Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

   

 

IN SEARCH OF ACCOUNTABILITY

 

Ontario Information Privacy Commissioner

After refusing an Order of the Ontario Information Privacy Commission the OSC quietly released the 2000 OSC Audit of the IDA in January 2005

David Brown

ex-Chair of the Ontario Securities Commission

Joe Oliver

ex-President of the Investment Dealers Association of Canada

 

Watchdog on a short leash

18 September 2000


Settling with an SRO

March 2001


OSC Audit criticizes IDA, sparks departures

April 2001


Regulators under fire

 

May 2001


Investors suffer from silence

25 May 2001

 

An investor's request to the Freedom of Information Office at the Ministry of Finance for Access to the OSC Audit of the IDA

Request

18 September 2001

DENIED

01 November 2001


Concurrent with this request, another investor also made the same request to the Ontario Information Privacy Commission.  This request was successful, albeit, heavily contested by the Ontario Securities Commission.


Appeals rising sharply over Ontario government denials of information access

12 June 2002

 

Are all these refusals warranted in the face of this recent ruling by the 

Supreme Court of Canada?

Court limits scope of publication bans

'Our country is not a police state,' ruling says in allowing coverage of police sting

16 November 2001


Province short on Freedom of Information

25 April 2002


Document dispute leads to court fight

03 June 2004

"Investors as well as brokers have an absolute right to know if they have been subjected to improper or negligent regulation," Kyle says. "After all, we recognize that regulators are not perfect — and with immunity, what have they got to worry about?"


OSC tries to block release of report on brokerage watchdog

20 July 2004

 


 

OSC Representations to the Information Privacy Commission

ALL DOCUMENTS


The OSC was ORDERED to RELEASE the Audit

Order PO- 2029

  1. I order the OSC to issue an access decision with respect to the audit report to the appellant under the Act, treating the date of this order as the date of the request, in accordance with the provisions of sections 26, 28 and 29 of the Act.

  2. I further order the OSC to provide me with a copy of the access decision referred to in Provision 1.

Original signed by: Tom Mitchinson
Assistant Commissioner
July 24, 2002


The OSC APPEALED the DECISION and FAILED

ORDER PO-2206

  1. I order the OSC to disclose the record to the appellant no later than December 16, 2003, but not earlier than December 9, 2003.

  2. In order to verify compliance with provision 1, I reserve the right to require the OSC to provide me with a copy of the material disclosed to the appellant.

    Original signed by: David Goodis
    Senior Adjudicator
    November 18, 2003


The OSC further APPEALED  to the Superior Court for Judicial Review

Minister of Finance of Ontario v. Information and Privacy Commissioner of Ontario

and Jane Doe and The Investment Dealers' Association of Canada, Toronto Doc. 37/04 (Div. Ct.)


The 25-page document, which is the subject to this order of the IPC, was produced by the Ontario Securities Commission in August 2000 and delivered to the Investment Dealers Association of Canada (IDA).

It was a critical performance appraisal of the IDA. 

The OSC's examination focused largely on the IDA's enforcement procedures. According to the commission's report, the IDA's Mr. Clarke altered penalty recommendations put forward by staff in the IDA's enforcement branch "on a very frequent basis" without documenting reasons for his changes.

 "This brings into question the adequacy of the due diligence process followed by enforcement counsel in formulating the recommendations," the OSC report said.

"It is the staff's view that there is a need for significant improvement in the IDA's corporate governance and organizational structure and in the enforcement department" declared the report written by staff at the securities regulator and delivered to the IDA last August [2000] and the enforcement division was chastised for "lack of trained and experienced investigators, counsel and complaints officers."

As a result the IDA retained AssetRisk Advisory Group to perform an independent review.  Immediately following the completion of the "Chambers Report", the IDA dismissed two senior officials;

 

1. Greg Clarke, Senior V.P. Member Regulation

(now employed by an IDA member M Partners Inc.  and later TradeFreedom Securities Inc. where he also sits on the IDA Financial Administration Committee.

2. Fred Maefs, Director of Enforcement

(now employed by Ministry Of Environment - Legal Services Branch)

 

Mr. Chambers called for a more streamlined enforcement division but he also notes the IDA needs to do a better job of managing its position as a self-regulatory organization and a trade association.

"In order to manage the conflicts that could arise between the two functions, there is a senior vice-president in charge of member regulation and trade association," wrote Mr. Chambers, adding "there is a perception that the senior management in member regulation is too close to members and that this introduces a bias in the enforcement process."

