Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

   
Split OSC, protect consumer, committee says
Steven Lamb
(October 18, 2004) The Ontario Legislature's Standing Committee on Finance and Economic Affairs has tabled its review of the Securities Act, calling on the provincial parliament to restructure the OSC and work toward a single national regulator.

But on top of the regulatory reform, the committee is calling for stricter oversight of investment advisors and proposing a review of the role of the IDA and MFDA in handling investor complaints.

"The government should establish a task force to review the role of SROs including whether the trade association and regulatory functions of SROs should be separated," the committee report said, due to "deep-seated skepticism on the part of the investing public."

To help soothe such skepticism, the committee also recommended that mutual fund companies "establish and maintain an independent governance body that provides for substantial investor protection." These boards would have the authority to dismiss fund managers.

Traditionally, the OSC has not had the power to order restitution for investors who have been subject to abuses, but the committee has called for the government to work with the OSC to establish a workable mechanism that would allow investors to pursue restitution in a timely and affordable manner.

But while the committee was in favour of giving the OSC more power to protect consumers, it called for a limitation of some of its powers.

The report recommends the OSC be split into two separate units, dividing the enforcement arm from the rule-making process. The fusion of the two functions has led to criticism that the OSC acts as both prosecutor and judge in enforcement proceedings. In making this recommendation, the committee pointed to the Report of the Fairness Committee to the Ontario Securities Commission, headed by Coulter A. Osborne, Q.C., and published in March 2004.

"The nature of the apprehension of bias has become sufficiently acute as to not only undermine the Commission's adjudicative process, but also the integrity of the Commission as a whole among the many constituencies that we interviewed," read the report. "Matters of institutional loyalty, the involvement of the Chair in the major cases, the increased penalties, the sense that 'the cards are stacked against them,' the home court advantage, the lengthy criminal law-like trials, and the Commission's aggressive enforcement stance, which will likely only increase over time, all combine to make a compelling case for a separate adjudicative body."

The committee called for closer governmental oversight for the OSC, calling the current system "unacceptable." Over the years, the OSC has evolved from a government agency to a Crown corporation to a self-funding body.

"Any new oversight mechanism should include a requirement that the annual reports of the Commission be automatically referred to a Committee of the Legislature, and should ensure that the Committee has the ability to compel witnesses to appear before it, including the responsible minister, to answer questions regarding progress in implementing recommendations approved by the Legislature."

But while the committee called for closer oversight and limitations on some OSC powers, it agreed with the Crawford report, which recommended that the OSC should be given rule-making authority over corporate governance matters in general terms.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com