to predict the degree to which they will be open 
to the public, unlike the approach of the Commercial Registration Appeals 
Tribunals, for example, which would generally hold open hearings.  HACCP plans 
are likely to be considered proprietary information by the firms. 
      4.   Fairness 
¶ 153     Industry organizations enforcing industry codes through such 
mechanisms as the use of logos or membership in an organization would be 
governed by rules of fairness in dealing with members. The public would usually 
have no right to demand dispute settlement procedures, however. 
¶ 154     The processes of professional self-regulatory organizations are 
governed by the rules of fairness and natural justice to ensure a level of 
fairness.  The actions of professional SROs are subject to judicial review and 
their governing statutes may also provide for appeals to the courts on 
disciplinary matters.  The rules of the organizations are articulated and 
public, although they may be phrased in such broad terms (e.g., "conduct 
unbecoming...") that a high degree of discretion is placed in the professional 
members' interpretation of their rules.  Generally, it is a condition of 
delegation (in addition to the Charter and human rights legislation) that 
membership be nondiscriminatory and only limited by reasonable criteria such as 
competency and education. [See Note 170 below]  In practice, however, certain 
groups or members may be favoured by statutory self-regulatory regimes. 



   Note 170: Andrews v. Law Society of B.C., [1989] 1 S.C.R. 143, 56 D.L.R. 
(4th) 1. 



¶ 155     Firms operating under a system of firm-defined regulation would 
generally use internal disciplinary processes to deal with problems; the firm 
disciplinary and internal sanctioning structures would be required to be fair.  
Labour and employment law and legislation provide the framework.  The rules 
themselves are likely to be fair with respect to the individual firm and the 
requirement for government approval should protect the public interest 
considerations.  There is, however, the potential for disparate or 
disproportional rules when comparisons are made among firms. 
¶ 156     The processes of the supervised SROs are subject to the rules of 
fairness, and both fairness and natural justice govern the processes of the 
supervising agency.  The disciplinary processes of the SRO can be appealed to 
the agency; the decisions of the agency are, in turn, often appealable to the 
courts.  Judicial review is available for agency actions and is also probably 
available for the actions of the SRO, although the tendency is to use the 
supervisory powers of the agency rather than the courts to control inappropriate 
actions of the SRO.  The actions of the agency are subject to the provisions of 
the Charter, as well as provincial human rights legislation.  The SROs may not 
discriminate against members, although the history of supervised self-regulation 
indicates that certain members or groups may be favoured by rules or their 
application. 
¶ 157     Self-management organizations are subject to rules of fairness in 
enforcing the rules and applying sanctions to members; it is uncertain whether 
the courts would consider self-management organizations to have a sufficiently 
governmental character for the Charter to apply.  Government must be fair in 
dealing with firms using cooperative implementation techniques, such as HACCP, 
and the requirements for fairness are probably imported into any action taken by 
firms to further regulatory objectives (in addition to labour and employment law 
requirements in dealing with noncompliant employees). 
      5.   Accountability 
¶ 158     In terms of accountability, the members of an industry organization 
that creates a voluntary code may regard themselves as being accountable to each 
other, with the organization enforcing the code through contractual rules of 
membership.  In some circumstances, peer pressure can be effective in holding 
industry members accountable for their compliance with voluntary codes.  
Although a code may not have the status of legislation, it may be part of a 
standards system and adherence to the standard (i.e., the code) may be certified 
by a certification organization.  In general, however, voluntary codes have 
reduced accountability functions because of the noncoercive nature of the 
arrangement.  To the degree that codes are substitutes for government regulation 
in situations where the government might otherwise regulate, they result in 
reduced accountability for regulatory action.  As a complement to government 
regulation, however, they can provide additional mechanisms for accountability 
by taking advantage of peer pressure and the dynamics of industry organizations, 
as well as by creating firm-level compliance systems. 
¶ 159     The primary accountability regime of professional self-regulatory 
organizations is regular elections of the governing body by the members, as well 
as regular reports to members.  Many professional bodies are also required to 
make regular (usually annual) reports to government.  In general, they are not 
subject to audits by the provincial auditor, but may be required to have regular 
independent audits of their financial affairs.  The government tends to take a 
"hands off" attitude toward professional self-regulatory bodies, presumably 
because of their expertise and reputation, resulting in little direct 
accountability to government.  Since the professional SROs are creations of 
statute, however, the government does retain an ultimate responsibility that can 
be exercised in the case of a loss of faith in the regulatory process. 
¶ 160     Government remains accountable for the rules established by 
firm-defined regulation, but the delegation of rule-development responsibility 
may attenuate accountability. The government reporting mechanisms that are put 
in place for firms will affect the degree of accountability.  The firms 
themselves should put in place independent audits as part of their compliance 
reporting and accountability structure; indeed, government approval of 
firm-defined rules may be contingent on adequate and accountable compliance 
systems. There are also corporate governance mechanisms ranging from directors' 
liabilities, use of audit committees, corporate reporting relationships and 
corporate rewards and sanctions that can enhance accountability. 
¶ 161     In supervised self-regulation, the SRO is accountable to its members, 
who elect a proportion of the board of governors and are represented on 
committees that carry out rulemaking and disciplinary functions.  The government 
is generally also responsible for appointing a number of directors or governors 
to the board.  The oversight of the specialized agency provides a strong 
accountability mechanism for the SRO; the agency itself is accountable to the 
government.  The agency is generally subject to the provincial Ombudsman and 
provincial auditor.  The SRO is subject to an independent financial audit.  Both 
the SRO and the agency make public annual reports.  The agency can also be 
subject to examination or review by a legislative committee, either on an ad hoc 
basis, as part of an annual budget review, or as part of a legislative review.  
Special inquiries have also been established from time to time to examine the 
activities of both SROs and their supervising agencies. 
¶ 162     The occupations that have been identified as candidates or placed into 
self-management organizations in Ontario have traditionally been subject to the 
Commercial Registration Appeals Tribunal to settle disputes about licences or 
consumer complaints.  The new system envisions the organizations developing 
their own dispute settlement mechanisms, which are intended to provide, among 
other things, a mechanism for accountability.  The organizations are also 
required to provide annual reports and business plans to government.  They are 
not subject to the provincial Ombudsman. At this stage, it is uncertain whether 
their activities could be judicially reviewed. [See Note 171 below]  
Accountability for firms engaged in cooperative implementation is found 
primarily in their relationship as regulatees to government and through their 
own compliance and corporate governance structures. 



   Note 171: For an example where a Commonwealth court has found that the power 
to review exists, see Electoral Commission v. Cameron, 2 NZLR 421 (1997). 


      V.The Legal Structure of Self-Regulation

A.   Delegation and Accountability 
¶ 163     The degree of government involvement in self-regulation varies.  At 
one end of the spectrum, there may only be the threat of government regulation 
that induces an industry to establish some degree of self-regulation, often 
through an industry code.  The government may actively encourage such 
self-regulation or may be involved sufficiently to demand the development of an 
industry code.  At the other end of the spectrum is the direct delegation of 
government regulatory powers to an industry or industry organization with active 
supervision by a government agency.  In the latter case, the industry is 
performing government functions. 
¶ 164     Where the government's role is limited to encouragement of more 
public-spirited conduct, the issues of the accountability of government for its 
role, or the accountability of industry for its behaviour that serves a broader 
public interest, are restricted.  Where the industry is performing a 
quasi-governmental function, a function that has been delegated to it by 
government, it is necessary to ask what specific forms of accountability have 
been lost or diminished by the delegation of government functions. 
¶ 165     This delegation of government functions is not unique to 
self-regulation, but rather is a characteristic of the Canadian political 
system.  For example, in Ontario there are approximately 80 bodies that have 
been delegated quasi-judicial functions by the government. [See Note 172 below]  
In addition to these members of the administrative justice system, there are 
over 300 bodies that exercise some powers delegated by the provincial 
Legislature; these include institutions as diverse as Ontario Hydro, the Liquor 
Control Board of Ontario, the Art Gallery of Ontario, and various hospitals and 
universities.  It is within this range of bodies exercising delegated powers 
that self-regulatory organizations must be placed. 



   Note 172: M. Priest, "Fundamental Reforms to Ontario Boards and Agencies" in 
Rethinking Civil Justice:  Research Studies for the Civil Justice Review, vol. 2 
(Toronto: Ontario Law Reform Commission, 1996). 



¶ 166     In many cases, powers have been delegated to institutions or 
organizations in order to remove them from the direct influence of government.  
Crown corporations are often formed in order to operate in the private sector 
with commercial motives but to still retain the potential for indirect 
government influence; in some cases, of course, the crown corporation may 
consciously operate as an instrument of government policy.  One of the most 
important rationales for the creation of adjudicative tribunals is the removal 
of decision making from political influences.  The focus of expertise and 
specialized experience in a tribunal is also an important rationale. 
¶ 167     In the case of self-regulated industries, government has chosen to 
delegate powers for a variety of reasons.  Some, particularly involving the 
traditional professions of law and medicine, are based on historical precedent.  
For the legal profession, there is also the argument that the independence of 
the profession and the courts demands a special regulatory status.  For others, 
such as the stock exchanges, the decisions regarding self-regulation were 
essentially pragmatic and built on well-established organizations.  In more 
recent years, political opportunism on the part of many industries or 
professions has fueled the growth of self-regulation.  This, of course, is 
consistent with the political philosophy of minimal government that is popular 
today and is leading some governments, notably those of Ontario and Alberta, to 
seek out candidates for self-regulatory status. [See Note 173 below] 



   Note 173: Ministry of Consumer and Commercial Relations, supra note 5. 



