Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Curious optics


Barry Critchley

Thursday, February 21, 2008

With all the regulatory actions launched in the U.S. into subprime matters, the question for Canadian investors is why hasn't the OSC waded in with its own inquiries into how $35-billion of asset-backed commercial paper became stranded, and whether rules, procedures and disclosures were not properly followed.

Of course, we likely wouldn't know if an investigation were underway, as the country's largest regulator likes to keep its activities close to its chest, but there are some curious optics that have come to our attention -- thanks to the research efforts of Diane Urquhart, an independent analyst -- that could explain what's going on.

More than two years back, Purdy Crawford, a lawyer with Osler Hoskin & Harcourt and a veteran of the world of securities regulation, was named head of the nomination committee to name the next chair of the Ontario Securities Commission.

It selected David Wilson, former CEO of Scotia Capital Markets. Wilson was the first non-lawyer to hold the position at the body that "administers and enforces securities legislation in the Province of Ontario."

On Feb. 22, 2007, Wilson announced Lawrence Ritchie and James Turner as OSC vice-chairs. "Both Mr. Ritchie and Mr. Turner have outstanding reputations, extensive experience in securities law and a keen interest in policy development," he said, noting both had worked at the OSC.

At the time, Ritchie was a partner with Osler, Hoskin & Harcourt, while Turner was a senior partner with Torys. What the release didn't say was the link between Crawford and Ritchie. The link: Ritchie is married to Crawford's daughter, Heather.

Fast forward a few months to mid-August, when a liquidity crisis in the global debt markets caused Canada's $35-billion non-bank asset-backed commercial paper (ABCP) market to seize up. "The crisis was largely triggered by market sentiment as news of significant defaults on U.S. subprime mortgages spread, and not by the creditworthiness of the underlying assets of the ABCP," wrote Crawford in this paper last November.

Crawford noted that "a group of market participants -- including financial institutions, institutional investors and international banks -- signed the Montreal Accord on Aug. 16, 2007, preventing the default of most third-party ABCP and the accompanying destruction of value that a 'fire-sale' liquidation would undoubtedly have caused. The Montreal Accord led to the creation of a 'Pan Canadian Committee' of investors, which I was invited to chair."

A tentative workout plan was reached in December that is slated to be in place by next month. Most of the key details haven't been disclosed.

Back to Urquhart, who has written to the OSC wondering what it was doing on ABCP. The reply, dated Dec. 24, said, "The OSC is actively reviewing the causes, circumstances and consequences of recent developments in the credit markets ... we are participating with a number of international organizations in assessing the various factors that have led to these developments." But no enforcement actions. (To date, at least two ABCP-related lawsuits have been filed.)

Urquhart has expressed an opinion regarding the role of the regulator in allowing the issuance of the now-stranded ABCP: The "securities commissions were enablers of DBRS being the only credit-rating organization providing credit ratings for the non-bank ABCP conduits and of DBRS providing top credit ratings."


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