Ontario Securities Commission
(1988), 11 OSCB 3544
Report of the Standing Committee of the Ontario
Legislature on Government Agencies
August 26, 1988
The Standing Committee of the Ontario Legislature on
Government Agencies is responsible for the
review of the operation of all agencies, boards and commissions of
the Government of Ontario.
The Ontario Securities Commission appeared before
the Committee on March 9 and 10 and May 25,
1988 and the following is the Report of the Committee on its
review of the Ontario Securities
Standing Committee on Government Agencies
Report on Agencies, Boards and Commissions (No. 14)
1st Session, 34th Parliament
37 Elizabeth II
After the General Election of September 10, 1987,
the Standing Committee on Government Agencies was reconstituted under
Standing Order 90(f), which gives the Committee the mandate to
review the operation of all agencies,
boards and commissions of the Government of Ontario. The Committee is
empowered to make recommendations on such matters as the redundancy of
agencies, their accountability, whether they should be sunsetted and
whether their mandates and roles should be revised. Eleven members serve
on the Committee, with the three parties having representation
corresponding to the number of seats held by each party in the House: six
Liberals, two New Democrats and two Progressive Conservatives. The
Chairman is of the Progressive Conservative Party.
In accordance with its terms of reference, the
Committee decided to review the
operation of the following agencies:
||Civil Service Commission;
Ontario Food Terminal Board;
Ontario Securities Commission; and
Pension Commission of Ontario.
During March and April
1988, the Committee conducted public hearings with respect to these
agencies and heard testimony from the representatives of the agencies,
and, in some cases, from the responsible ministry. The Committee wishes to
express its appreciation to all the witnesses who presented their views.
The Committee wishes to acknowledge the cooperation of the officials of
the various ministries of the Government of Ontario and the agencies
In addition, the Committee urges ministers under
whom these agencies fall to give serious and thoughtful consideration to
the Committee's recommendations.
The Committee wishes to express its appreciation to
the Clerk of the Committee and the Research Officer for their assistance
and dedication to the work of the Committee.
The recommendations contained in this report
represent a consensus of opinion rather than complete agreement on every
issue that was before the Committee. While each member of the Committee
may not agree with every recommendation, your Committee is pleased to
present a report that each member can support.
II. AGENCY REVIEW
ONTARIO SECURITIES COMMISSION
The Ontario Securities Commission, created by the
Securities Act R.S.O. 1980, chap. 466 as amended, is the regulatory agency
given the responsibility of overseeing and supervising the securities
industry in Ontario. (Each of the other provinces, and the two
territories, has its own securities legislation; British Columbia,
Alberta, Saskatchewan and Manitoba have statutes based on the Ontario
model). In addition to administering the provisions of the Security Act,
the Commission is given a role under the Commodity Futures Act, R.S.O.
1980, chap. 78; the Deposits Regulation Act R.S.O. 1980, chap. 116; and
under the Business Corooration Act R.S.O. chap. 54 as amended.
The first modern Securities Act in Ontario was
introduced in 1945, though securities legislation dates back to 1928 and
1931. Since then the Act and regulations have been amended and changed on
numerous occasions. As the securities industry has become more
sophisticated, the Act and regulations have become increasingly more
complex and technical.
THE SECURITIES MARKET
The Securities Act provides the regulatory framework
for the securities market in Ontario which consists of the buying and
selling of "securities." Examples of securities include: shares of common
and preferred stock and limited partnership units that are sold to the
public and traded on a stock exchange or in the over-the-counter market;
bonds and debentures issued by governments and companies; shares or units
in mutual funds; warrants or rights to purchase shares; options on gold,
silver, foreign currency, bonds, shares, etc. The above examples do not
exhaust the types of securities that exist or that can be devised.
It should be noted that two types of markets for
securities exist; the primary market comprising the buying and selling of
newly issued securities and the secondary market comprising the trading of
already existing securities. The latter are mostly traded on the floor of
stock exchanges, while newly issued securities are usually sold
over-the-counter, that is bought directly from an investment dealer.
An investor, in order to buy and sell securities,
must contact a firm or individual registered with the Ontario Securities
Commission. That person or firm may be a stock brokerage house, a
securities firm or a mutual fund sales organization. The salesperson with
whom the investor deals is commonly known as a stock broker, account
executive or registered representative.