      It is important to remember, however, that the delegation by the state to 
the self-regulatory body does not displace the public accountability of the 
state for the way in which an industry is regulated. [See Note 174 below]  
Before embracing self-regulation as a solution for increasing government costs 
or intrusiveness of government, it may be useful to review some of the 
criticisms of increasing use of delegated authority. 



   Note 174: Aucoin, supra note 141. 



¶ 168     The Royal Commission on Civil Rights (the McRuer Commission) [See Note 
175 below] undertook one of the first studies of self-regulatory organizations 
in Ontario.  It concentrated on the self-governing professions.  The Commission 
considered the professions to have significant characteristics that made them 
suitable for self-government: 



   Note 175: McRuer Report, supra note 59. 


      ...the calling is one which depends for its effective pursuit on 
      confidence of two kinds--the personal confidence of the patient or client 
      in the technical competence of the practitioner, and the confidence of the 
      public at large in the integrity and ethical conduct of the professional 
      as a whole; it requires a high standard of technical skill and 
      achievement; it provides a service to members of the public; practitioners 
      are usually employed under a contract for service rather than under a 
      contract of service....

McRuer believed that the appropriate criterion for the granting of 
self-government should be:  "Is self-government necessary for the protection of 
the public," not "do the practitioners of this occupation desire the power of 
self-government?"  In general, self-government should not be granted where 
government regulatory licensing scheme would serve the public objectives. [See 
Note 176 below] 



   Note 176: Ibid. at 1162, 1182, and 1209. 



¶ 169     To ensure that professional SROs serve the public interest, McRuer 
recommended that lay members should be appointed to the governing bodies by the 
Lieutenant Governor in Council to broaden the interests being considered and 
provide "public interest" input.  A lawyer should sit on the disciplinary bodies 
of the nonlegal SROs to ensure the protection of legal rights.  Each SRO should 
have a code of ethics, available to the public and circulated to its members. 
Disciplinary hearings should be subject to due process and be private unless the 
member being disciplined requests a public hearing.  Civil rules of evidence 
should apply to provide additional due process protections, and the SRO should 
not have a right to impose a fine.  McRuer further recommended that a Model Act 
be drafted that would form the basis of all self-governing acts to create 
uniformity in the delegation of powers. [See Note 177 below] 



   Note 177: Summary of Recommendations, ibid. at 1209-11. 



¶ 170     Peter Aucoin has argued that accountability for self-regulatory 
organizations requires the SRO to be organized as an agent of the state and for 
the purposes of self-government.  The governing bodies must provide broad 
representation of the members and allied professions (e.g., paralegals in the 
Law Society) and "third party" interests must be represented by lay members on 
the governing bodies. The government should have the power to both approve and 
initiate rules and the SRO should be required to make annual reports that would 
be tabled in the Legislature.  Government should establish a review and 
evaluation agency within the executive branch that will provide the Lieutenant 
Governor in Council with assessments to allow him to make the necessary 
judgments about the SROs.  Aucoin provides no criteria for the work of the 
evaluation agency. [See Note 178 below] 



   Note 178: Aucoin, supra note 141.  It may be noted that Aucoin was speaking 
of the professional organizations.  Where SROs are supervised, such as The 
Toronto Stock Exchange, the accountability functions are generally present in 
the relationship to the oversight agency, such as the Ontario Securities 
Commission, which is accountable as a quasi-judicial tribunal. 



¶ 171     The Professional Organizations Committee in Ontario studied five 
occupational groups:  architects, accountants, engineers, lawyers and notaries.  
Most of the Committee's recommendations dealt very specifically with the 
enabling statutes of these professions.  The Committee recommended, however, the 
appointment of public members to the governing bodies of the professions, and 
the establishment of Lay Observers to investigate complaints from the public 
about the complaint and discipline process of the SROs.  The Lay Observer would 
make an annual report to the Legislature.  A prospective entrant would have a 
right of appeal to a Registration Committee and a further appeal to the courts. 
Disciplinary orders would also be appealable to the courts. 
¶ 172     The Economic Council of Canada in its Report on the Regulation 
Reference was also concerned about the accountability of delegated forms of 
regulation.  "Governments must be aware that although they can delegate 
regulatory authority to private bodies, they cannot avoid the ultimate 
responsibility for the actions of such bodies.  The private bodies must be 
directly accountable to government for their activities--not just in the 
abstract, but in the very practical working sense." [See Note 179 below] 



   Note 179: Economic Council, supra note 65 at 119.  The Council did not 
address the degree to which accountability might confer liability on government 
for the actions of SROs. 



¶ 173     The Council recommended that each jurisdiction establish an 
Occupational Regulation Commission to coordinate the strands of occupational 
regulation under its authority. In addition to advising the government on 
legislation and researching and publishing assessments of the SROs, the 
Commission would hear appeals initiated by members of the public and the 
profession, or by potential entrants.  The Economic Council also recommended 
that occupational licensure be used sparingly and that certification with 
reserved title was often sufficient to protect the public; consequently, 
governments should review existing arrangements to be sure that the least 
restrictive form of regulation consistent with the protection of the public 
interest had been chosen. Indeed, the Council believed that "consideration 
should also be given to transferring the exercise of regulatory powers back to 
the government." [See Note 180 below] 



   Note 180: Ibid. at 118-124. The Council did not recommend any criteria for 
the assessment of SROs. 



¶ 174     The Manitoba Law Reform Commission believed that the current approach 
to occupational regulation, which involved a significant degree of 
self-regulation, had serious flaws and was based on unexamined premises and 
outmoded thinking.  The first question that should be asked is whether 
regulation of an occupation is warranted and not whether it is analogous to a 
self-regulated profession and should therefore be self-regulated.  Too often 
occupational regulation has grown, always at the behest of the occupation in 
question, without a serious examination of the threshold question of regulation. 
 Occupational licensing (which restricts entry to those with licences) should 
only be used "when the public faces a serious risk from the improper performance 
of a service and when licensing is the least costly measure which will 
adequately protect the public." [See Note 181 below] 



   Note 181: Manitoba Law Reform Commission, supra note 8 at 153. 



¶ 175     The Manitoba Commission recommended a task-based approach to licensing 
in which the various tasks that members of an occupation perform would be 
analyzed to determine the appropriate type of regulation for various services. 
[See Note 182 below]  This would encourage competition by allowing several types 
of occupations to engage in a given task where the public interest allowed 
(e.g., paralegals could compete directly with lawyers for simple divorces or 
nurses and other paramedical practitioners could compete with doctors and each 
other to perform certain tasks).  An arm's length government body should 
consider new applications for self-regulation, review the existing SROs and 
supervise the SROs.  To ensure that the powers of SROs are exercised in the 
public interest, they should be required to make annual reports; they should 
also provide public access to a register of members, to their rules and their 
meetings, and to disciplinary records of members.  To curb potentially 
self-interested SRO behaviour, public representatives should compose one-third 
of hearing panels on discipline and hearings should be open to the public. 



   Note 182: It may be noted that the Ontario Regulated Health Professions Act 
follows this structure. 



¶ 176     In the American context, the discussion of the accountability of SROs 
has centred more on the degree of discretion allowed to self-regulatory 
organizations and the need to limit discretion.  The American experience with 
self-regulation has to be interpreted in light of the constitutional 
nondelegation doctrine. [See Note 183 below] The basic principle is that while 
Congress can delegate its power, the administrators should not have unguided and 
uncontrolled discretionary power.  This means that the administrators are 
subject to fundamental process rights.  In practical terms, the limitations on 
U.S. administrators are similar to those that are imposed on Canadian 
administrators by the rules of natural justice and fairness.  The fundamental 
process rights include rule-making with broad participation, disqualification of 
biased decision makers, adjudication on notice with an opportunity to be heard, 
and explicit findings and reasons.  These fundamental process rights affect how 
the self-regulatory organization carries out its functions, whether they be 
rulemaking or enforcement and discipline functions. 



   Note 183: Michael, supra note 12 at 195 passim. 



¶ 177     Concerns about the accountability of the SROs are not unique to SROs, 
but exist with respect to the entire administrative justice system.  With 
respect to the administrative justice system agencies, I have argued elsewhere 
that they are accountable by virtue of their public character; their decisions 
and the evidence on which they are based are public. [See Note 184 below]  
Furthermore, their decisions are governed by the requirements of natural justice 
and fairness. 
¶ 178     This has some relevance to the accountability requirements of 
self-regulating organizations and their procedures.  The disciplinary functions 
of SROs are now clearly considered to be part of the administrative justice 
system. [See Note 185 below]  The SROs, however, are only now coming to realize 
the full degree of their responsibilities as being, at least in part, 
administrative justice system agencies. [See Note 186 below]  The rulemaking and 
disciplinary functions must have a public component and, for many bodies, 
improvements are still required to meet concerns about accountability. 



