Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House

Regulators defend transparency policies

Steven Lamb

(November 1, 2004) The Ontario Securities Commission is facing criticism over its plan to allow staff to disclose ongoing investigations to the public, a policy shift from its traditional choice to neither confirm nor deny such probes.

"The refusal to confirm or deny is the right approach for a regulator. I don't think a regulator should be announcing investigations before they're in a position to initiate regulatory action," said Toronto securities lawyer Philip Anisman in a panel discussion on "Accountability and Transparency in Securities Regulation" at Dialogue with the OSC.

"The reasons for prohibition against disclosure of an investigation relate to the impact of information that could be released prematurely on people's reputations," he said. "When the commission discloses that an issuer is being investigated, that has a market impact and it affects the investors. It puts the commission in the position of being a market player, in influencing prices."

He argues that if OSC staff has strong enough grounds to disclose the investigation, the regulator should instead issue a cease-trade order. This would require staff to convince commissioners that there is in fact a risk to investors. If there is not enough evidence to justify the order, there would be no justification for the potential damage to the reputation of a probe's subject.

"It seems to me that if the staff has enough grounds to say investors need protection, they should be using regulatory recourse," Anisman said. "If the staff has to persuade a commission or two commissions that a temporary cease-trade order is appropriate, there's a test there. It's not just staff saying 'its time, we're going'."

Further, once the regulator discloses an investigation, Anisman said it would be incumbent upon it to continually provide updates on the status of the investigation. Under section 16 of the Securities Act, companies subject to investigation can be compelled to reveal the existence of the probe, but are not allowed to disclose the nature of the investigation they face.

Michael Watson, OSC director of enforcement, says the rule against non-disclosure has never been hard and fast, pointing to high-profile announcements such as Bre-X.

"Under the circumstances, it would have been ridiculous not to confirm that we were carrying out that investigation and obviously it was not going to cause any harm either to investors or the company," he said.

The OSC has come under pressure, particularly in the wake of its mutual fund probe, to be more forthcoming with information concerning its investigations. The commission frequently faces comparisons to the U.S. Securities and Exchange Commission, which Watson says is far more tight-lipped.

The reason for more disclosure of investigations in the U.S., he says, is the civil liability corporations face from investors if they do not reveal they are under investigation.

"If there is no disclosure there's risk that billions of investor dollars will be lost as the investigation proceeds," said Watson. "We recognized that no matter which way we came down on this issue, somebody was going to be critical. Ultimately we sided with investors."

The panel also discussed whether the OSC should publish its audit reports on self-regulating organizations.

"It is only reasonable that if audits are intended to be published, they should be written with that in mind," said Joe Oliver, president and CEO of the IDA. "They should be written as objective report cards rather than merely a list of deficiencies, which can be misleading and inappropriately undermine confidence in the capital markets."

This critique was put into context by Doug Hyndman, commissioner of the British Columbia Securities Commission, who admitted that in the past their audits were not written with an eye to publication. Upon receiving a request for one such audit under the Freedom of Information Act, he realized it could reflect more poorly on the IDA than the BCSC had intended.

The regulator released the report, but not before notifying the IDA and allowing them to draw up a response. Both were released at the same time. Hyndman says the BCSC is now more conscious of the tone of its reports.

Filed by Steven Lamb,,