The futures market comprises trading in contracts
that give the purchaser of the contract the right to purchase or deliver a
commodity of a specific quantity and quality at some specific time in the
future. Over 90% of those who purchase such contracts do not intend to
take possession or make delivery of a specific good or commodity.
Commodities that can be traded include such goods as wheat, cattle, wool,
sugar, copper, gold, silver etc., as well as futures in money and
financial instruments and Stock Index futures. The Toronto Futures
Exchange only deals in financial instruments and stock futures.
The Toronto Futures Exchange opened in 1984 under
the Commodity Futures Act and is located on the trading floor of the
Toronto Stock Exchange. The former operates in much the same way as the
TSE and is governed by rules similar to those of the Securities Act.
PURPOSES OF SECURITIES LEGISLATION
The overall objective of securities legislation is
to protect the investing public. This objective is achieved through
various means and techniques. One method is to proscribe and control
certain fraudulent activities such as manipulation, misconduct or fraud in
the market place. Another requires that investors be fully and truly
informed of any appropriate facts in disclosure documents relating to
publicly-offered (new) securities and that investors be advised on a
continuing basis of information they need in order to make investment
decisions in the secondary market. In addition, in order that only
reputable individuals and firms operate in the marketplace, the Act
requires that those involved as intermediaries in the selling and buying
of securities be registered with the Commission, and that the Commission
supervise the standards imposed upon registrants by the Act and
regulations, the Toronto Stock Exchange and the Investment Dealers'
Association, the self-regulating professional body. The Commission aiso
seeks to impose a standard of fair dealing in the marketplace by issuing
policy statements that constitute a legislative response by the Commission
with respect to some abuse.
These objectives and purposes must, however, be set
beside several other values which implicitly compete with the objectives
of any securities legislation. lt has been pointed out that investor
protection should not be achieved at too high a cost to the participants
in the market; and that a degree of risk is inherent in the securities
market. These concerns can be subsumed under the general principle that
one should not overregulate.
The broader economic purposes served by a well-run
and fair securities market organized around securities legislation is to
ensure that Canadian needs for capital are met, that the market permits
the mobility of capital and that the market provides a pricing mechanism
that is appropriate to the risks involved. If these principles are adhered
to, the markets in securities will be efficient in allocating scarce
financial resources among the buyers and sellers. Public confidence in the
securities market should encourage a larger participation by the investing
Canadian public which ultimately will rebound to the general good of the
MANDATE OF THE COMMISSION
The Commission has explained its mandate as
The Ontario Securities Commission ("OSC") has
administrative responsibility for the Securities Act, Commodity
Futures Act Deposit Regulations Act, Toronto Stock Exchange Act and
Toronto Futures Exchange Act, as well as certain provisions of the
Ontario Business Corporations Act. The bulk of day-to-day operations
centre around the administration and enforcement of the Securities Act
and the Commodity Futures Act.
The OSC's original investor protection mandate has
evolved into a more complex concern for fair and efficient capital
markets. There are three broad activities involved in securities
regulation in Ontario and in most other jurisdictions with developed
First of all, there is the registration of persons
who trade in securities and commodities. In the case of individuals,
the OSC is concerned primarily with minimum competence and integrity.
In the case of firms, it is concerned with financial stability and
adequate supervision of individuals. The OSC currently has
approximately 8,000 salesmen and 500 companies registered. With active
markets and the breakdown in the barriers between financial
institutions, these numbers are increasing rapidly.
The OSC's second broad activity is the
review and clearance of
prospectuses. No person may trade in a security where such a trade
would involve a distribution unless a prospectus is filed with the
Commission. During 1986, the OSC reviewed over 600 prospectuses and
similar financing documents, representing in excess of $17 billion in
financing activity, and processed over 300 applications for exemptions
from the prospectus requirement.
The OSC's third broad activity involves
investigations and enforcement. Staff investigate suspected violations
of the legislation and, in appropriate cases, recommend either
administrative proceedings before the Commission or criminal
prosecution under the Act. Staff are also involved in criminal
investigations for possible prosecution by the Attorney General under
certain provisions of the Crimingl Code relating to securities. During
1986, staff undertook approximately 100 investigations.