   Note 184: M. Priest, "Structure and Accountability of Administrative 
Tribunals" in Special Lectures of the Law Society of Upper Canada, 
Administrative Law: Principles, Practices and Pluralism (Toronto: Carswell, 
1993). 
   Note 185: Consolidation of appellate disciplinary functions in a single 
adjudicative agency has obviously helped to draw attention to this phenomenon.  
See, for example, the Health Professions Board in Ontario and l'Office des 
professions du Québec. 
   Note 186: The administrative justice system has benefited from the 
articulation of the standards of fairness and natural justice that has 
accompanied the large number of cases that were either appeals or judicial 
reviews of decisions made by SRO disciplinary bodies.  Even the Law Society has 
not been without blemish in this area. 



¶ 179     Those who have studied self-regulated groups are often wary of the 
increasing power they possess and the potential for irresponsible use of 
delegated powers.  SROs can limit competition and harm the public interest in a 
variety of ways.  Several studies recommend the institution of a government 
agency or council to supervise the SROs. [See Note 187 below]  Others recommend 
that only supervised SROs, such as the stock exchanges, are an appropriate 
alternative to direct government regulation. [See Note 188 below]  The reports 
are unanimous in suggesting that public participation, particularly in the 
disciplinary process, is necessary to provide accountability and protect the 
public interest.  While the emphasis in the literature is often on public 
participation in the disciplinary process, the  broader question of the role of 
the public, or of representative public interest groups, in self-regulatory 
processes needs further exploration.  One model, tripartism, has  been suggested 
by Ayres and Braithwaite, in which public interest groups would play an active 
role along with government and the regulated industry in rule-development and 
enforcement. [See Note 189 below] Other models can be found in European 
"covenants" negotiated with industry to fulfill regulatory objectives, often in 
the environmental area [See Note 190 below] where nongovernmental organizations 
can play a vital role either in negotiation or in the setting of the regulatory 
objectives. 



   Note 187: The Economic Council of Canada, supra note 65; and the Manitoba Law 
Reform Commission, supra note 8. 
   Note 188: The  Administrative Conference of the United States; Michael, supra 
note 12; and discussion at Part VI, above. 
   Note 189: Supra note 13. 
   Note 190: K. Bastmeijer, "The Covenant as an Instrument of Environmental 
Policy in the Netherlands:  A Case Study for the OECD" (Paris: Organisation for 
Economic Co-operation and Development, November 1994). 



      Two primary accountability mechanisms that may be lost in a 
self-regulatory regime are the transparency of decision making afforded by 
freedom of information regimes and the oversight of a government ombudsman.  
Self-regulatory organizations, such as the Law Society of Upper Canada or the 
College of Physicians and Surgeons, who have been delegated powers and 
responsibilities by government, are not scheduled agencies under the Freedom of 
Information and Protection of Privacy Act. [See Note 191 below]  Nor are they 
considered to be a "governmental organization" for the purposes of the Ombudsman 
Act. [See Note 192 below] 



   Note 191: R.S.O. 1990, c. F-31.  It may be noted, however, that they are 
scheduled agencies for the purpose of the British Columbia Freedom of 
Information and Protection of Privacy Act, Bill 50 (1992) and Bill 62 (1993). 
   Note 192: R.S.O. 1990, c. O-6.  The self-governing professions in British 
Columbia, however, are subject to the B.C. Ombudsman and Information and Privacy 
Commission. 



¶ 180     Where industries are performing functions delegated to them by 
government, by statute or by contract, there should be a continuing effort to 
maintain the transparency of the decision-making process.  Indeed, one might 
argue that greater transparency is required to maintain the integrity of the 
process and protect the public interest since political responsibility has been 
diminished or attenuated in the case of self-regulatory bodies.  The general 
public should not be refused access to information that would be available if 
the functions were governmental.  It may be noted that in the United States, the 
Administrative Conference recommended that information regarding regulatory 
functions by audited SROs be made available on the same terms as if the U.S. 
Freedom of Information Act applied. [See Note 193 below] A similar requirement 
would be advisable for the directly delegated functions of government performed 
by private bodies. [See Note 194 below] 



   Note 193: Michael, supra note 12 at Appendix. 
   Note 194: The other side of the access to information coin is privacy; 
similar privacy protections should be available in those jurisdictions that do 
not have privacy legislation in place governing the private sector (i.e., all 
provinces except Quebec). Note that the Ontario Information and Privacy 
Commissioner has urged the application of access and privacy principles to 
self-managed organizations; the government has responded by including an 
information and privacy code in self-management agreements; supra note 114. 



¶ 181     The removal of an ombudsman's jurisdiction over certain 
self-regulatory activities is not as problematic in the case of supervised 
self-regulation.  The supervising or auditing government agency can perform many 
of the functions of an ombudsman.  Its own activities then, in turn, may be 
subject to review by an ombudsman.  The agency has the additional advantages of 
expertise that may be lacking in the Office of the Ombudsman.  Statutory SROs, 
such as the professional bodies, are subject to supervision only in selected 
areas, but these areas (rulemaking and discipline) are the vital regulatory 
functions, and an argument can be made that the advantages of the organization's 
expertise and experience in its own affairs outweigh the disadvantages of 
reduced accountability.  In the areas of self-management, such as the new 
organizations dealing with real estate, cemeteries, elevators and pressure 
vessels, the government's anxiety to distance itself from the activities of the 
new bodies has removed them from the ambit of the Ombudsman.  Where one 
accountability mechanism has been dropped, then others should be consciously 
strengthened, such as the transparency of decision making and the availability 
of information. 
B.   Judicial Review of Self-Regulatory Organizations 
¶ 182     Supervised self-regulatory bodies, such as the TSE, do not appear to 
be judicially reviewed with any frequency.  There is a tendency to allow the 
review by the regulator to take its course before any judicial proceedings are 
initiated.  The decisions of the OSC are subject to appeal to the Divisional 
Court and provide a route for the court to consider the SRO's actions.  The 
Commission itself has developed a practice of deference toward disciplinary 
decisions made by the TSE and brought to the OSC for review. [See Note 195 
below]  Certain actions of the TSE are probably subject to the Charter of Rights 
and Freedoms, but the TSE itself would be unlikely to be considered competent to 
determine Charter issues. 



   Note 195: Re Williams and the Toronto Stock Exchange (1972), O.S.C.B. 87; Re 
Lafferty, Harwood & Partners Ltd. (1973), O.S.C.B. 26, aff'd (1975), 8 O.R. (2d) 
604 (Div. Ct.); Re Security Trading Inc. and the Toronto Stock Exchange (1994), 
17 O.S.C.B. 6997. The criteria developed by the OSC for review of TSE decisions 
are similar to those developed by tribunals for review or rehearings of their 
own decisions; see, Telecom Decision CRTC 79-1, Bell Canada, Request to Review 
that Part of Telecom CRTC 78-7 of August 10, 1978 Dealing with the Saudi Arabian 
Telephone Project, and AMOCO Canada Petroleum Co. v. Canadian Pacific Ltd., 
[1974] C.T.C. 300 at 306-26. 



¶ 183     Whether the activities of unsupervised regulatory bodies are subject 
to judicial review may depend on the degree to which they are established by 
government and receive powers by government delegation.  Professional bodies 
established by statute are reviewable. [See Note 196 below] Voluntary industry 
organizations, however, may not be reviewable, but may be treated like a private 
club (rather than a quasi-governmental body) whose members are only bound by 
their contractual terms of membership. [See Note 197 below] 



   Note 196: Supra notes 61-62. 
   Note 197: Kaplan v. Can. Institute of Actuaries (1994), 161 A.R. 321, 28 
Admin. L.R. (2d) 265 (Alta. Q.B.); Re Pestell and Kitchener-Waterloo Real Estate 
Board Inc. (1981), 34 O.R. (2d) 476, 131 D.L.R. (3d) 88 (Ont. Div. Ct.). 


      VI.Legal Liability of Self-Regulatory Organizations

A.   Liability Under the Competition Act 
¶ 184     The Competition Act is a "framework act" of general application that 
sets out basic rules and structures according to which broad sectors of the 
economy must operate. Its purpose is to "maintain and encourage competition in 
Canada in order to promote the efficiency and adaptability of the Canadian 
economy...and in order to provide consumers with competitive prices and product 
choices." [See Note 198 below] Regulated industries, however, are at least 
partly exempt from the operation of the Act. 



   Note 198: R.S.C. 1985, c. 27, s. 1.1 (1st Supp.). 



