By James Langton
The street is not alone in wondering whether the Ontario Securities Commission should wield the powers of judge, jury and executioner for market players. The commission itself is wrestling with the issue of its
own conflict of interest and has
quietly engaged a three-person committee to advise it.
The committee is made up of Bryan Finlay, a partner with Weir Foulds; David Mullan, a professor in Queen’s University’s faculty of law; and its chairman,
Osborne, a former appeal court associate chief justice who currently
serves as Ontario’s integrity commissioner. Since the summer, the three have been meeting with lawyers and industry players to sound them out on the question of whether the OSC’s adjudicative function should be spun off into an independent body.
The consultations are ongoing, and Osborne says the committee hopes to complete the meetings by yearend and produce a written report for OSC chairman David Brown shortly thereafter. A wide range of opinions have been expressed but there is no obvious
consensus. “It’s not a slam dunk one way or the other,” he says.
The people consulted have advocated everything from no changes to the current structure to minor tweaking to spinning off the adjudicative function entirely. Several of those consulted have proposed the enforcement division be separated — to preserve
the benefits of having policy-making and adjudication under one roof while easing the perception of conflict.
Osborne says he doesn’t yet know what Brown will be told, but the committee will recommend a single course of action; how it’s used will be up to the regulator.
The purpose of the committee’s efforts is to inform the commission on the issue, says OSC general counsel
Susan Wolburgh-Jenah. It should also prepare the OSC to face any ministerial pressure to change its structure.
The OSC’s multiple roles — as rule-maker, prosecutor and judge in securities law matters — have drawn fire in the past, but since the five-year review committee flagged the issue in its most recent review, it has heated up again.
As well, lawyers who work on the Street and appear before the OSC began complaining, both privately and publicly, about the perceived impartiality of the commission. Also, three former OSC chairmen —
James Baillie, Stanley Beck and Ed Waitzer — wrote
to Brown to amplify the Street’s concerns. They indicated the biggest problem with the current structure is that the “credibility of the commission’s process” could be hurt by the OSC performing both policy-making and adjudicative functions.
While the gripes of the Street put some public pressure on the commission, the more pertinent issue is the five-year review committee’s report. It is intended to guide the government to reform the rules and the regulator. As Wolburgh-Jenah points out,
the commission can’t change its structure unilaterally; that requires legislation being passed. The fact the OSC has raised the issue means that the government may be motivated to make such changes.
The recent change in Ontario’s government, however, may stall any immediate pressure for reform. The former Tory government had planned to convene a legislative committee to study the five-year committee’s recommendations with an eye to acting on
them. However, that committee wasn’t established before the Tories found themselves out of power.
But the issue isn’t likely to evaporate. Although its intentions are unclear at this point, presumably Ontario’s new Liberal government won’t ignore all of the five-year committee’s work.
The question of the OSC tribunals’ independence remains important on the Street, particularly after one of its more controversial rulings — in the case against former Yorkton Securities Inc. head trader Piergiorgio Donnini — was substantially
softened by the courts in September. The court largely upheld the commission’s ruling, but it cut Donnini’s penalty to four years from 15 years.
The Donnini case has been a lightning rod for OSC critics, who say it shows the commission is too tough on those who refuse to settle. The theory is that potential defendants settle because they are fearful of going to a hearing in which the cost of
losing is too high.
The OSC appears to be responding to the criticism. It has charged the three-member committee with investigating the merits of splitting off the judicial function. Brown says the OSC would entertain the idea of adopting a different structure if a better
alternative could be found. Some have suggested the U.S. Securities and Exchange Commission’s use of administrative law judges as a potential model, while others recommend reconstituting hearing panels with outside members. The commission has also created a new position, the independent adjudicative
counsel, to advise panel members on legal issues during hearings. The OSC says it has not yet filled the position.
Some industry members, however, say such activities aren’t getting at the heart of the structural issues that plague the commission.
In October, Toronto lawyer Phil Anisman delivered a paper to the Queen’s business law symposium that tackled a number of issues. Anisman doesn’t believe the commission’s adjudicative function needs to be separated. He argues there is little
evidence of actual bias to support the claims of those who suspect it, and that the benefits of having adjudicators that are well informed on policy issues outweigh mere suspicions of bias. He also shoots down proposed alternatives, such as the SEC model.
Anisman does, however, express concerns about the current structure of the commission and its operations. He says the move to hire an independent adjudicative counsel alone suggests “a crisis of confidence on the part of the commission.”
Anisman recommends the OSC publicize its process for picking the commissioners that sit on hearing panels. The commission should also be open about dealing with allegations of bias. “In a few cases in which commissioners were requested to disqualify
themselves, the commission’s reasons reflected a technical approach, relying on nice distinctions and the authority of precedent rather than on principle,” he says. “In view of the practices of the commission, such technical analyses suggest a defensive mode of thought, which might reinforce the
apprehensions of those who appear before the commission.”
Anisman also proposes that the commission not have the power to impose costs on defendants because it creates a conflict of interest. The OSC must also supervise staff to ensure its various functions don’t blur. He cites the example of the commission
using the registration process as a form of enforcement in the case of former reps from penny-stock dealers trying to transfer to new firms. He says settlement agreements should not be used to announce policy positions, and the commission should publicly explain the emergence of settlement agreements that don’t
require OSC approval.
Further, Anisman’s paper argues that the commission’s current accountability mechanisms are not sufficient and not transparent enough, given its far-reaching powers. The commission and the province’s finance minister took several years to come up
with a memorandum of understanding that they should have adopted back in the 1998-99 fiscal year. The process itself lacks transparency, he says: “As the accountability mechanisms in the act and the MOU are internal to the minister and the ministry ... there is a lack of openness that might provide
investors and other members of the public with an opportunity to address issues of accountability at the political level.”
Additional accountability measures may help ease public concern about the OSC’s multiple roles, he says, proposing a legislative standing committee that could annually review the OSC’s activities, budget and plans. He says the current committee could
possibly receive public submissions, engage outside counsel, and Brown and the executive director could be required to appear before it and to answer questions.
Such an approach is not normal in Canada. Anisman says it’s more of a U.S. model of public accountability but he believes it is justified. “In view of the unprecedented scope of the commission’s authority, and its independence, the creation of such
an accountability mechanism is essential,” he says.
He also says the judicial review standard the commission faces should be broader. The current standard requires the courts to be very deferential to the commission’s discretion. The courts, he says, should have the option of reviewing decisions of
whether or not to adopt a rule.
Regardless of how it plays out, it appears that the Street agrees some change is needed to preserve the commission’s credibility. IE