Staff also supervise the filing of financial
statements, insider trading reports and other material. During 1986,
corporate financial disclosure filings and similar filings exceeded
The OSC is empowered to recognize associations or
organizations representing registrants as self-regulatory
organizations ("SROs"). The OSC has recognized the Toronto Stock
Exchange (the "TSE"), the Ontario District of the Investment Dealers
Association of Canada (the "IDA") and the Toronto Futures Exchange
(the "TFE") as SROs, delegating to them both the authority and the
responsibility to monitor and regulate their members, while retaining
the power to review their decisions.
SROs impose financial and trading rules on their members which are
enforced through independent audit and compliance checks.
STRUCTURE AND ORGANIZATION
The Ontario Securities Commission is organized on
two levels or tiers. At the top is the Commission acting as an
administrative tribunal, composed of a Chairman and two Vice-chairmen (one
of these positions is vacant), and eight Commissioners, all appointed by
Order-in-Council. Only the Chairman and the Vice-Chairmen are full-time
positions, and all positions are for three year terms. The Commission
performs several functions, including purely administrative,
quasi-judicial and judicial. Moreover, the Commission can advise the
government with respect to legislation that touches on the Commission's
areas of responsibility and the Commission can issue policy statements
that are viewed as binding by those affected by the Securities Act and the
Commodity Futures Act.
The principal divisions of the Commission are
The Chairman of the Commission, as Chief Executive
Officer, has over all responsibility for the OSC. The Commission
formulates policy, sits as an administrative law tribunal in hearings,
acts as an appeal body from decisions made by the Director and staff
and makes recommendations to the government for changes in
legislation. Two members constitute a quorum.
Office of the Secretary - The Office of the
Secretary receives and coordinates the processing of all formal
applications to the Commission and to the Director. The Secretary may
accept service on behalf of the Commission and certify the Commission
records as required. The OSC, through the Office of the Secretary
publishes a weekly bulletin containing information on prospectuses
filed with the OSC, takeover and issuer bids, new registrations,
orders and rulings, new policy statements and other information on OSC
activities. The weekly bulletin is published by Micromedia Limited
under the authority of the Commission and is available at an annual
subscription fee of $405.
Office of the Legal Advisor - The Legal Advisor's
Office supplies a wide variety of legal services directly to the
Commission, including, for example, research, policy formulation,
legislative drafting, private sector liaison, special projects work
and general legal advice. It is responsible for most of the
legislation and regulations recommended to the Minister by the OSC.
The Legal Advisor's Office is also responsible for coordinating the
OSC's participation in the semi-annual meetings of the Canadian
Securities Administrators (the "CSA") and in the Uniformity Committee,
a CSA subcommittee which seeks national uniformity in legislation and
The second tier of the Commission consists of an
administrative agency composed of some 150 staff, headed by a Director.
The Director of the OSC is responsible for the
administration of the Commission as well as having overall
responsibility for the five operating branches of the Commission
(Commodity Futures, Corporate Finance, Enforcement and Market
Regulation, Capital Markets (including Registration), and Finance and
Administration) and the Offices of the Chief Accountant and the
General Counsel. The following is a description of the activities
carried out by each of these branches or offices of the Commission:
Office of the Chief Accountant - The Office of the
Chief Accountant was established in 1986 in recognition of the
increasing importance and complexity of financial reporting. As the
senior staff accountant, the Chief Accountant is responsible for the
formulation of policy on financial reporting matters, the resolution
of significant questions relating to the interpretation and
application of generally accepted accounting principles ("GAAP") and
generally accepted auditing standards ("GAAS") at the staff level. The
Chief Accountant participates in decisions on financial reporting
matters that are likely to result in a hearing before the Commission
or when staff propose to accept a significant departure from GAAP or
Office of the General Counsel - The Office of the
General Counsel was created in 1986 with the objectives of augmenting
the legal services available to the Commission at the staff level. The
General Counsel, as senior staff lawyer, has broad responsibility for
all legal matters at the staff level and is available as a resource to
staff lawyers in connection with the interpretation of the Securities
Act the Regulations and the Policies of the OSC. The General Counsel
participates in all decisions which result in or are likely to result
in administrative or criminal proceedings under the Securities Act.
