Investors Scrutinizing the Regulators

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Fox Guarding the Hen House


Report urges review of OSC structure

Suggests dividing watchdog's roles to avoid conflict


Friday, May 30, 2003

The Ontario government should review "on a priority basis" whether to radically overhaul the Ontario Securities Commission by splitting its dual roles as both investigator and adjudicator, a committee report recommended yesterday.

The recommendation is contained in the final report by the Five Year Review Committee, which is headed by corporate director Purdy Crawford.

The committee was established in 2000 by the Ontario government to review the province's securities regulation.

The report also recommends giving the OSC broader powers over corporate boardrooms, and giving companies less time to publish quarterly and annual financial statements.

Among the changes in the final report is a new section examining the structure, governance and accountability of the Ontario Securities Commission.

The OSC both prosecutes securities violators in Ontario and presides over disciplinary hearings, acting in both a policing and judicial role. The committee report said this can give rise to "perceptions of potential for conflict or abuse."

"We think that's something that should be carefully looked at," Mr. Crawford said in an interview yesterday.

Mr. Crawford said the OSC's structure is not unusual for an administrative tribunal, nor is it contrary to legal precedents. He added that he has seen no evidence of actual conflict.

"But there's a perception of bias -- I'm not saying it actually exists -- but there is a perception," he said.

Mr. Crawford said the divisions of the two roles would not have to be an expensive adjustment. He said current commissioners who hear cases could simply become administrative judges, separate from the commission.

"You'd move it, so that it's more independent of the OSC," he said.

Ontario Finance Minister Janet Ecker, who tabled the final report in the legislature yesterday, said the government will set up a select committee of the legislature to review the entire report and report back by this fall.

"We intend to respond promptly to the recommendations of the committee, and to the input that they receive," Ms. Ecker said yesterday.

The select committee will include participants from all three parties in the legislature. A high-powered group of former commission chairmen has been pushing to separate the OSC's roles.

The Globe and Mail reported earlier this year that securities lawyers Edward Waitzer, Stanley Beck and James Baillie have met with OSC chairman David Brown to discuss the structure of the commission and whether the time has come to spin off the tribunal function from the rest of the Crown corporation.

The structure they proposed would be similar to that of the U.S. Securities and Exchange Commission, where administrative judges who do not work for the agency preside over regulatory hearings.

OSC spokesman Eric Pelletier said yesterday that he could not respond to the Crawford report because it had just been released.

Mr. Crawford said his committee had already been planning to make its recommendation before the former securities commissioners came forward with their concerns.

"Obviously it confirmed that our thinking was right that we should take a careful look at it," he said.

The final draft contains other significant changes, including a recommendation that the OSC be given broader powers to set corporate governance rules for public companies.

Earlier this year, the OSC was given the authority to set rules for companies' audit committees. But Mr. Crawford said his committee felt this authority should be broadened to cover governance generally.

Currently, most governance standards are recommendations of the Toronto Stock Exchange, and are not mandatory rules. Critics such as Ontario Teachers Pension Plan Board chief executive officer Claude Lamoureux have said that governance authority should be removed from the TSX now that it has become a for-profit, publicly traded organization that is focused on attracting listings.

"It's hard to regulate when you're trying to be profitable and you want listings," Mr. Crawford said yesterday.

The committee said the OSC can adopt governance reforms in a more flexible and timely manner, and can co-ordinate with other securities commissions to develop harmonized national standards.

"We would also urge the commission, however, to exercise caution and restraint in imposing new regulations in these areas," the report says. "In particular, the commission should ensure that any of its rule proposals take into account existing corporate requirements and are not overly burdensome to both large and small-cap companies."

The report also says the commission should continue to work with stock exchanges on corporate governance matters. TSX president Barbara Stymiest is a strong advocate of having a system based on guidelines, rather than rules.

The final report also contains changes in its recommendations for self-regulatory organizations, such as the Investment Dealers Association of Canada (IDA).

The original draft report said there is "considerable potential for conflict" between a self-regulatory organization's role as a trade association and as an industry regulator, and said the two roles should be separated with distinct governance structures.

The final version of the report backs off from this proposal but says the IDA should look at the structure of its disciplinary committees, including who sits on them, to deal as well as possible with the inherent conflicts in a self-regulatory agency.

Many of the final report's recommendations take into account sweeping reforms made in the United States in the wake of a string of corporate scandals.

For instance, the report recommends giving companies much less time to publish quarterly and annual financial statements. Senior companies should file interim statements 35 days after the end of a quarter and annual statements after 60 days to parallel recent rule changes made by the SEC. By contrast, Canadian regulators have proposed cutting the time for filing annual statements to 90 days from 120 days.