By JANET McFARLAND
Friday, Aug 20, 2004
The Ontario government should beef up
governance of mutual funds and expand the rights of investors to sue
public companies as two top priorities for securities regulation reform,
corporate lawyer Purdy Crawford said yesterday.
Mr. Crawford, who headed a committee that
reviewed the securities system in Ontario, appeared yesterday before the
province's finance committee, which is conducting hearings into his
The finance committee was asked by the
Ontario legislature to focus on recommendations to create a national
securities commission and to reorganize the structure of the Ontario
But Mr. Crawford said he thinks that if
the finance committee does "only one thing" with his committee's sweeping
295-page report -- known as the Five Year Review Committee report -- it
should expand the powers of shareholders to sue companies when they have
been misled by press releases, financial statements or other corporate
"It's a very important initiative in
terms of investor protection," Mr. Crawford said.
Currently, companies are only liable in
civil cases for misrepresentations contained in prospectuses, which are
published when companies issue new securities. But Mr. Crawford said more
than 90 per cent of trading occurs in the so-called "secondary" market
after shares have been issued. For those trades, investors rely heavily on
other documents, such as financial statements and annual reports.
The former Conservative government in
Ontario introduced legislation to expand civil liability, but it was never
proclaimed, and was not reintroduced after the Liberal government was
Mr. Crawford said he is aware that the
government has faced lobbying from large companies concerned about facing
more lawsuits, but said the legislation should nonetheless proceed. "I say
let's get on with it and turn the page and move forward," he urged.
Mr. Crawford also urged the province to
beef up the governance of mutual funds, saying there is a clear potential
for conflict of interest between the interests of consumers and those of
the mutual fund company.
His committee recommended that all mutual
funds should have their own independent boards, separate from the board of
the fund management company. Those boards should have the ability to fire
fund managers who are involved in self-dealing or conflict-of-interest
In January, the Canadian Securities
Administrators, an umbrella group of provincial securities commissions,
published proposed new mutual fund governance rules that did not adopt the
Five Year Review Committee proposals.
"We were very surprised that the
instrument contains what many have characterized as a very 'watered down'
regulatory regime for governance of mutual funds," Mr. Crawford said in a
presentation prepared for the committee.
He said securities administrators should
rethink and toughen the guidelines released earlier this year.
Also yesterday, the Canadian Public
Accountability Board (CPAB), which is the new organization that
scrutinizes Canada's audit firms, appeared before the finance committee to
ask for new legislation to protect it from lawsuits.
Gordon Thiessen, chairman of the CPAB,
said his new organization has no legal protection if angry audit firms or
individual auditors sue the CPAB employees or directors. The parallel U.S.
organization has such protections, he said.
"It is apparent to us that our efforts in
audit oversight will be constrained if we cannot secure a sound statutory
footing," Mr. Thiessen said.
David Scott, chief executive officer of
the CPAB, also said yesterday that the audit watchdog will release by the
end of September the findings of its first round of reviews of Canada's
largest audit firms. Although individual audit firms will not be
identified, he told reporters the CPAB will issue a report on the general
trends it found and the areas of weakness it identified.
As part of its review, the CPAB has
examined the audits of 40 to 50 public companies, he said, and no material
financial misstatements were uncovered.
Meanwhile yesterday, lobby group
Democracy Watch urged the finance committee to adopt new rules to make it
easier for consumers to organize into lobby groups.
Democracy Watch co-ordinator Duff
Conacher said Ontario should adopt a model that is in place in four U.S.
Under the proposal, public companies and
mutual funds would have to enclose a pamphlet in all mailings to
shareholders or unitholders, inviting them to join an investors lobby
group for an annual membership fee.
This would create a powerful, funded
lobby group. Mr. Conacher said securities reform has been tilted in favour
of big companies and industry lobby groups because investors have not been
able to organize effectively.