¶ 185     The current Act makes no reference to regulated conduct or to a 
regulated industries exemption or defense to the operation of the Act. [See Note 
199 below]  The jurisprudence [See Note 200 below] has indicated, however, that 
if a valid regulatory statute authorizes anticompetitive behaviour, then that 
behaviour is exempt from the application of the Competition Act.  In practical 
terms, self-regulatory organizations established by statute, particularly a 
professional organization such as a law society, are also exempt from the Act.  
Whether the regulatory decision makers are appointed by the government, by an 
independent body, or by those who are regulated, is irrelevant.  This exemption 
from the application of the Act can be an incentive for industries to seek 
self-regulatory status with some form of government oversight. 



   Note 199: The treatment of regulated conduct had a bumpy road through the 
extensive process that encompassed the amendments to the Combines Investigation 
Act.  The 1969 Report of the Economic Council, Interim Report on Competition 
Policy, recommended that the Act should apply to the unregulated activities of 
"regulated industries." Bill C-256, which was introduced in 1971 and died on the 
order paper, exempted the regulated activities of regulated firms from the ambit 
of the Act; the drafters of the Stage I amendments in 1973, however, relied on 
case law to deal with the regulated industries.  The Skeoch-McDonald Report in 
1976 recommended limiting criteria be applied to any exemption of regulated 
industries from competition law (i.e., the restrictive conduct be specifically 
imposed by legislation, be actively supervised by independent officials, and be 
necessary for the effective accomplishment of the legislative goal of the 
regulatory statute). Bill C-42, introduced in 1977, defined "regulated conduct," 
as did Bill C-13, also introduced in 1977; the amendments that were ultimately 
passed in 1986 did not include any definitions of regulated conduct. 
   Note 200: R. v. Chung Chuck, [1929] 40 B.C.R. 512, 1 D.L.R. 756 (B.C.C.A.), 
aff'd [1930] 2 D.L.R. 97; R. v. Simoneau, [1936] 1 D.L.R. 143, 65 C.C.C. 19 
(Q.B.); Cherry v. The King ex rel. Wood, [1938] 1 D.L.R. 156, 69 C.C.C. 219 
(Sask. C.A.); Reference Re the Farm Products Marketing Act, [1957] S.C.R. 198, 7 
D.L.R. (2d) 257; R. v. Canadian Breweries Ltd., [1960] O.R. 601, 126 C.C.C. 133 
(H.C.); A.G. Can. v. Law Soc. of B.C., Jabour v. Law  Soc. of B.C., [1982] 2 
S.C.R. 307, 137 D.L.R. (3d) 1; Waterloo Law Ass'n v. A.G. Can. (1986), 58 O.R. 
(2d) 275, 35 D.L.R. (4th) 751 (Ont. H.C.); Industrial Milk Producers Ass'n v. 
Milk Board (1988), 47 D.L.R. (4th) 710, 8 A.C.W.S. (3d) 107 (F.C.T.D.); Re 
Mortimer and Corporation of Land Surveyors of British Columbia (1989), 58 D.L.R. 
(4th) 172, 37 Admin. L.R. 87 (B.C.S.C.); R. v. Independent Order of Foresters 
(1989), 32 O.A.C. 278, 26 C.P.R. (3d) 229 (C.A.). 



¶ 186     It may be noted, however, that the so-called "regulated industries 
exemption," is actually a defence that relates to regulated conduct. [See Note 
201 below]  It does not necessarily exempt entire industries from the 
application of the Act, but only authorized conduct.  It is therefore necessary 
to examine conduct to ensure that it is regulated or authorized by a regulatory 
statute for the defence to be available. 



   Note 201: This point was emphasized by Madam Justice Reed in her reasons in 
Industrial Milk Producers Ass'n, ibid. 



¶ 187     Because so much experience with self-regulation is drawn from the 
United States, it may be helpful to examine the application of U.S. antitrust 
laws to regulated conduct. The situation in the United States is similar to that 
in Canada; there is a form of regulated conduct immunity from the application of 
the Sherman Act. [See Note 202 below] The rationale for the immunity depends on 
whether the regulatory scheme is authorized by federal or state law. 



   Note 202: 15 U.S.C. [sections] 1-7 (1988). 



¶ 188     Under the state immunity doctrine, the courts have held that Congress 
never intended to limit state action with the passage of the Sherman Act. [See 
Note 203 below] To be immunized for anticompetitive activities, the conduct must 
meet two tests.  First, it must be authorized by a clearly articulated and 
affirmatively expressed state policy in order to ensure that the state intended 
to displace competition. Second, it must also be supervised by the state itself. 
[See Note 204 below]  The active supervision requirement has an evidentiary 
function to show that the national policy of competition expressed in the 
Sherman Act is not being thwarted by a "gauzy cloak of state involvement" cast 
over private anticompetitive conduct. [See Note 205 below] 



   Note 203: There is extensive case law in this area, but the primary cases are 
Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307 (1943); Goldfarb v. Virginia State 
Bar Ass'n, 421 U.S. 773, 95 S.Ct. 2004 (1975); Cantor v. Detroit Edison Co., 428 
U.S. 579, 96 S.Ct. 3110 (1976); Bates v. State Bar of Arizona, 433 U.S. 350, 97 
S. Ct. 2691 (1977); California Retail Liquor Dealers Ass'n v. Midcal Aluminum, 
Inc., 445 U.S. 97, 100 S.Ct. 937 (1980); Community Communications Co. v. City of 
Boulder, 455 U.S. 40, 102 S.Ct. 835 (1982); and Town of Hallie v. City of Eau 
Claire, 471 U.S. 34, 105 S.Ct. 1713 (1985). 
   Note 204: Midcal, ibid. 
   Note 205: Ibid. at 106. 



¶ 189     The issue of regulated conduct and competition under federal law is 
dealt with in the United States under the primary jurisdiction doctrine.  The 
Sherman Act is a federal law and when Congress enacts other statutes that have 
the potential of authorizing anticompetitive behaviour, the question arises 
whether the Sherman Act or the other statute is intended to govern activity in 
the particular industry or economic sector.  The courts have the final say in 
these matters, but the further question arises as to the role of the regulatory 
agency:  does it have a responsibility to supply an initial answer to this 
question? [See Note 206 below] 



   Note 206: K.C. Davis, Administrative Law Treatise, vol. 4, 2nd ed. (San 
Diego:  K.C. Davis Pub. Co., 1983) at [section] 22.6. 



¶ 190     The U.S. Supreme Court has determined that the responsibility of the 
regulator is not to apply the antitrust laws, but to accommodate antitrust 
policy to the relevant regulatory policy. [See Note 207 below]  In some 
circumstances, however, the regulatory policy may be so all-encompassing that it 
displaces the antitrust laws.  The Court has looked to such matters as specific 
and active regulatory oversight or approval of activities to find that an 
activity is exempt from the application of the antitrust laws. [See Note 208 
below]  Generally, an antitrust exemption is justified only where it is 
necessary to make the regulatory scheme work, and the regulatory agency must 
inquire as to whether the restraints on competition are both reasonable and the 
least restrictive means of achieving the regulatory end. [See Note 209 below] 



   Note 207: McLean Trucking Co. v. United States, 321 U.S. 67, 64 S.Ct. 370 
(1944); Davis, ibid. 
   Note 208: Silver, supra note 137; Gordon v. NYSE, 422 U.S. 659, 95 S.Ct. 2598 
(1974). 
   Note 209: P. Areeda & D. Turner, Antitrust Law, vol. 1 (Boston: Little Brown, 
1987) at para.224e. 



¶ 191     In sum, where a supervised SRO has required an activity or policy that 
has anticompetitive effects, the case law indicates that the activity or policy 
is exempt from the application of the Competition Act.  Thus a recent ruling 
found that the Law Society of Upper Canada had a defense against a complaint of 
abuse of dominant position in relation to its operation of the Lawyers' 
Professional Indemnity Company.  The court found that the Ontario Law Society 
Act "contains sufficient authority to authorize the Law Society to implement its 
own insurance scheme" and "clearly confers authority upon the Law Society to 
compel members to participate in its professional liability insurance program 
through the payment of levies." [See Note 210 below] 



   Note 210: Law Society of Upper Canada, 4 Benchers Bulletin, No. 6 (March 
1996) at 1; Law Soc. of Upper Can. v. A.G. Can. (1996), 134 D.L.R. (4th) 300, 28 
O.R. (3d) 460 (Gen. Div.). 



