Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House


Stricter rules on mutual funds urged

Committee head also wants Ontario to expand investor rights to sue



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 committee's recommendations.

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 Securities Commission.

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 documents.

"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 elected.

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 transactions.

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. states.

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.