Corporate Finance - The Corporate Finance Branch of
the Commission is charged with the primary responsibility for
regulation of public financing activities in Ontario. As such, its
staff of lawyers and accountants review
all prospectuses filed by issuers with the OSC. The staff of the
corporate finance branch are also responsible for reviewing and making
recommendations with respect to applications filed with the OSC for
exemptions from prospectus requirements as well as from other
requirements of the Securities Act.
Enforcement and Market Regulation - Enforcement and
Market Regulation is the largest branch of the OSC, reflecting the
emphasis placed on market surveillance, investigation, and
enforcement. This branch investigates suspected violations of the
legislation and, in appropriate cases, recommends either
administrative proceedings before the Commission or criminal
prosecutions. In addition, the Branch is responsible for the Canadian
Over-the-Counter Automated Trading System.
Registration - The Registration Branch deals with
the registration of all salespersons and companies trading in
securities with the public in Ontario. The OSC is primarily concerned
with the competence and integrity of individuals and with the
financial stability and adequate supervision of individuals by firms.
The cardinal rules imposed upon registrants are the "know your client"
and "suitability" rules. With active markets and the breakdown in
barriers between financial institutions, the number of registrants is
Capital Markets - The Capital Markets Branch is
responsible for the implementation of the government's new ownership
policies respecting foreign ownership of securities dealers and
ownership of securities dealers by other financial institutions which
became effective on June 30, 1987. The Capital Markets Branch is also
responsible for overseeing the Toronto Stock Exchange, the Toronto
Futures Exchange and the Ontario District of the Investment Dealers
Association of Canada. Approval for the creation of the Capital
Markets Branch, and for the positions and expenditures thereby
entailed, was received early in 1987 and the Branch is therefore in
its "start-up" stage. It is intended that the Registration Branch will
eventually be incorporated in the Capital Markets Branch.
Commodity Futures - The Commodity Futures Branch
administers the Commodity Futures Act and Regulations thereunder.
Finance and Administration - The OSC has its own
finance and administration staff to oversee the internal
administration of the Commission. This Branch also includes the
Disclosure Section of the Commission which monitors compliance with
the continuous disclosure and insider trading reporting requirements.
POWERS OF THE COMMISSION
Some of the principal powers of the Commission
1. Appointment of Experts
The Commission can appoint one or more experts to
help the Commission in assessing the quality of information that the
Commission receives. These responsibilities are carried out by Commission
2. Investigative Power
The Commission can appoint someone to investigate
complaints or assertions that the provisions of the two Acts have been
contravened or that someone has committed an offence under the Criminal
Code. These responsibilities are carried out by Commission staff.
3. Audit Power
The Commission can appoint someone to conduct
financial audits of those registered wlth the Commission.
4. Stock Exchanges
The stock exchanges and commodity future exchanges
must be approved by the Commission; the Commission also exercises broad
regulatory powers with respect to such exchanges.
5. Registration Power
The Commission is given broad powers to suspend,
cancel, restrict and impose terms upon a registrant, or to reprimand
6. Exemption Powers
The Commission can exempt any trade, security,
person or company from the prospectus and registration requirements of the
Act. The Commission can also grant exemptions from any of the requirements
of the take-over and issuer provisions of the Acts. At the same time,
however, the Commission can specifically deny the use of any of the
prospectus or registration exemptions in the Act to any person and
7. Cease-trading Power
The Commission is given power to order that trading
in any security be prohibited.
8. "Freeze" Order
Funds of investment firms can be frozen by the
Commission or it can apply for court-appointed receivers.
9. Relief Powers
The Commission can grant relief from the financial
reporting requirements, and from proxy solicitation and insider trading
It should be pointed out that the powers described
above are taken from the Securities Act, though the Commission's powers
under the Commodity Futures Act are similar. The various powers of the
Commission are in most instances exercised by the Director or his senior
staff. In addition to the powers the Director exercises on behalf of the
Commission, the Securities Act gives the Director a number of specific
duties and powers. Included among these powers are: to grant registration
where the applicant is suitable and such registration is not
objectionable; to prohibit the use of advertising and sales literature
where the Commission has ordered submission of same for
review; to issue receipts for
prospecting syndicate agreements, for preliminary prospectuses; to permit
the variation of prospectus certification requirements; to refuse to issue
receipts for prospectuses in certain circumstances; to refer material or
novel questions arising in connection with prospectuses to the Commission
for determination; to make an order waiving compliance with the Act's
requirements in respect of a distribution of previously issued securities;
to order that trading cease where the preliminary prospectus is defective.