¶ 192     The circumstances of mandatory self-regulation, which occurs primarily 
in the health and safety area, are much less likely to raise issues that have 
anticompetitive effects. Nonetheless, the mandatory nature of the regulatory 
structure would likely provide an adequate defense to any charges of 
anticompetitive behaviour. 
¶ 193     With respect to industry codes, there is no provision in the 
Competition Act that is analogous to the encouragement and "approval" provisions 
found in the British and Australian Acts.  Section 45 of the Canadian Act does 
allow for defenses to the conspiracy provisions that may be applicable to 
industries engaged in developing voluntary codes.  For example, measures to 
protect the environment (ss. 45(3)) are permitted, as are agreements or 
arrangements relating to "a service and to standards of competence and integrity 
that are reasonably necessary for the protection of the public in the practice 
of a trade or profession relating to the service or in the collection and 
dissemination of information relating to the service. (ss. 45(7)).  In general, 
however, there cannot be said to be an exemption for voluntary industry codes.  
If industry codes are to be encouraged in Canada, [See Note 211 below] 
amendments to the Competition Act should be considered to provide for the 
Director's approval, as is found in other jurisdictions.  The Australian model 
allows the Competition and Consumer Commission to authorize behaviour that would 
otherwise be anticompetitive where the Commission is satisfied that the public 
benefit outweighs the anticompetitive effect of the behaviour. [See Note 212 
below] The public benefit has been interpreted widely; in a case involving the 
World Health Organization International Code of Marketing of Breast Milk 
Substitutes, the Commission noted the limitations on advertising and promotional 
activities, but accepted there were benefits from consumers receiving 
information only from trained professionals and the Government's commitment to 
the promotion of breast feeding. [See Note 213 below]  The authorization process 
is relatively open, with comments being received by interested parties; the 
Commission's decision can be appealed to the Australian Competition Tribunal.  
Authorizations can be given for limited time periods and reporting requirements 
imposed. 



   Note 211: Industry Canada, Consumer Affairs Division and Treasury Board, 
Regulatory Affairs Division are jointly sponsoring a study with regard to the 
development of federal government guidelines for industry codes along the lines 
of the Australian or New Zealand Guides, supra note 20. 
   Note 212: S. Bhojani, "'Public Benefits' under the Trade Practices Act" 
(Address to Joint Conference--Competition Law and the Professions, 11 April 
1997); A. Fels, "Can the Professions Survive under a National Competition 
Policy?--The ACCC's view" (Chairman's Address to Joint Conference--Competition 
Law and the Professions, 11 April 1997). 
   Note 213: Abbott Australasia Pty. Ltd. and Nestle Australia Limited, (1992) 
ATPR (Com) 50-123. 



B.   Liability for Negligence 
¶ 194     While government supervision and a statutory basis for regulatory 
actions may provide some immunity for SROs against prosecution under the 
Competition Act, they do not immunize the SROs from general tort liability.  In 
recent years, the courts have been increasingly likely to find that members of 
the public, whom a regulatory regime was intended to protect, are owed a duty of 
care by the regulator and negligence in carrying out operational regulatory 
responsibilities can leave the regulator open to liability. For example, the 
Supreme Court of Canada has found the British Columbia Department of Highways 
responsible for not adequately inspecting roadcuts where a falling boulder 
killed one motorist and seriously injured another. [See Note 214 below] 



   Note 214: Just v. B.C., [1989] 2 S.C.R. 1228, 64 D.L.R. (4th) 689.  See 
Department of Justice, Administrative Law Section, Tort Liability of Public 
Authorities (February 1995); L.A. Reynolds & D.A. Hicks, "New Directions for the 
Civil Liability of Public Authorities in Canada" (1992) 71 Can. Bar Rev. 1; D.K. 
Wilson, "Deep Pocket Justice--Recent Cases on Tort Liability of Public 
Authorities" (1991) 4 C.J.A.L.P. 311. 



¶ 195     The SROs are established to protect the public. They clearly owe a 
duty of care to the relevant public, such as patients of doctors, clients of 
lawyers, clients of accountants, and the third party investors who rely on 
accountants' audits.  The failure to adequately investigate and discipline a 
negligent member could clearly lead to liability on the part of the SRO if the 
member's negligence or misfeasance was related to the professional behaviour 
controlled by the SRO. [See Note 215 below]  The SRO's actual decisions in 
disciplinary matters would likely not be subject to liability unless there was 
malice, since quasi-judicial functions are not generally actionable. [See Note 
216 below] 



   Note 215: In Birchard v. Alberta Securities Comm. (1987), Alta. L.R. (2d) 
300, 42 D.L.R. (4th) 300 (Q.B.), the Alberta Law Society was held not liable 
because the questionable practices of the lawyer were in relation to his 
business dealings as a mortgage broker, not in his dealings with a client as a 
lawyer.  In fact, law societies are now beginning to question whether mortgage 
brokering should be a matter of concern to the societies. 
   Note 216: Harrington (Public Trustee of) v. Pappachristos (1992), 75 B.C.L.R. 
(2d) 121, 8 Admin L.R. (2d) 176 (S.C.). 



¶ 196     The general trend in liability indicates that government bodies, 
including bodies operating under delegated powers, must take their regulatory 
responsibilities seriously to avoid liability.  "Pure policy" decisions are 
protected. [See Note 217 below]  However, under-regulation, favouritism, and 
failures of the disciplinary process are not only objectionable on their own 
terms, but can also lead to liability to those whom the regulatory structure was 
established to protect. 



   Note 217: Anns v. Merton London Borough Council, [1978] A.C. 728, [1977] 2 
All E.R. 492 (H.L.); Kamloops v. Nielson, [1984] 2 S.C.R. 2, 10 D.L.R. (4th) 
641. 



¶ 197     There remains the issue of government's liability for the delegation 
of functions that are not adequately performed by the delegatee.  The structures 
of the Ontario self-managed organizations are obviously intended to avoid, to 
the greatest degree possible, a finding that the government is responsible for 
the actions of the self-managed organizations.  It is uncertain, however, 
whether the government would continue to be liable for the adequacy of the 
delivery of a regulatory function where it clearly retains responsibility for 
the creation of regulatory responsibilities and powers.  Furthermore, 
liabilities might arise in terms of the decision to delegate powers to a 
self-management organization and the ongoing monitoring of the self-management 
organization's operational functions, even though the government might not be 
liable for negligent inspections or enforcement per se. [See Note 218 below]  A 
complete removal of liability from government for delegated functions may 
provide a disincentive for responsible delegation and adequate monitoring or 
supervision of the delegated activities. 



   Note 218: I.R. Mackenzie, Self-Regulation and Third Party Certification, A 
Background Paper (Department of Justice, 31 March 1994). 


      VII.Policies that Complement the Use of Self-Regulation

A.   Creation of Incentives to Improve Self-Regulatory Systems 
¶ 198     Mandated self-regulation or enforced self-regulation by their very 
nature require the establishment of internal compliance systems.  Firms that are 
able to use this form of regulation generally find that its advantages create an 
incentive to maintain an adequate internal compliance system.  In other 
self-regulatory situations, incentives may be required.  For voluntary 
self-regulators, it may be the threat of direct government regulation.  For 
supervised self-regulators, it may be the threat of action by the supervising 
agency.  For firms regulated by an SRO, it may be that the expertise and 
intimate knowledge of the SRO, combined with a fear of disgrace before peers, 
can create incentives.  However, requirements by government (or by an SRO acting 
on delegated government power) for self-regulation at the firm level may not be 
sufficient to ensure that regulatory objectives are met.  They need to be 
buttressed by other incentives. 
      1.   Liability Rules 
¶ 199     Legal liability is one form of incentive for changing behaviour. [See 
Note 219 below]  For example, the experience rating system in workers' 
compensation has been shown to be a distinct incentive for improving worker 
safety systems in firms. [See Note 220 below]  Just as important are analytical 
methods that reveal to the corporation the real costs of injuries. [See Note 221 
below]  The Stanford University Accident Cost Accounting System highlights for 
companies all their accident costs which can then be factored in as part of the 
costs of production.  Companies discover that the bottom line is a strong 
incentive to reducing accidents and facilitating health and safety regimes. 
Similarly, companies may respond to product liability regimes by increasing 
care.  It may be noted, however, that product liability regimes can have mixed 
effects, which include discontinuation of product lines and stifling of 
innovation, as well as improved safety and warnings.  Empirical evidence 
suggests that an increase in product liability claims has not led to a decrease 
in accidents, but there may be a marginal positive impact on safety performance. 
[See Note 222 below] 



   Note 219: Deterrence theories postulate that individuals and firms are 
sufficiently economic actors that they will change their behaviour if the 
potential costs of the behaviour are too high.  Increasing potential liability 
and the costs of liability are incentives to change behaviours. 
   Note 220: Rees, supra note 131. 
   Note 221: Ibid. 
   Note 222: See D. Dewees et al., Exploring the Domain of Accident Law: Taking 
the Facts Seriously (New York:  Oxford University Press, 1996) at 418-19. 



      2.   Duties of Care 
¶ 200     Imposing special duties of care on directors, such as the provisions 
found in the Ontario Environmental Protection Act or Occupational Health and 
Safety Act [See Note 223 below] can be an incentive for directors to ensure that 
adequate compliance systems are in place.  Directors are thus under a duty to 
see that there is compliance with certain statutes.  This goes beyond the 
directors' general duty to the corporation, which has implicit in it the 
requirement that the corporation be law-abiding.  Due diligence defenses are 
available to such provisions and adequate and effective compliance systems are a 
well-accepted form of proof of such diligence. [See Note 224 below] 



   Note 223: R.S.O. 1990, c. E.19, s. 194(1); R.S.O. 1990, c. O.1, s. 32.  These 
statutes, as well as others, place a special duty of care on the directors of a 
corporation to ensure that there is compliance with the provisions of the 
regulatory statute.  For example, section 194(1) of the Ontario Environmental 
Protection Act states: 
      "Every director or officer of a corporation that engages in an activity 
      that may result in the discharge of a contaminant into the natural 
      environment contrary to this Act or the regulations has a duty to take all 
      reasonable care to prevent the corporation from causing or permitting such 
      unlawful discharge."

