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Separate OSC roles: report

Overhaul should split adjudicative and enforcement to counter 'bias' perception


Wojtek Dabrowski
Financial Post

Tuesday, October 19, 2004

Provincial politicians should overhaul the structure of the Ontario Securities Commission to separate its adjudicative and enforcement powers, a government committee has recommended.

The issue of perception of bias at the OSC "has become paramount," the standing committee on finance and economic affairs wrote in its report, which was tabled at the Ontario legislature yesterday.

The report backs the creation of a single securities regulator to replace the current patchwork system of 13 provincial and territorial securities authorities.


"Any new single securities regulator should include a separate adjudicative function," the committee wrote. "Failing substantial progress toward the establishment of such a regulator over the next 12 months, we believe the Ontario government should take the necessary steps to separate the adjudicative role of the [OSC] from its other roles.





OSC chairman David Brown will not
stand in the way of splitting off the regulatorís adjudicative function.

"This should not preclude the government from immediately beginning the serious examination of the necessary steps needed to undertake such a transition."

Currently, OSC staff investigate and prosecute complaints, while a panel of OSC commissioners adjudicates them. The regulator -- which also has policymaking authority -- is set up to ensure the two arms act without influence over or contact with each other, although all operate under the OSC umbrella.

David Brown, OSC's chairman, said yesterday he would not stand in the way of splitting off the regulator's adjudicative role, as long as the move benefits investors.

"I'm quite happy to work with the government to try to find the best possible model that we can," he said in an interview. "I think we have to make sure that a separate tribunal will indeed serve investors."

The standing committee, made up of provincial politicians of various stripes, was tasked with reviewing OSC's structure, consider the report of the so-called Five-Year Review Committee, which examined securities regulation in Ontario, and to consider a single securities regulator for all of Canada. It held two days of hearings at Queen's Park in August.

The committee noted that the Alberta Securities Commission separated its adjudicative role from its enforcement arm in 1988, but found it cumbersome and reverted to its original model in 1996.

Gerry Phillips, chairman of the government's management board and overseer of the OSC, said in an interview yesterday he does not have serious problems with any of the standing committee's 14 recommendations.

"There were none that I disagreed with at first read," he said. He will prepare a formal response within three weeks.

Asked about the recommendation to separate the OSC's adjudicative role, Mr. Phillips said, "unless someone makes a fairly strong argument that I haven't yet heard, I personally am inclined to think this recommendation has got a fair bit of merit."

The standing committee also urged the government to review its oversight of the OSC, which has grown increasingly independent from the legislature. For instance, before the regulator became a Crown corporation in 1994, its internal controls were set up and monitored by the government. "Now, the commission establishes its own controls," the standing committee noted, adding it believes "the status quo is unacceptable."

Mr. Phillips agreed, saying, "I think there's some merit in ... the securities commission coming before a legislative committee on an annual basis" for a review.

"I have a lot of confidence in the Ontario Securities Commission, but I think we have to challenge them to keep getting better."

Mr. Brown said the regulator would be comfortable subjecting itself to an annual legislative review, noting it will give the OSC a chance for additional dialogue with provincial politicians.

The standing committee's recommendation to separate the OSC's adjudicative function from its other roles backs a report of the so-called Osborne committee, struck by the OSC itself.

That committee, headed by Coulter Osborne, Ontario's integrity commissioner, recommended a structural overhaul at the OSC: "We are satisfied that 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," the Osborne committee wrote in its report.

The OSC has recently been granted powers to lay stiffer penalties and force the disgorgement of profits, which has prompted critics to renew calls for change in the OSC's structure.

However, the standing committee yesterday recommended that the regulator not be given additional lawmaking powers under the provincial securities act, due to concerns with current levels of legislative oversight.


Other major recommendations of the Ontario standing committee on finance and economic affairs:
  • The OSC should require public mutual funds to set up an independent governance body "that provides for substantial investor protection."
  • The government proclaim civil-liability provisions that would give investors the right to sue a public company for making a material misrepresentations or failing to comply with disclosure requirements. Mr. Phillips said yesterday he plans to act on this recommendation in the near future.
  • That a task force be set up to review the role of self-regulatory organizations.