Investors Scrutinizing the Regulators

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Fox Guarding the Hen House



September 2004
OSC should not hold disciplinary hearings

Report says independent tribunal should be created to remove perceptions the OSC could be biased in enforcing its own laws


By James Langton

The long-awaited osborne report delivers a stinging criticism of the Ontario Securities Commission’s multiple roles as investigator, prosecutor and judge, suggesting a perception of bias is undermining the commission’s integrity, and calling on government to establish a separate tribunal for disciplinary hearings.

The report, largely based on a canvass of industry opinions, finds a “pervasive and widely held” belief that a fair hearing can’t be obtained at the OSC. It concludes that arguments in favour of hiving off the OSC’s adjudicative function are “persuasive, indeed overwhelming.”

OSC chairman David Brown, who released the report, insists he is indifferent on the issue. Brown says a better structural model should be adopted if it can be found; otherwise, the Toronto-based OSC should stick to the status quo.

The report proposes creating a tribunal — provisionally titled the Ontario Securities Tribunal — that would have jurisdiction over all disciplinary hearings and reviews of SRO decisions (not routine transactional decisions), with a further right of appeal to the court. The report recommends the tribunal should be composed of up to 12 people, including a permanent chair, with commissioners appointed by the lieutenant-governor-in-council. It would have independent funding, its own office space and be accountable to the legislature.

Despite the unequivocal stance of the committee, headed by Ontario’s integrity commissioner Coulter Osborne, and the OSC’s official position of not caring one way or the other, it appears to some that the commission opposes the idea of spinning off its adjudicative function. Some members of the standing committee on finance and economic affairs, which was convened to review the recommendations of the final report of the five-year review committee, have the impression the OSC would prefer to retain its current structure.

“Mr. Brown presented both sides of the argument but, quite bluntly to me, wants things to remain the way they are,” says committee member Michael Prue, a New Democratic MPP.

Such an impression was probably fed by the OSC’s decision to submit a few legal opinions that it ordered in reaction to the Osborne committee’s findings. An opinion from Toronto-based Torys LLP finds the commission’s multiple roles, as well as the dual role of commissioners in both policy-making and adjudication, doesn’t impair its impartiality. The OSC also sought an opinion from Toronto-based McCarthy Tétrault LLP, which declares the commission’s structure doesn’t conflict with its responsibilities to oversee enforcement. On the strength of such findings, the OSC is confident it can carry on as it is, without legal or constitutional problems.

Perception, rather than a proven bias, is clearly the problem, as the Osborne committee found. The central question for the government is whether this perception is substantial enough to warrant restructuring the commission. The Osborne committee found the problem does indeed rise to such a level. It says that it worked on the assumption that it would not recommend change without clear and convincing evidence that change is necessary. Last year, three former OSC chairmen recommended the same course.

However, the OSC’s decision to sit on the report for six months and then release it, along with two legal opinions that support the status quo, raises questions with some SCFEA members about the OSC’s true feelings about the report’s findings. Deb Matthews, Liberal MPP, suggested to the hearing that the commission didn’t get the results it wanted from the Osborne committee so it went out and got the legal opinions.

Brown denies the assertion, insisting the OSC sought the legal opinions to clarify a few legal questions raised by the report, to ensure it could continue carrying on hearings as usual. Nevertheless, the commission’s handling of the report is apparently still creating problems of public perception.

Notwithstanding some committee members’ skepticism, Brown insists the OSC is open to change. He says he is sensitive to perceptions of bias and its effect on the commission’s ability to do its job. But he maintains there are advantages of an integrated agency with both policy-making and adjudicative/enforcement functions under one roof. The current model, he says, leads to both better policy and better adjudication. By hearing real cases, commissioners’ policy-making is improved, he says, and their decision-making is enhanced by their hands-on knowledge.

The Osborne report rejects such arguments. It finds little evidence for the need to “cross-pollinate” the adjudicative and policy-making functions.

To the extent that the OSC is willing to entertain the possibility of splitting out the adjudicative function, it appears eager to hitch this option to the eventual creation of a single, national regulator. In his comments to the legislative committee, Brown says a separate tribunal may make more sense if it is implemented on a national level, because only then would it have enough work to do and be able to attract worthy adjudicators.

“I believe a somewhat stronger case could be made for a separate tribunal if we were to establish a single securities regulator for Canada,” Brown says. “Such a tribunal would probably have a significant case load with national reach, enabling it to attract and build a base of qualified experts. The tribunal would also have the flexibility to conduct hearings wherever in Canada they are appropriate.”

The proposal to tie the commission’s restructuring to the issue of a single regulator may be contributing to the perception that the OSC would prefer the status quo. With all the competing national reform proposals under consideration and the lack of consensus, it’s hard to conclude that a single regulator is much more than a fond fantasy at this point. So attaching the notion of restructuring the commission to the possibility of a single regulator seems speculation at best, procrastination at worst The Osborne committee clearly believes a change is justified under current circumstances. Indeed, it has found the evidence compelling. It rejects many of Brown’s arguments for the status quo. It argues there would be sufficient work for a separate tribunal in Ontario alone and there would be little problem finding people to serve on the tribunal. Indeed, it says, once freed from the responsibility of conducting hearings, it’s possible that more cases could be brought forward than the OSC currently hears.

The Osborne report also recommends the OSC establish what it calls the “enforcement advisory committee” to oversee its enforcement arm. It says OSC commissioners should have more input on enforcement matters once the adjudication function is spun off.

Among the alternatives to splitting out the adjudicative function, the Osborne committee also considered splitting out the enforcement branch, but it found little support for the idea. It contemplated an internal restructuring of the adjudication function, but concluded such a change would not adequately address the perception problems. It has also pondered making greater use of the courts to hear disciplinary cases, but found little support for transferring administrative discipline to such a forum.

Most of those who testified before the legislative committee seem to agree with the Osborne committee’s recommendation that the commission should be divided. Of course, their comments were made with little time to digest the report.

Tom Hockin, president and CEO of the Investment Funds Institute of Canada in Toronto, is one prominent industry voice siding with the findings of the Osborne report in his testimony at the SCFEA hearings. Hockin stresses that his comments are his personal opinions and not the views of IFIC members.

Nevertheless, responding to committee questions, he said that the OSC may find it easier to do its job if it is not saddled with multiple roles, and the public may have more confidence in the regulator.

On the other side of the debate, Toronto securities lawyer Phil Anisman supports the current structure and says the Osborne committee “got it wrong.” He maintains a better solution is to improve the OSC’s accountability by establishing a legislative committee it must appear before every year to defend its work — a solution he says would preserve the advantages of an integrated agency while dispelling some perception problems.

Also speaking at the SCFEA hearings, Gerry Phillips, the acting minister responsible for securities regulation and chairman of Ontario’s Management Board Secretariat, says the government approaches the issue of the commission’s structure with an open mind. Phillips says a decision on the issue hasn’t been made, but there are some “fairly good arguments” in favour of splitting out some OSC adjudicative functions. He adds the government will probably wait for the SCFEA committee’s response to the report and public reaction before coming to a decision. He also notes the question of splitting out the adjudicative function may be particularly relevant in the context of a single regulator.

But hitching the restructuring of the OSC to the development of a single regulator seems to be a red herring. An independent committee was struck to consider the issue for the OSC alone. It took the task seriously and decided the commission’s reputation with market players is at such a low ebb it’s time to spin off the adjudication function. It remains to be seen whether the government accepts the conclusion. IE