   Note 224: Bata, supra note 56. 



      3.   Peer Pressure: "Hostages of Each Other" 
¶ 201     Incentives can also exist because of the nature of the industry.  Most 
members of stock exchanges acknowledge the need to maintain the confidence of 
the public in the integrity of the industry.  This gives all the members an 
incentive to comply and to ensure that their colleagues comply. Thus, all 
members have an interest in seeing that each member complies.  In the nuclear 
energy industry, the inter-firm dependence, based on public confidence, was 
expressed by the phrase describing all of the member firms as "hostages of each 
other." [See Note 225 below]  In some circumstances, the potential harm to 
individuals, the environment, or to reputations can be considered a strong 
incentive for compliance. [See Note 226 below] 



   Note 225: Rees, supra note 36, quoting Detroit Edison CEO, Walter J. McCarthy 
Jr.  The delegated regulation of the nuclear industry described in the book, 
however, was held to be impermissible by the courts; Michael, supra note 12. 
   Note 226: The degree of potential harm usually reflects the legal liability 
for damages.  This incentive does not always appear to work, however, as the 
recent blood scandals would appear to indicate; the Red Cross can be viewed as a 
self-regulating body delivering a vital service. 



¶ 202     A consensus of interests is required for peer pressure to work.  In 
some circumstances, the consensus appears to fall apart.  The experience of the 
securities industry indicates that this has happened when a small group of firms 
dominates the self-regulatory process or when rapid expansion of the industry 
brings in new entrants without the commitment to self-regulation.  A rapid 
increase in responsibilities or an increase in business can also put stress on 
the consensus inherent within a successful self-regulatory system.  On the other 
hand, consensus can be built on an industry response to a crisis (e.g., Bhopal 
or Three Mile Island) and individual firms can play dominant roles as industry 
leaders. [See Note 227 below] 



   Note 227: Rees, supra note 36; Bregha & Moffet, supra note 39. 



      4.   Rewards for Adequate Compliance Systems 
¶ 203     Firm compliance systems can also have the effect of reducing 
liability.  The U.S. Organizational Sentencing Guidelines recognize the 
existence of an "adequate" system as a mitigating factor in sentencing. [See 
Note 228 below]  The existence of an effective compliance program can be used to 
persuade prosecutors either not to indict, or to indict on lesser charges; the 
corporation can argue that it is a good corporate citizen and that the 
violations are aberrations.  A compliance system must be effective to be 
considered under the Guidelines; it must constitute a substantial, good faith 
effort to detect and prevent criminal conduct.  Specific factors that are 
considered include timing, subject matter, degree of formality, industry 
practice, and due diligence. [See Note 229 below] 



   Note 228: United States Sentencing Commission, supra note 57. C.J. Walsh & A. 
Pyrich, "Corporate Compliance Programs as a Defense to Criminal Liability: Can a 
Corporation Save Its Soul?" (1995) 47 Rutgers L.R. 6; D.K. Webb et al., 
"Understanding and Avoiding Corporate and Executive Criminal Liability" (1994) 
49 Bus. & L. 617. The existence of an adequate compliance program can reduce a 
sentence by 40 to 60 percent. 
   Note 229: Walsh & Pyrich, ibid. at 663. 



¶ 204     No fine reduction applies for compliance programs introduced after the 
violation was committed.  The subject matter of the compliance program depends 
on the nature of the company's business, but should consider what could go wrong 
at all levels of the company.  The requisite degree of formality will depend on 
the size of the organizations; the larger the organization, the more formal the 
program should be.  Courts are directed by the Guidelines to compare a company's 
compliance program with standard industry practices. The Guidelines also state 
that the "hallmark of an effective program is that the organization exercised 
due diligence." Due diligence requires setting reasonable compliance standards, 
putting in place an oversight and enforcement program under the responsibility 
of a senior individual, communicating standards, and enforcing them through 
adequate disciplinary measures.  After an offence is committed, the company must 
also make any necessary revisions in its program to prevent further offences. 
¶ 205     The Director of Research and Investigation under the Canadian 
Competition Act has released a draft consultation paper regarding corporate 
compliance programs. [See Note 230 below]  The existence of an effective 
compliance program will be a factor that the Director will consider in 
evaluating due diligence, alternative case resolutions, immunity, and sentencing 
recommendations. 



   Note 230: Director of Investigation and Research, Competition Bureau, 
Information Bulletin, Corporate Compliance Programs (Industry Canada, 1997). 



¶ 206     The existence of adequate internal compliance systems can also lead to 
additional incentives being offered to a firm.  The "good guys" are often 
subject to less frequent inspection or reporting requirements. [See Note 231 
below] Some have suggested that companies with effective compliance programs 
should be granted incentives, such as an increase in their allowed rate of 
return, tax breaks, or priority in government bids. [See Note 232 below]  Being 
allowed to participate in an "enforced" self-regulation scheme could itself be 
considered an incentive to establish an active internal compliance system. [See 
Note 233 below] 



   Note 231: This is a standard practice for government compliance programs. 
Just as firms have compliance systems in place to ensure that regulations are 
followed and standards are met, so too do governments have programs to ensure 
compliance.  These programs set out standards for inspections, reporting, 
exercise of discretion, and the use of sanctions. See, for example, Compliance 
Policy for Canadian Environmental Protection Act, 1993.  It is quite common to 
assign frequency of inspection or other monitoring functions according to the 
compliance records of the regulated persons and the division of the regulatees 
into "good guys" and "bad guys." 
   Note 232: Sigler & Murphy, supra note 86. 
   Note 233: Ayres & Braithwaite, supra note 13, acknowledge that not all 
industries are suitable candidates for enforced self-regulation.  It is likely 
that the existence of an adequate compliance system to deal with the standard 
government regulatory scheme would be a precondition to allowing a firm to write 
its own rules.  It is also likely that a firm would require experience with a 
compliance system before it would be able to write meaningful rules. 



      5.   A Wide Range of Sanctions 
¶ 207     Sanctions must be available in a mandatory self-regulatory system to 
deal with the minority of noncompliers and lend credibility to the system. [See 
Note 234 below]  The existence of sanctions provides an answer to the "assurance 
problem," which refers to the need of firms to be assured that the other firms 
in the industry will also be expending the resources necessary to comply with 
regulation and maximizing the longer terms gains that can be achieved through a 
self-regulatory system. [See Note 235 below] 



   Note 234: See quote from Chester Bowles, supra note 137. 
   Note 235: I. Maitland, "The Limits of Business Self-Regulation" (1985) 27 
Calif. Mgmt. Rev. 132. 



¶ 208     The requirements for compensation or restitution, improved compliance 
practices, education, retraining, hiring of experts, reporting and publicity are 
sanctions in addition to fines that can be used to change behaviour and deter 
future noncompliance.  These forms of sanctions can be particularly important in 
a public interest regulatory system where the objective is not so much the 
punishment of wrongdoers as the prevention of future misconduct. 
¶ 209     One of the advantages of some self-regulatory systems is that they 
have a wide range of sanctions available. SROs with licensing powers or 
memberships can revoke licences and memberships or impose terms and conditions.  
The same flexibility should be found in tribunals and courts dealing with 
regulated firms and individuals so that sanctioning options are not lost and the 
full range of behavioural changes (or deterrence) can be effected. 
      6.   Government Procurement or Contracting Practices 
¶ 210     Governments are major consumers of goods and services.  Governments 
therefore have considerable consumer power and may require firms to comply with 
certain codes of practice in order to contract with them.  Defense contractors 
in the United States have to establish internals codes of practice.  The 
Australian federal government, which spends about $10 billion a year on goods 
and services, has an environmental purchasing policy. [See Note 236 below]  The 
Canadian Federal Government also has an environmental purchasing policy and 
provides "green procurement training" to government officers with purchasing 
authority. [See Note 237 below]  The policy seeks to encourage environmentally 
sound products and encourage the development of new products.  A government 
could require, for example, that suppliers be certified to ISO 9000 or 14000 
standards, or comply with a Code of Privacy Principles. 



   Note 236: P.N. Grabosky, "Green Markets:  Environmental Regulation by the 
Private Sector" (1994) 16 Law & Policy 419 at 431. 
   Note 237: A Guide to Green Government (Ottawa: Minister of Supply and 
Services, 1995). 



