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Osborne report says OSC should split off adjudicative function

Brown says without a better model, current structure should be left as is; Hockin backs report

Wednesday, August 18, 2004


By James Langton

The Ontario Securities Commission has finally made public the report that recommends the OSC split off its adjudicative function.

The report on the structure of the OSC, which the OSC commissioned from a committee headed by Ontario's Integrity Commissioner Coulter Osborne, examines the structure of the commission and the potential for the perception of bias and the possibility that such a perception would erode the credibility of the commission.

The report was delivered to the OSC on March 5 and only released now despite many requests to make it public sooner.

It concludes that the arguments in favour of hiving off the adjudicative function are “persuasive, indeed overwhelming”. It also said that the perception of bias undermines the adjudicative process and the integrity of the commission.

The report proposes a tribunal that would have jurisdiction over all disciplinary hearings and reviews of SRO decisions, with a further right of appeal to the court. The tribunal should have separate office space, composed of up to 12 people, including a permanent chairman, with commissioners sitting on the tribunal appointed by the government. It would have independent funding and be accountable to the legislature. It also recommended that the OSC establish a committee to oversee its enforcement arm.

Despite the fact the report advises the commission to undertake structural changes, it also found no impediment to the commission continuing to fulfill its adjudicative responsibilities and functions on a business-as-usual basis. The OSC also tabled a couple of legal opinions, from Torys LLP and McCarthy Tetrault LLP, defending its current structure.

Appearing at the Standing Committee on Finance and Economic Affairs at the Ontario Legislature on Wednesday, OSC chairman David Brown said that “we should go for it”, if a better model for investors can be found. But, without a better model, the current structure should be left as is.

Brown noted that as head of the commission he is acutely sensitive to issues of bias. However, he also noted that he understands the argument for keeping the current structure, noting that the Osborne report pointed out that the Supreme Court of Canada has found no complaint about the apprehension of bias where organizations adopt an integrated regulatory model.

He noted that Chief Justice McLaughlin has said, "The overlapping of investigative, prosecutorial and adjudicative functions in a single agency is frequently necessary for [an administrative agency] to effectively perform its intended role."

Apart from the structure issue, Brown also recommended that the committee give priority to four initiatives requiring legislative attention: a regime for statutory civil liability for secondary market disclosure, and add express prohibitions against fraud, market manipulation and misrepresentation; statutory amendments to facilitate inter-jurisdictional delegation of decision-making; allowing the commission to issue blanket rulings and orders that provide exemptive relief to market participants; the need to catch up to changes in how commercial law deals with the transfer and pledging of securities.

"Unlike investors in the United States, Ontario investors face significant hurdles in suing corporations and their insiders for false or misleading disclosure," Brown said. "The proposed civil remedies will both provide investors with a means to seek redress and encourage compliance by corporations and others with their obligations of transparency. The prohibitions against fraud, market manipulation and misrepresentation will enable us as regulators to seek quasi-criminal sanctions against those who would undertake that activity in our markets. We'll get tools we need to help protect investors in this province."

Meanwhile, Tom Hockin, president and CEO of the Investment Funds Institute of Canada, sided with the Osborne report's call for the OSC to hive off its adjudicative function.

Hockin stressed that his comments reflect a personal opinion, and not the views of IFIC’s members. Nevertheless, responding to committee questions, he suggested that the OSC may find it easier to do its job if it is not saddled with multiple roles; and, the public may have more confidence in the regulator.

In his prepared remarks, Hockin also expressed concerns about the OSC’s actions. He said that the OSC should stick to its knitting – ensuring compliance with its rules – and not stray into areas such as prescribing service levels at fund dealers. He warned that the OSC appears to be creeping into a “social engineering” role.