Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House


Almost five years later, where's the review?



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 up.

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 cases.

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.