 

IDA boss stakes job on improving performance

19 June 2001

"We safeguard the public interest-- and scrupulously avoid conflict of interest -- by rigorously separating our regulatory operations from other parts of the organization," he said. The lobbying arm's staff "do not interfere" in regulatory matters, he said -- "period." 

- Joe Oliver, ex-President of IDA

 

Ralph Brockbank, a retired Royal Canadian Mounted Police inspector, left the IDA only two months after having joined on March 1, 2001 as a replacement for Fred Maefs.


The OSC is responsible for, and relies upon, the IDA.  Since the OSC would be revealing how poorly it's oversight was of the IDA with the great number of regulatory deficiencies uncovered within the reports, the OSC would be seen to remiss in its mandate.

The OSC has also denied access to the public of the 57- page "Chambers Report" which was also very critical of the IDA.

Both the IDA and the OSC did everything within their power to keep the two reports as secret as possible.

Below are extracts from the submissions of the OSC and the successful requestor of the OSC audit.


(The paragraph numbers on the margin below will take you to the actual Order)


"For organizations that are touting the merits of corporate governance, their own governance seems sadly lacking."

   

 19

The OSC submits:

 

The record contains no less than 18 specific recommendations regarding the corporate governance and organizational structure of the IDA, the IDA's Enforcement Division, and the IDA's compliance with the terms and conditions of its recognition by the OSC as a self-regulatory organization. These recommendations are summarized at the beginning of the report and developed throughout the body of the report. Each recommendation clearly relates to a suggested course of action.

Staff in the Capital Markets Branch of the OSC formulates the recommendations. The responsible staff members are permanent employees of the OSC.

The record is the result of OSC Staff's oversight examination of the IDA. The purposes of such an examination include:
 

1.

To determine compliance with the terms and conditions of the IDA's recognition and related undertakings,

2.

To ensure that the IDA continues to have appropriate corporate governance structure, procedures and resources to fulfil its regulatory obligations,

3.

To ensure that the IDA's core member regulation functions are being performed appropriately and there is consistent enforcement of securities laws and IDA rules,

4.

To analyze and address any deficiencies in the IDA's functioning as a self-regulatory organization, and ensure the effective resolution of these deficiencies.

 

Where, in the course of an oversight examination, OSC staff identifies possible areas of concern regarding the IDA's fulfillment of its regulatory obligations, it can recommend corrective action. These recommendations are initially provided to the IDA for feedback but are ultimately directed to the OSC for consideration. Some recommendations may require actions by the OSC. In considering them, the OSC decides which recommendations, if any, the IDA or OSC should implement.

 

Following its oversight examination of the IDA and other self-regulatory organizations, OSC Staff make their recommendations frankly and candidly to assist the OSC and the self-regulatory organization in determining whether or not the self-regulatory organization is meeting its mandate or if changes to any regulatory processes are required. Not every recommendation is necessarily accepted or rejected.

 

Public scrutiny of Staff's recommendations could reasonably be expected to result in undue pressure on the OSC to make decisions or take actions regarding a particular self-regulatory organization. A direct result of such pressure would be an unwillingness by OSC Staff to be as frank and candid in their assessments and recommendations in the exercise of the OSC's oversight function. This would deprive the OSC of the benefit of a full and measured consideration of the issues raised by Staff's recommendations. As the IPC noted in reiterating representations made by the Ontario Human Rights Commission,

 

[i]t is a fact that staff would not feel free and open to express their minds in writing on specific issues if they were aware that their advice or recommendations were subject to possible public scrutiny. Such "chilling effect" is precisely the rationale behind the exemption. In our opinion, the [Human Rights] Commissioners must have the benefit of staff advice which is candid, direct and to the point.


¶ 20

The appellant submits:

 

The audit does not constitute "advice and recommendations" in the traditional sense. The OSC is, by its own definition, the regulator of capital markets in Ontario and administrator of the Securities Act. The audit, presumably, represents the findings of the OSC in the discharge of that duty. Therefore, "advice and recommendations" carry the weight of directives for this purpose.

The OSC cannot claim on the one hand that the audit offered "advice and recommendations' and at the same time constituted a law enforcement document. Since I haven't been able to read the audit, I can only assume that the OSC conducted an investigation of IDA operations, found flaws and instructed the IDA to correct the faulty practices?  If that assumption is correct, then the audit does not meet the test of either definition.

 

"... [T]he argument by both the OSC and IDA that the audit was prepared in confidence and that its release would prevent public servants in future from offering their frank and candid advice. Seemingly, a chill would descend on the offices of both organizations.