B.   Complementary Policies 
¶ 211     As discussed above, many mechanisms dealing with powers and functions 
delegated by government and which ensure government accountability are missing 
from self-regulatory regimes. In some cases,  accountability structures, such as 
an Ombudsman for supervised SROs may not be necessary; in other cases, there is 
a trade-off between the advantages of self-regulation and a reduction in 
accountability.  The trade-off may be weighed more heavily than necessary in 
favour of reducing accountability.  The use of public members on boards of 
directors or governing bodies of SROs, the opening of meetings and procedures to 
the public, the introduction of transparent and fair processes to the complaint, 
enforcement and discipline procedures of SROs, and the use of independent 
auditors or reviewers of SRO functions can enhance accountability.  Where 
government delegates functions, any or all of these techniques should be used. 
¶ 212     Self-regulation may not involve government directly, but may have been 
implemented to improve an industry's reputation, to gain consumer confidence, or 
to avoid the potential of government action.  The issue here is not 
accountability for the use of state powers, but enhancement of the objectives of 
the self-governing regime. Community involvement, independent nonindustry 
directors, third party compliance audits and an industry ombudsman to deal with 
complaints are techniques that add to the credibility and ultimate effectiveness 
of the regime. 
¶ 213     In the case of delegated self-regulation, government policies should 
be developed to either  directly apply access to information legislation to the 
regulatory functions of the SRO or to establish a complementary regime. [See 
Note 238 below]  For the "private" self-regulator, industry codes are generally 
well-publicized.  The Competition Bureau can play a role in the development of 
private industry codes.  The "approval" of industry codes by the Bureau should 
depend, in part, on the existence and transparency of the complaint processes in 
the code. 



   Note 238: See discussion above.  Some may anticipate difficulty in defining 
"regulatory" functions.  I believe this can be done, but is an additional 
argument in favour of separating lobbying from the regulatory role.  For 
example, in the Netherlands, separate groups have been formed to negotiate 
environmental covenants; Ontario, Ministry of Environment, Industry 
Self-Management for Environmental Protection:  A Background Paper by J. Moffet 
(18 April 1997). 


      VIII.When Should Self-Regulation Be Used?

A.   The Role of Government in Self-Regulation 
¶ 214     All firms and industries self-regulate to some degree or another.  
Some have fairly sophisticated internal compliance systems in place and others 
just "muddle through." As noted in the discussion above, there are a variety of 
forms of self-regulation, ranging from voluntary industry codes to supervised 
SROs.  While it is useful for policymakers to be aware of the range of 
self-regulating options available, it is even more useful to have a sense of 
when voluntary self-regulation is to be encouraged and when the government 
should consider delegating powers to the private sector to perform 
quasi-governmental functions. 
¶ 215     To some degree, the answer to this question involves a much broader 
question dealing with the proper role of government at the end of the 20th 
Century.  Leaving this question to the politicians and the electorate, some 
guidelines can be drawn from the above discussion of the forms and uses of 
self-regulation. 
¶ 216     The critical first decision is whether regulation itself is required, 
not whether self-regulation is required.  As a starting point, a problem must 
exist that can be solved or ameliorated by regulation; without that threshold 
question's being answered in the affirmative, self-regulation should not be 
considered.  Thus an industry's desire for professional status should not be the 
impetus for the establishment of a self-regulatory regime. Rather, the public 
interest should require regulation. 
¶ 217     This is not to say that, having identified the need for a regulatory 
solution (or at least a government response), self-regulation might not be the 
chosen policy instrument in cases where direct regulation might not be feasible 
or pragmatic and would be rejected if it were the only available regulatory 
solution. [See Note 239 below] Self-regulation, however, should not become 
attractive because it seems like a "kinder, gentler" form of regulation in the 
absence of a sustainable rationale for regulation. 



   Note 239: This is a theoretical discussion, but history indicates that 
self-regulation has been chosen pragmatically where direct regulation was 
impracticable; see discussion of securities regulation, above.  For a discussion 
of policy instruments, see Economic Council of Canada, Regulation Reference, The 
Choice of Governing Instrument by M. Trebilcock et al. (Ottawa: Minister of 
Supply and Services Canada, 1982); Canada, supra note 7. 



B.   The Choice of Voluntary Codes 
¶ 218     Industry codes probably work best as alternatives to government 
regulation when there are a relatively small number of firms in the industry. 
[See Note 240 below]  They are also probably most effective when the firms are 
relatively large and mature so that they can afford to take a longer term view 
of their self-interest and not be constrained by short-term considerations that 
inhibit expenditures on rulemaking and internal monitoring and enforcement.  
There may also be other firm characteristics that make firms or industries more 
likely to comply with self-regulation.  Gunningham suggests that firms with 
rapidly changing or advanced technology may be more likely to comply with 
regulation of industrial processes, such as environmental regulation. [See Note 
241 below] 



   Note 240: There is no magic number; the issue is whether the transition costs 
of organizing and policing compliance will be too high to make an effective 
organization feasible.  See analysis of Gunningham, supra note 35.  It should be 
noted, however, that where the industry consists of only a small number of 
players, direct regulation may be preferable to prevent anti-competitive 
behaviour; Trebilcock, supra note 80. 
   Note 241: Gunningham, ibid. at 68.  Presumably in a field with rapidly 
evolving technology, the companies could more easily adjust to the investment 
and changes in production processes that would be required to comply with new 
regulatory regimes. 



¶ 219     The firms should have sufficiently common interests to be able to 
agree on a code and be willing to fairly enforce it; ideally, the opinion of 
peers should be important to industry members [See Note 242 below] and there 
should be a sensitivity to consumer or public opinion.  Low import activity and 
a situation where all or most of the industry players are members will be 
necessary for an effective organization.  The industry should have sufficient 
resources to support an industry organization and the development and monitoring 
of a code or rules.  Expertise must be available, either within the industry on 
a voluntary basis or within the organization.  In many cases, the industry group 
will have a long history, often as a lobby group, and will have had an 
opportunity to develop membership and gain expertise. 



   Note 242: In two of the most effective voluntary situations, Responsible Care 
and the Institute of Nuclear Power Operations, peer pressure provides a potent 
force for compliance. 



¶ 220     In some situations, direct government regulation is preferable to the 
use of voluntary, or even mandatory, codes.  For example, if there are a large 
number of players in the industry and no industry association representing most 
of the players or if the industry members cannot agree on the appropriate 
standards to be embodied in a code, the government may have to take action.  If 
there is a significant imbalance of power among the players in the industry, a 
code may also be difficult to develop and enforce.  A code may not be considered 
to be an appropriate alternative to direct regulation when imported products 
account for a substantial portion of the market and foreign companies are 
unlikely to comply with Canadian codes.  Nor may a code be appropriate when 
there is significant export potential and no comparable standards in trading 
partner jurisdictions so that a code would put Canadian firms at a competitive 
disadvantage. [See Note 243 below] 



   Note 243: It is always possible, of course, that adherence to a code will 
establish a reputation for quality that could give Canadian firms a competitive 
advantage. 



¶ 221     The Australian Trade Practices Commission has identified situations 
where a mandatory code is preferable: 
      -the code is intended to operate instead of government regulation, 
      following repeal of legislation, or as an alternative to proposals for 
      government regulation
      -the voluntary code is delivering unsatisfactory outcomes or there is 
      inadequate coverage of relevant participants under the voluntary scheme
      -there is a need for industry specific regulation to address demonstrated 
      market failure which is resulting in significant consumer detriment. [See 
      Note 244 below]



   Note 244: Submission by the Australian Trade Practices Commission to the 
Australian Law Reform Commission, supra note 50 at 23.  The Law Reform 
Commission preferred the use of regulation rather than mandatory codes where 
there was a failure of voluntary responses. 



C.   The Delegation of Government Powers to Self-Regulate 
¶ 222     Most of the same factors will have to be present in identifying an 
organization to which government powers should be delegated. [See Note 245 
below]  In this case, additional concerns about the accountability for the 
exercise of powers are raised.  An SRO must be capable of enforcing regulation 
with an even hand.  Provisions for complaints, dispute resolution, discipline 
and sanctions are required. The SRO must have the expertise and resources to 
fulfill its regulatory responsibilities. Among the qualities necessary to 
sustain self-government are adequate finances, a democratic structure and a 
demonstrated willingness to operate in the public interest and a consensus on 
the objectives to be achieved by regulation. [See Note 246 below] 



   Note 245: See, for example, the Ontario Securities Commission, "Request for 
Comments" (1995) 18 O.S.C.B. 2667. Certain weaknesses of a voluntary system, 
such as the willingness of industry members to join an organization or draft a 
code, can be overcome by the potential of mandatory provisions in government 
regulation.  Thus the Draft Code of the IFIC will cover the entire industry, 
even the reluctant "holdouts" when it is embodied in the rules of the OSC; see 
discussion above. 
   Note 246: Manitoba Law Reform Commission, supra note 8 at 51. 



¶ 223     The usually mandatory nature of delegated self-regulation means that 
the entire industry is subject to the SRO's jurisdiction [See Note 247 below] so 
the problem of "holdout" firms or free riders is eliminated; indeed, this is a 
major rationale for delegated self-regulation as opposed to voluntary 
self-regulation.  Serious consideration must be given, however, to the need for 
government supervision or auditing of an SRO. [See Note 248 below]  In many 
cases, a compromise is reached, with an independent tribunal hearing appeals 
from the SRO on selected matters and the government having a role in appointing 
a portion of the SRO's board of directors and requiring public representation on 
disciplinary committees. [See Note 249 below]  This is the common form of the 
supervised self-regulatory model. 



