By James Langton
The three-way press release war among the
Ontario Securities Commission, Ontario Finance Minister Greg
his former employer, Royal Group Technologies Ltd., is an entertaining
spectacle for those who enjoy watching public squabbles. At its heart,
however, the dispute raises questions about the structure of governance
and accountability at the country’s top securities regulator.
Here’s the gist, for those who haven’t
followed the blow-by-blow accounts of the scrap: the OSC is part of an
investigation into certain transactions involving Royal Group, the firm
for which Sorbara formerly served as a board member and chairman of its
audit committee. As a result, the OSC has been temporarily removed from
Sorbara’s brief of responsibilities and handed over to Gerry Phillips,
chairman of management board committee.
The move was made to quell any talk of
conflict that could arise as a result of Sorbara overseeing a regulator
that may be investigating activities at a publicly traded company that may
have occurred during his watch. As Investment Executive went to press, no
allegations had been brought by the regulator, or any other authority,
against Royal Group or any of its officers or directors.
Putting aside what may or may not come
out of the investigation, and ignoring who told what to whom and when, how
does the ministerial reassignment affect the day-to-day operation of the
regulator and its future?
It doesn’t, according to both the
ministry and the OSC.
While the OSC no longer reports to
Sorbara himself, all of the Finance ministry staff that typically deal
with the regulator are on the job. None have moved over to the management
board. They still report to the deputy minister of finance, Colin
Andersen, who now reports to Phillips concerning securities matters.
The change has hardly been noticed at the
OSC, says Wendy Dey, the commission’s director of communications. “It’s
business as usual,” she says. It’s the same story from Finance media
relations officer Boni Fox Gray.
While the arrangement seems workable in
the short term, however, it’s hard to tell how well it will hold up over
time. At this point, it’s impossible to say how long the arrangement will
last — presumably until the OSC concludes its investigation of Royal
Group, and the case is resolved one way or another. Dey says that there
are no long-term alternatives under discussion: “All I can tell you is
that there’s a new reporting relationship, and it’s working just fine.”
Veteran securities lawyer Phil Anisman
says the new reporting relationship shouldn’t make much difference to the
daily business of securities regulation. He says that ministers aren’t
called upon to make many independent decisions on specific rule-making
initiatives or similar OSC initiatives that require ministerial approval.
For most issues, they tend to rely on recommendations of their staff, he
says, and Phillips can presumably do that as easily as Sorbara. “It’s a
workable arrangement,” Anisman says, “but that doesn’t mean it’s ideal if
it were protracted.”
Nor is it ideal at a time when several
highly politicized regulatory reform efforts are underway. For instance,
before this whole squabble surfaced, Sorbara was openly championing a
national securities regulator to his provincial counterparts. This is a
goal that the OSC favours but can’t hope to achieve without major
political involvement. And it will likely require some hefty
Officially, a national regulator is part
of the Ontario Liberal government’s platform, and Fox Gray says that
Phillips will be pursuing the issue in Sorbara’s place. Yet there is no
progress to report on the issue. Getting to a national regulator is surely
going to take more than a supportive provincial minister, and the current
situation in Ontario can’t help that initiative.
Anisman says the central lesson from the
whole affair is that the OSC shouldn’t be reporting on its investigations
to a finance minister anyway. He says the OSC shouldn’t be reporting to
the political level about enforcement policies or performance, either.
“If there’s any area in which the
commission should be completely independent, it’s enforcement,” Anisman
says. “It shouldn’t be reporting to the minister about investigations. The
minister should learn about them when the notice of hearing is issued,
like everybody else.”
On the other hand, he says,
policy-making, rule-making and other issues are appropriate areas for the
minister to oversee. Other critics, however, aren’t so sure that this
should be a ministerial responsibility, either. One former regulator says
the current system isn’t working as intended; it has politicized
rulemaking, and is hampered by a lack of transparency.
The problem, it seems, stems from the
decision to give the OSC rule-making power. Originally, the move was
intended to speed up the regulator’s ability to modernize the rules, as
the OSC had a very hard time getting its changes on the legislative
agenda. However, the result is that power has been concentrated at the
ministry level, which means that assiduous lobbying has the power to kill
controversial rules (note the financial planning proficiency rule). Even
worse, the regulator may become self-censoring to avoid initiating rules
that may generate political heat.
Rather than the current reporting
arrangement, Anisman proposes that a standing legislative committee could
be established to provide oversight. In a paper he delivered last fall, he
recommends that such a committee should be established to review every
year the OSC’s activities, budget and plans. Anisman suggests that this
committee could receive public submissions and engage outside counsel. As
well, he says, the OSC’s chairman and executive director should be
required to appear before the committee to answer questions, as the
Securities and Exchange Commission chairman is required to before the U.S.
Congress. Anisman allows that this model is more American in style but, he
says, it’s justified by the securities commission’s broad authority and
Concerns about the extent of the OSC’s
power has pushed others to call for reform in that area, too. In a 2002
paper, economist Neil Mohindra, now at Finance Canada but then working for
the Fraser Institute, argued that governance reforms were necessary at the
OSC to provide greater financial accountability and alleviate concerns
about its broad powers to impose discipline in the name of the “public
interest.” The problem is that the public interest really isn’t defined,
which theoretically gives the regulator carte blanche when it comes to
meting out punishment. Mohindra declined to comment for this story, citing
his current position at the federal government.
However, in his paper, Mohindra proposed
a menu of governance reforms that could be implemented at, or imposed
upon, the OSC. They include actions that could be taken within the current
structure, such as improved public reporting by the regulator and inviting
the provincial auditor to examine its efficiency; more fundamental
reforms, such as forming an independent board of the commission consisting
of the part-time commissioners; and hiving off administrative powers into
an independent regulatory committee (a similar structure is used by the
regulatory authority in Hong Kong).
Questions of regulatory governance and
accountability aren’t just legal or theoretical abstractions; they can
have big implications for the capital markets. Mohindra insists that the
quality of regulatory governance contributes to a jurisdiction’s market
competitiveness — providing market players with confidence that they will
be treated fairly by regulators.
The relevance and importance of such
fundamental questions haven’t escaped the OSC’s notice. Last year, the
regulator commissioned a three-person committee to look into some of the
structural issues concerning the OSC — particularly its multiple roles as
rule- maker, prosecutor and judge. The committee, headed by Ontario’s
integrity commissioner, Coulter
Osborne, heard submissions calling for
everything from the status quo to adopting independent tribunals to hear
OSC cases to spinning off the commission’s enforcement arm.
Dey says the OSC now has the committee’s
report and plans to release it to the public, although the timing remains
uncertain. Osborne didn’t respond to a request for comment.
Another possible source of accountability
reform is the legislative committee that must be struck to deal with the
recommendations of the five-year review committee. The Securities Act
requires that the five-year committee’s final report, delivered last
spring, be referred to a legislative committee for review, to solicit
comment and make recommendations for legislative changes. Fox Gray says
that the government plans to refer the report to a committee in the “near
future, but the specific timing has not yet been determined.”
Perhaps the eventual committee, whenever
it is struck, will address some of the structural concerns. Anisman and
Mohindra have both made some recommendations that could improve oversight
and accountability at a time when the issues are particularly sensitive to
An alternative approach could be a
newfangled body that reports to the legislature but isn’t itself a
creature of the legislature. Such a function is served by the General
Accounting Office in the U.S., and it seems to do a good job of asking
tough questions and carrying out thorough, independent scrutiny of U.S.
If nothing else, the current Sorbara
episode may focus attention on some of the fundamental problems with the
existing governance and accountability mechanisms. IE