By JANET McFARLAND
Tuesday, August 17, 2004
Here's an interesting piece of history. In March, 2000, the Ontario
government set up its Five Year Review Committee to review the workings of
the Ontario Securities Commission and the regulation of securities issues
in the province.
And what's interesting about this bland fact?
Such a review is required to be undertaken every five years under the
Ontario Securities Act, and it was overdue even then. And that was four
and a half years ago.
This week -- in the middle of summer with little advance notice -- the
province will begin public hearings into the committee's report, which was
completed in draft form in May, 2002, and in final form in March, 2003.
With luck, the legislature's finance committee will report by October. And
then, maybe, the government will have some sort of legislative response
ready to roll by early 2005. That's five years after the committee was set
By that point, according to the Securities Act, it should be high time
to set up another Five Year Review Committee. In other words, something
about this process isn't working as intended.
Mandatory five-year reviews were established in Securities Act reforms
in 1994 to ensure regulation kept pace with changing times. This committee
was the first one to be created. And already it is clear that five years
is an eye-blink to try to do public policy reform. Maybe the government
should set up a review committee to study how a review committee can
usefully function with less than a five-year turnaround time.
The foot-dragging over this study has continued so long that parts of
it have been overtaken by history or more recent studies, while other
parts have already been implemented. Since the committee was struck, for
example, Enron has collapsed, Sarbanes-Oxley has been passed in the United
States, various legal and corporate governance reforms have been
implemented in Canada, and the so-called Wise Persons committee has issued
its report on creating a national securities commission.
By now, the best that can be hoped for the Five Year Review Committee
report is that the critical matters that haven't been handled elsewhere
will be singled out and will become the focus of the province's finance
committee hearings. This way the committee can still be satisfied that
years of work on a sweeping 295-page study have not been wasted.
Luckily, there are still several key recommendations in the committee
report that have not been addressed, so there is room for something
valuable to emerge.
The most significant issue is the structure of the Ontario Securities
Commission, which is a topic that needs to take on a higher profile. The
Five Year Review Committee said the government should study on a "priority
basis" (too late for the priority part) whether the OSC should carry out
the dual roles of prosecutor of securities crimes and adjudicator of the
And, if the OSC's dual roles should be considered a conflict of
interest, then the finance committee should examine other regulatory
bodies, too. The Investment Dealers Association, for example, is both the
industry lobby group for the brokerage firms in Canada and the main body
that regulates those firms and disciplines wrongdoing. The Five Year
Review Committee suggested the IDA should consider whether improvements
can be made to reduce perceptions of conflict of interest. There is no
reason why the finance committee shouldn't also tackle this broader issue
of regulatory structure.
The Five Year Review Committee also issued tough recommendations for
better governance of mutual funds, most of which have been ignored in new
mutual fund proposals drafted by the OSC. The finance committee can still
revisit the question, however, and at least send a message that fund
governance needs more teeth.
Another issue the committee can attack is the whole question of
expanding the right of shareholders to sue companies when they have issued
misleading financial statements or press releases. Under the current
system, companies can only face lawsuits for misinformation in
prospectuses, but not for far more routine communications.
The former Conservative government actually passed legislation to
expand shareholders' rights to sue, but it was never enacted, and has not
been reintroduced by the new Liberal government. The committee should lift
this critical reform off the back burner and onto the legislative agenda.
By letting this important review languish for so long, the Ontario
government has made it clear that regulation of the securities industry is
not a top-priority agenda item these days. The best way to salvage the
project is to make some meaningful reforms in at least a few key areas.
Better later than never.