Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House

OSC needs reform to preserve 'integrity'

Osborne committee urges splitting role of policing, judging


Wojtek Dabrowski

Financial Post


Thursday, August 19, 2004

The Ontario Securities Commission should separate its adjudicative and enforcement roles to avoid undermining its integrity, a committee created by the regulator has found.

"The arguments supported by the evidence in favour of this separation are persuasive, indeed overwhelming," the so-called Osborne committee wrote in its report dated March 5 but made public only yesterday by OSC.

"We are satisfied that the apprehension of bias has become sufficiently acute as to not only undermine the commission's adjudicative process but also the integrity of the commission as a whole," the report states.

The committee, named after its head, Ontario integrity commissioner Coulter Osborne, calls for a structural overhaul of the OSC. It recommends the creation of a provincial securities tribunal independent of the country's largest securities regulator.

The Osborne committee was appointed by OSC to explore whether such a separation is warranted. OSC staff investigate and prosecute complaints, while a panel of OSC commissioners adjudicates them. The regulator is set up to ensure the two sides act without influence over or contact between each other, although all operate under the OSC umbrella.

CREDIT: Kevin Van Paassen, National Post

The Osborne committee criticizes the role of David Brown, Ontario Securities Commission chairman.

While the Osborne committee acknowledges the partition between enforcement staff and commissioners, it criticizes the role played by the OSC chairman, currently David Brown.

"The chair takes an active role in overseeing enforcement and its major cases, both before and after the issuance of a notice of hearing," the report states. "This structure has led to a malfunctioning of the commission."

Mr. Brown does not sit on commission panels during adjudicative hearings.

In coming to its recommendation to reform the OSC structure, the committee interviewed some of the most prominent corporate and securities lawyers in Canada as well as investment-industry officials, academics and others.

The 104-page Osborne report goes as far as recommending "hearing rooms, offices and meeting rooms should be separate from the commission to avoid any lingering perception that the commission and [the new tribunal] are in substance one entity."

The tribunal should also have no more than 12 people and while independent from the OSC, it could receive some of its funding from the regulator, the report suggests.

Its contents were part of a submission made by Mr. Brown yesterday in government hearings on securities reform in Ontario at Queen's Park. The hearings are to review OSC's adjudicative role, consider the report of a Five-Year Review Committee, which examined securities regulation in Ontario and to consider a single securities regulator for all of Canada.

The Five-Year Review Committee noted in its report last summer that the OSC's current structure could create perceptions of conflict of interest.

Along with the Osborne report, Mr. Brown yesterday tabled a pair of legal opinions on the report obtained by the OSC earlier this month. The opinions -- by the law firms Torys LLP and McCarthy Tetrault LLP -- do not share the Osborne committee's urgent call for separating the OSC's judicial and prosecutorial roles.

The Torys opinion states that a perception of bias doesn't affect the OSC's ability to "lawfully exercise its adjudicative powers." The McCarthy Tetrault opinion concludes that the OSC's structure doesn't conflict with the OSC board's responsibilities in overseeing enforcement.

Mr. Brown, who said the legal opinions were not an effort to undermine the Osborne committee's findings, told the government hearings that he believes a stronger case for separating enforcement and adjudication at the OSC could be made should a single regulator be in place.

In that case, an independent tribunal "would likely have a significant case load with national reach, enabling it to attract and build a base of qualified experts," Mr. Brown said. "The tribunal would also have the flexibility to conduct [its] hearings wherever in Canada it is appropriate."

Later, Mr. Brown told reporters there is no way to absolutely eliminate the perception of conflict of interest without separation of the OSC's adjudicative duties.

However, a separation would come at a sacrifice of the expertise gained by commissioners in adjudicating hearings, he said. The knowledge gained there can be utilized in policymaking -- yet another role of the OSC.

The debate over the separation of the OSC's adjudicative role also promises to heat up.

Earlier yesterday, Gerry Phillips, chairman of the government's management board and overseer of the OSC, told the Queen's Park hearings the Osborne report contains "a fair bit of argument to suggest some merit" in separation. This appeared contrary to Mr. Brown's stance.

The OSC had been criticized for keeping the Osborne report secret for months. It had responded that it was planning to release the paper at the government hearings so that the public could digest it in a proper context. Yesterday, it appeared none of the MPPs on the committee had advance knowledge of the report's contents. Further, Mr. Phillips said he saw the report for the first time a week ago.

The government hearings continue tomorrow with testimony from Purdy Crawford, who headed the Five-Year Review Committee.