Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

   

COMMENT
Separating the judge from the prosecutor

 

Monday, August 23, 2004

A report released last week recommended that the Ontario government restructure the Ontario Securities Commission to eliminate an appearance of bias that has begun to "undermine the integrity" of the province's securities crime watchdog. It's a timely prod.

The unequivocal recommendation came from a committee led by Ontario Integrity Commissioner Coulter Osborne, who was asked by the OSC itself to study its organizational structure. The Osborne report, which has been tabled with the province's finance committee, compels the Ontario government to respond to a pressing concern about the legitimacy of the OSC's key operations.

Mr. Osborne was asked to study whether people accused of securities violations can be confident they will receive a fair hearing from the OSC when a single institution investigates, prosecutes and adjudicates the cases. Those multiple roles are common at most of Canada's securities commissions and at other industry regulatory bodies, but questions about whether they are appropriate became particularly pressing for the OSC after it was granted stronger sanction powers last year, including the right to impose large fines on offenders. Its growing powers have shifted it further along the judicial spectrum between an industry association and a criminal court. The question is whether the OSC has evolved to the point at which it needs a new structure.

Mr. Osborne's report acknowledges there are two broad ways to assess the fairness of the current system. On the one hand, OSC commissioners who decide cases maintain a strict internal separation from the enforcement officials who investigate cases. As such, there is no body of evidence to suggest commission tribunals are making biased or unjust decisions.

However, it's fair to argue that there is an enormous perception problem when the same institution carries out all roles in the administration of justice. In the criminal system, it would be unthinkable for judges to work at the police station or in the same offices as Crown attorneys. A division of roles is fundamental to the perception that justice is being served. As OSC chairman David Brown acknowledged last week, a perception of fairness is as important as the outcome.

For the OSC, the perception issues are additionally tangled. Commissioners not only adjudicate cases but oversee the commission as its board of directors. As a result, they hire and supervise senior management and help formulate policy.

Critics of the current system argue that this "institutional loyalty" makes it difficult for commissioners to remain strictly impartial. Senior staff make critical decisions about which cases to pursue and how to handle the prosecutions. If commissioners reject the merits of a case at a hearing, they publicly overrule the judgment of colleagues they hired.

Moreover, commissioners who help formulate policies may have a bias when those issues confront them in tribunal cases. If, for example, the OSC targets illegal insider trading as a priority, can commissioners appear impartial when hearing the wave of prosecutions that emerge?

The Osborne report says there is a simple way to address these concerns. The province could create an independent tribunal of securities experts to adjudicate cases, removing the judicial role from the OSC. The report proposes that the province hire a panel of part-time experts who would be paid a per diem and have offices separate from the OSC's. This structure would be similar to that of the U.S. Securities and Exchange Commission.

The idea has its detractors. Mr. Brown, the OSC chairman, warned the finance committee last week that it could prove difficult to find qualified people willing to give up all potentially conflicting jobs to sit on a part-time tribunal. He also said commissioners make better adjudicators because they play such a major role in creating the policy goals of the commission, and so understand the broader context of their decisions.

But those hurdles are not insurmountable. Mr. Osborne said he is confident it would be possible to find good adjudicators to fill the jobs. And there is no reason such people could not stay current with the policy issues unfolding in the securities realm, while remaining free of the conflicts that come with creating those policies. It seems likely that Ontario's vast ranks of current or retired lawyers, judges, academics and other professionals could yield a strong crop of adjudicators. And it should be possible to hire part-time panelists without imposing a large new financial burden on Ontario taxpayers.

The perception of bias is substantial in the current system, and fairness would be better served with an arm's-length structure. The benefits of dividing the OSC's functions clearly outweigh the risks.