Why?  Public servants make an oath of service that requires them to discharge their responsibilities in the public interest. Occasionally, this involves the identification of problems that might arise in the provision of services, or protection of the public. I am assuming that the audit does not reveal the names of public servants who might have volunteered their thoughts and information during the course of the IDA review. In which case, confidentiality should not be an issue. Frankly, the public should be seriously concerned about the comment  made by the OSC, in its representation, to the effect that:

   
  "Public scrutiny of staff's recommendations could reasonably be expected to result in undue pressure on the OSC to make decisions or take actions regarding a particular self-regulatory organization.  A direct result of such pressure would be an unwillingness by OSC staff to be as frank and candid in their assessments and recommendations in the exercise of the OSC's oversight function." -OSC
   
  If that is true, the OSC is openly confessing an inability to endure public scrutiny.
   
  Why would that be?
   
What is perhaps most troublesome about the representations by the OSC and IDA is almost their total lack of reference to their obligations to the investor. Only passing mention is offered. The representations essentially focus on the perceived problems that could befall the administrators should their inner workings be glimpsed by the public they are charged to protect."
   
 

On its web site, the OSC tells the public that its mandate is to

  • Protect investors from unfair improper and fraudulent practices

  • Foster fair and efficient capital markets

  • Maintain public confidence in the integrity of those markets

   
 

Similarly, on its web site, the IDA claims its mission is "to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets."

I submit that the repeated refusal of the OSC and IDA to release the audit flies directly in the face of their professional priorities and, in fact, erodes public confidence in Ontario's investment industry.


 56   IPC Findings:

 

  In essence, the position of the OSC and the IDA is that if the record is disclosed, the IDA will be reluctant to cooperate with the OSC in its reviews. This submission lacks credibility. By the terms of the order in which the OSC recognized the IDA as a self-regulatory organization [see Re Investment Dealers Association of Canada (1995), 18 O.S.C.B. 5293] the IDA is bound to cooperate and be fully frank with the OSC in its reviews and, specifically, to provide OSC staff with access to its processes and procedures (see, in particular, Schedule "A" of the recognition order). In addition, with respect to the IDA's annual self-assessments, paragraph 10 of Schedule "A" of the recognition order states:

Management of the IDA shall at least annually self-assess the IDA's performance of its self-regulatory responsibilities and report thereon to the executive committee, together with any recommendations for improvements. The executive committee shall be responsible for reporting to the Board as to the IDA's performance of its self-regulatory responsibilities, and the executive committee shall include at least one public director. The IDA shall provide the [OSC] with copies or summaries of such reports and advise the [OSC] of any proposed actions arising therefrom.

   
¶ 57  In my view, this provision conflicts with the position of the OSC and the IDA that, in future, the IDA would be "unlikely to provide useful critical commentary on its own performance" and "would provide the OSC with little more than a statistical review as an annual self-assessment."
   
¶ 58 Further, in the absence of any evidence to indicate that other self-regulatory organizations are not similarly bound to cooperate with the IDA, I am not persuaded that it is reasonable to expect that disclosure of the record will have any effect on the OSC's reviews of these other organizations.
   
¶ 59 To conclude, I find that the OSC and the IDA have not provided sufficiently "detailed and convincing" evidence to establish a "reasonable expectation of harm" under section 17(1)(b). Therefore, the record is not exempt under section 17.
   
ORDER
   
¶ 60

 

1 I order the OSC to disclose the record to the appellant no later than December 16, 2003, but not earlier than December 9, 2003.
2 In order to verify compliance with provision 1, I reserve the right to require the OSC to provide me with a copy of the material disclosed to the appellant.
   

 

OSC Examination of the Corporate Governance and Organizational Structure of the Investment Dealers Association of Canada and Review of the 1999 Member Self-Assessment

July 2000

Neither the IDA nor the OSC has posted the Audit on their web sites.

 

OSC drops court challenge

12 January 2005


Since audit, IDA has tackled problems

The SRO says internal mistakes have all been corrected, but its critics aren’t all satisfied

January 2005


IDA audit quietly released

13 January 2005

Kyle speculates that the OSC didn't want to end up in a messy — and very public — court battle with another government agency, adding that it would appear that the regulator has reviewed its position on disclosure and transparency in the marketplace and found it to be wanting.


Brokerage group, slammed in audit, says faults fixed

13 January 2005


OSC backs off on attempt to block critical IDA report

13 January 2005


Scathing audit of IDA finally made public

13 January 2005