Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House


August 2004
Hearings into securities legislation begin Aug. 18

Critical issues for industry’s future expected to attract a number of concerned parties, and possibly even some summer fireworks


By James Langton

The Ontario government has finally created a legislative committee and set hearings to examine recommendations made in the five-year review committee’s final report on the Ontario Securities Act. Critical issues are on the line, which means there could be fireworks when the debate gets underway in a few weeks.

The standing committee on finance and economic affairs — headed by two provincial Liberals, chairman Pat Hoy and vice chairman John Wilkinson — is slated to hold hearings Aug. 18, 19, 23 and 24 and report its conclusions to the Ontario Legislature by Oct. 18.

Apart from reviewing the reform recommendations of the five-year review committee, Hoy and Wilkinson will also consider matters such as whether the Ontario Securities Commission’s adjudicative structure should be reformed, as well as contemplate the possibility of a single regulator in Canada.

On the single-regulator issue, the five-year committee, chaired by Purdy Crawford, called for Ontario’s finance minister to take a leadership role in establishing one regulator for the capital markets.

While the recommendation was directed at a previous administration, the current Ontario government has already initiated such an effort, proposing a plan that would see the provinces agree to adopt a “passport model” in the next few years, on the condition that Canada then move to a single regulator within two to four years.

The single regulator issue is a persistent concern for the market, and Ontario has no ability to impose a solution, which can only come from a federal edict or an overall provincial agreement.

Since Ontario has taken a direction on the question, the more significant work of the committee may be on things it actually has the power to affect, such as the structure of the OSC and the general function of regulation in the province.

The OSC’s structure was raised by the Crawford committee in its final report, although it didn’t recommend a specific alternative. However, it did suggest that its multiple roles as investigator, prosecutor and adjudicator should be studied.

The OSC took up that recommendation by striking a three-person panel — headed by Ontario Integrity Commissioner Coulter Osborne, along with Queen’s University professor (and Toronto’s new integrity commissioner) David Mullan and Bryan Finlay, a lawyer at Weir Foulds.

The committee canvassed opinion in the industry last summer and fall, and reported its findings to the OSC this past spring. It heard recommendations for everything from leaving the current system unchanged to moving to the U.S. model of external adjudicators, to possibly even hiving off the commission’s enforcement division.

The committee’s conclusions. however, have remained under wraps. The OSC promised to release the report to the public. It hasn’t yet done so, although it now says that it will present the report to the legislative committee when it testifies this summer. “Our plan is to have our chairman, David Brown, table the report, along with other legal opinions, at the start of the committee hearings,” says Wendy Dey, the OSC’s director of communications.

“We have always planned to make the report public and have said that when the legislative committee has been named, it would be appropriate that its members see the report first before we release it,” she says.

The timing isn’t soon enough for some who hope to testify before the committee. One veteran securities industry lawyer says that releasing the report at the start of a four-day hearing doesn’t really give others time to digest it and offer meaningful commentary.

"It does not make sense to expect the public to comment on a paper which is not before them or may be placed before them at those meetings."

Industry gadfly Robert Kyle has asked the clerk of the committee to make the report public sooner. “The Osborne Report should be released immediately,” Kyle says in his letter to the committee.

“As the committee has been scheduled to meet for four days in August, and the report’s contents are a subject of that meeting, it does not make sense to expect the public to comment on a paper which is not before them or may be placed before them at those meetings. The investing public deserves better disclosure,” he writes.

Dey argues that the Osborne report is not a separate item under consideration by the committee, that it is simply part of the commission’s response to the Crawford committee, and so it should be tabled along with its own testimony. That may be the case but the OSC’s insistence, particularly when the hearings themselves are already taking place with little fanfare in the dead of summer, leaves the process open to accusations of insufficient transparency.

The committee clerk indicates that the committee doesn’t yet have the Osborne report, nor has the subcommittee asked him to obtain a copy. The subcommittee has already met once to discuss the hearings and the issue is on the agenda for upcoming subcommittee meetings, possibly before the end of July (after Investment Executive’s deadline), so the matter may yet be settled before the first hearing.

While the structure of the commission is a critical issue, it’s hardly the only one that came out of the Crawford report. Some of its 95 recommendations — including tougher penalties for securities law violators and greater enforcement powers for the OSC — have already been adopted by the legislature.

Other issues it raised concern the Investment Dealers Association of Canada, including whether improvements can be made to the composition of its disciplinary panels and the membership of its board of directors to lessen perceptions of conflict of interest. It also asked the OSC to consider whether the IDA should be given more powers, including: expanded jurisdiction, statutory immunity, the ability to compel witnesses, the ability to file decisions as orders of the court; and the power to seek monitors for firms that are in chronic non-compliance.

The Crawford committee also called for streamlining of the Securities Act, speeding up the rule-making process, better oversight and accountability of the commission, fewer OSC projects, an expanded civil liability regime, and that the commission consider ordering restitution in certain cases.

It also made recommendations regarding the contentious issue of fund governance, calling for independent boards to oversee mutual funds, with specific responsibilities, including overseeing fees and approving material contracts. It recommended that the boards have the power to terminate managers, powers that go far beyond the regulators’ current plans for fund governance.

So many important issues means there should be plenty of interested participants queuing up to testify, despite the cottage-weather timing. Apart from the usual industry suspects that can be expected to testify, Kyle is trying to line up a strong contingent of speakers that will represent investors’ interests. IE