   Note 247: In some cases, there may be more than one SRO covering an industry, 
e.g., the Toronto Stock Exchange and the IDA dealing with brokers, and 
regulation either becomes rationalized (D. Westell, "One master seen for 
brokers" The Financial Post (4 September 1996)) or competing SROs may be 
encouraged (Manitoba Law Reform Commission, supra note 8). 
   Note 248: See the discussion of ACUS, above Part II, and Michael, supra note 
12. 
   Note 249: This is the approach taken with the regulated health professions. 



¶ 224     The government does not necessarily have to delegate all regulatory 
functions to an SRO.  It may choose to retain the rulemaking and policy-making 
function and only delegate operational management responsibilities for program 
delivery; this is found in the self-management or cooperative implementation 
model.  This is most likely to occur where the expertise of the industry is 
found mainly in its functional activities (i.e., its own business) but where an 
industry organization lacks the history and expertise to develop standards and 
adjudicate disciplinary matters. 
¶ 225     In other situations, the government may delegate rulemaking or rule 
elaboration functions while retaining residual enforcement and sanctioning 
power.  This is found in the firm-defined regulation model.  This is most likely 
to occur where industry processes are complex and highly variable from firm to 
firm.  A degree of industry expertise in setting standards is required and means 
that larger, more sophisticated firms are most likely to find this managed 
self-regulation or firm-defined regulation most attractive. At the same time, 
the government must retain its own expertise and responsive capacity in order to 
make judgments on the adequacy of firm or industry standards and deal residually 
with enforcement. 
¶ 226     For each form of self-regulation, an analysis is required of industry 
and firm-level commitment to compliance. Questions about compliance history, 
compliance programs, the availability of incentives for compliance, and the 
existence of expertise must be asked and answered satisfactorily to ensure an 
effective self-regulatory regime. 
      IX.  Conclusion

¶ 227     This paper has reviewed five models of self-regulation that vary in 
the degree of government involvement in the regulatory structure and reliance on 
delegation of powers of the state.  Purely voluntary codes are established and 
run by firms or industry organizations, relying on the state only to allow 
industry members to enforce industry contractual arrangements.  In statutory 
self-regulatory systems, the powers of the state to develop and enforce rules 
are delegated to industry organizations. There is also a delegation of state 
power in supervised self-regulatory structures, but the SRO is subject to the 
oversight of a government body, usually a quasi-judicial agency. 
¶ 228     There are relatively few examples of firm-defined regulation, but in 
these cases, the power of the state is brought to bear on the firm (or industry 
organization) to require the private development and enforcement of regulatory 
requirements.  Experience to date is narrow, but this model appears to be 
effective in developing safety systems in industries with existing regulatory 
regimes and a history of regulation. 
¶ 229     In regulatory self-management systems, the state retains the 
responsibility of developing policy and rules, but delegates through 
administrative agreements to an industry organization the operational 
responsibilities of a regulatory regime.  The regulatory self-management systems 
in Ontario and Alberta are new and more experience will be required to assess 
their operation. Another self-management approach, the HACCP system, is becoming 
more popular as government shifts regulatory responsibilities (e.g., inspection) 
to the private sector and recognizes the need for improved risk management 
systems. 
¶ 230     A public policy framework has been developed in order to analyze the 
self-regulatory models according to five criteria:  efficiency, effectiveness, 
openness, fairness and accountability.  Following the analysis, one finds, for 
example, that voluntary codes can be highly efficient: expertise is harnessed; 
they can be flexible; they present a low cost regulatory option to government in 
developing and operating codes; and they can be relatively quick to develop and 
respond to changing circumstances.  Voluntary codes, however, may be less 
effective than other forms of self-regulation since they often lack enforcement 
mechanisms and compliance incentives.  They can also be a closed process, with 
relatively little participation by interest groups representing the general 
public, and have limited accountability mechanisms. 
¶ 231     Continuing the analysis, one finds that supervised self-regulation 
presents a different range of strengths and weaknesses when assessed against the 
public interest criteria.  It may be less efficient than other self-regulatory 
models since it allows for, and even encourages, a duplication of effort by the 
SRO and the supervising agency. However, there are accountability mechanisms in 
place and incentives for compliance exist. There is likely to be a relatively 
high degree of openness and transparency.  Fairness and natural justice also 
play an important role in the regulatory processes of both the SRO and the 
oversight agency.  The other models each present their own range of strengths 
and weaknesses when assessed against the public interest criteria. 
¶ 232     The Responsible Care system of principles and voluntary codes of 
practice, for example, illustrates an arrangement where industry in its own 
self-interest undertook to impose regulatory requirements on itself.  While 
Responsible Care has been subject to criticism, primarily for possible lack of 
effectiveness, it can be viewed as one of the more sophisticated and established 
voluntary code systems. Peer pressure, community involvement and (in Canada) 
third party auditing provide incentives for compliance, openness, and a degree 
of accountability. 
¶ 233     Professional self-regulation is a regulatory model in which the state 
creates (in the most extreme method of licensing) a monopoly where the regulated 
industry is the regulator.  This model of statutory self-regulation has been 
applied primarily to the professions, which have historically been granted this 
unique role because of expertise and a special agency relationship with clients. 
 Consequently, the status of a professional has been eagerly sought and most 
professional regulation has been implemented at the request of the regulated 
members themselves.  In an effort to increase the accountability of professional 
self-regulatory organizations and temper self-interest, more public 
participation and openness is being encouraged. 
¶ 234     Supervised self-regulation has led to increasingly sophisticated and 
effective systems in the financial sector where both the government oversight 
agency and the SRO have been more knowledgeable and committed to regulatory 
objectives.  There has been a history, however, of periodic regulatory failure 
followed by strengthening of the regulatory system by a commitment of additional 
resources and elaboration of the governing rules.  The supervised SROs provide 
an expert and effective form of regulation, although self-interest has been a 
continuing weakness.  The monitoring by the oversight agency increases 
accountability and provides compliance incentives. 
¶ 235     The review of self-regulatory models indicates that self-regulation is 
most likely to work best when certain conditions are present.  These include 
such factors as: 
      -relatively few industry players;
      -high exit costs from the industry;
      -a history of effective cooperation;
      -expertise and resources for regulation are available in the industry;
      -noncompliant behaviour can be punished;
      -consumers value compliant behaviour;
      -fair and adequate dispute settlement mechanisms are in place (to deal 
      with both consumers and industry members disputing among themselves);
      -some role is available for public participation or oversight.

It may be noted, however, that many of the factors that are conducive to 
effective self-regulation also may create incentives for anti-competitive 
behaviour. 
¶ 236     There is an untapped potential in the use of self-regulation to deal 
with public policy problems that require action.  Self-regulation, however, 
should not be viewed as a panacea for reducing the regulatory burden of modern 
government.  Simply because the option of self-regulation may exist does not 
relieve the government from asking hard questions about the appropriateness of 
regulation. Even where some form of regulation is appropriate, self-regulation 
may not be the best choice, although it might be regarded as a politically 
attractive alternative. 
¶ 237     Ultimately policy choices have a political component and some 
governments have a bias toward greater or less intrusive forms of policy 
instruments.  The benefits and advantages of self-regulation may be given more 
weight in some political contexts while the costs and disadvantages may be 
stressed in others.  Self-regulation appears to work best where the government 
maintains a presence, either through supervision of self-regulatory functions or 
through residual enforcement powers.  The structure breaks down when the small 
minority of the regulated members who are disposed to noncompliance are allowed 
to operate with impunity. 
¶ 238     Self-regulation thus often works best when it functions in the 
"shadow" of government regulation.  Voluntary codes that are developed to 
forestall or, even better, to flesh out government regulatory structures are 
likely to have adequate accountability and compliance mechanisms which are 
sufficient to provide an effective system. 
¶ 239     The influence or "shadow" of government can occur when there is direct 
government involvement in mandating regulation, rule-setting or enforcement, or 
when a government agency supervises the regulatory activities of an industry 
organization.  There appears to be evidence that the advantages of 
self-regulation (e.g., flexibility, "buy-in" by the regulated industry, 
expertise, leverage of industry power) are genuine.  There is, however, 
sufficient evidence of regulatory failures to indicate that the government 
cannot completely abdicate responsibilities to self-regulators in those areas 
where there is evidence of a regulatory problem that indicates the need for a 
government regulatory response. 
*  *  * 
RE AUTHOR:--  Margot Priest, Partner, Regulatory Consulting Group Inc., Ottawa. 
The author would like to acknowledge the advice and support of Professors Liora 
Salter and Ellen Baar of York University, Professor Michael Trebilcock of the 
University of Toronto, and Professor W.T. Stanbury of the University of British 
Columbia. All errors and omissions remain those of the author, of course. Thanks 
are also given to Olga Avramenko for her help and support.