Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

OSC doesn't operate in political vacuum
Hired law firms to comment on report criticizing structure


Barry Critchley

Financial Post


August 20, 2004

The events of this week should prove once and for all that the political antenna of the Ontario Securities Commission is always up.

On Wednesday, we learned for the first time the details of the report prepared by the Honourable Coulter Osborne, Professor David Mullen and Bryan Findlay. That report, known as Report of the Fairness Committee to the Ontario Securities Commission, was dated March 5, 2004.

The OSC called for the report early last year "to review and provide advice on the Commission's current structure and, in particular, its adjudicative function."

CREDIT: Peter Redman, National Post


David Brown, chairman of the OSC, didn't reveal how much the commission paid for two legal opinions.

The report points out that the OSC "as it is currently structured engages in policy setting, rule making, investigations, prosecution and adjudication under one corporate, statutorily established umbrella."

Essentially, the OSC has too many roles. Therefore, the report recommends a number of changes to the OSC that would split the prosecuting from the adjudicating.

But clearly the commission -- and in particular its chairman, David Brown, who released the report to this week's provincial hearings into the workings of the OSC -- didn't like what the report had to say.

So the OSC retained the services of two high-profile law firms -- Torys and McCarthy Tetrault -- to comment on the Osborne report. (Osborne is the chairman of the Ontario Integrity Commission.)

The idea was presumably to find fault with some of the logic contained in the report and provide the OSC with some ammunition, lest the provincial government decided to take a serious look at the report's findings. Brown said he sought the legal opinions to answer some "loose ends" that were not fully addressed by the Osborne report.

It's not known why the OSC approached those two particular law firms. What is clear is that if the OSC had approached some other law firms -- especially those who focus on litigation -- they probably would have received a different view. (It's worth noting that more than 60 people, including a number of litigating lawyers, were interviewed in compiling the Osborne report.) And Brown didn't tell the committee how much the OSC paid for the two opinions.

The OSC's approach doesn't sit well with a number of lawyers. "The fact is that the two legal opinions can never take away from the substance of the issue, which is the adjudicator and the prosecutor wear the same hat. And that's unacceptable," said one lawyer. "I don't care what some law firm says about it. It's angels dancing on the head of a pin."

Another lawyer noted somewhat cynically that "you can't get Coulter Osborne to say what you want. Legal opinions are like fairness opinions for investment dealers."

Indeed, some lawyers argue that if the OSC had been operating all these years under a different structure -- one where there was a separation between the various roles -- the regulator may have had more success with some of its enforcement actions.

YBM Magnex is one of the recent high-profile cases of securities fraud. In that instance, the OSC was judge and prosecutor, twin roles that allowed some of the defendants to point out the paradox: one branch of the OSC had approved a prospectus allowing the issuer to raise capital while another branch was nailing the issuer and its advisors.