Several of these powers are exercised by the Director's senior staff.
Again, it should be pointed out that these powers
are exercised by the Director or his staff under both the Securities Act
and the Commodity Futures Act.
SECURITIES ACT: MAJOR PROVISIONS
As has already been stated previously, the objective
of securities legislation is to protect the investing public from
fraudulent practices. The Ontario Securities
Act in addition to providing the Securities Commission with various
powers in order to perform its regulatory functions, seeks to regulate
certain types of activities.
1. Registration of Participants
It is a requirement of the Securities Act and the
Commodity Futures Act that market participants must be registered with the
Commission. Certain requirements must be met before registration is
granted to dealers, underwriters, brokers, mutual fund salespeople and
others. If such requirements are not met on a continuing basis, the right
to participate in the securities business can be taken away by the
Commission. The emphasis with respect to individuals is on competence and
integrity, while for firms the emphasis is placed on minimum capital and
certain types of business record requirements.
The Securities Act exempts certain entities, such as
banks, and individuals, such as lawyers, from registering as advisors.
Moreover, if certain specified trades in securities are entered into,
registration of participants in that trade may not be required. One of the
more significant provisions stipulates that where there is a trade in
securities the cost of which to the purchaser exceeds $115,000, the
participants do not have to be registered. Further, registration is not
required if trading takes place in respect of certain securities, mainly
those that evidence some form of indebtedness, such as bonds, debentures,
The Act also includes more general provisions,
dealing with such matters as advertising, and direct telephone
solicitation of trades.
2. Prospecting Syndicates
The Act sets out under what circumstances
prospecting syndicate agreements can be filed with the Commission.
3. Prospectus Requirements
This is one of the more important requirements of
the Securities Act. Before securities may be issued to the public a
prospectus must be filed with the Commission. The purpose of the
prospectus is to provide potential investors with complete information
about the business affairs of the issuer of the security. First a
preliminary prospectus is filed, which is reviewed by the Director,
indicating any deficiencies. Then, if the Director accepts the changes, a
final prospectus is filed.
The Securities Act permits certain distributions,
trades and purchases to be exempt from the prospectus requirement.
Moreover, the Commission is given the power to exempt any trade, intended
trade, security, person or company from the registration and prospectus
4. Continuous Disclosure
The Securities Act requires that, in addition to the
prospectus requirement for new security issues, there be continuous
disclosure of material information from firms whose securities are traded
by the public. Firms must file quarterly and annual financial statements
with the Commission, and must mail the statements to all holders of voting
securities. Annual statements must be filed with the Commission. In
addition to these financial reports, the issuers of securities must
announce any material changes in the affairs of the firm that may affect
the value of the firm's shares immediately and publicly - by press
release, to the Commission and to stock exchanges. All investors must be
given an equal opportunity to assess material information on a timely
5. Proxies and Proxy Solicitation
When a firm sends out a notice of a shareholders'
meeting, it must also send out a form of proxy which, when signed by the
shareholder, entitles the proxyholder to vote the shareholder's interest
at the meeting. In addition, the solicitor of a proxy must disclose
information set out in the regulations by means of a circular.
6. Take-Over Bids and Issuer Bids
When someone seeks to acquire 20% or more of a
company's outstanding voting securities, or when the company itself seeks
to buy back any or all of its securities, those involved in such bids must
ensure that those holding the securities are adequately informed of the
bids. Moreover, when such bids are offered, minority shareholders are
entitled to be given the same value in return for their shares as is given
to majority shareholders.
In 1987, this section of the Securities Act was
amended, though some sections have not, at time of writing, been
7. Insider Trading and Self-Dealing
In general terms, an "insider" is anyone who has
access to special knowledge about a firm that either expects to issue or
has issued securities to the public. The Securities Act requires that
insiders file an insider trading report with the Commission within 10 days
after the end of each month during which any change took place in personal
security holdings. Such information is subject to Commission monitoring
An insider is liable if he buys or sells securities
with knowledge of a material fact or change in the affairs of a company
that was not generally disclosed to the public. Liability is also
attendant upon an insider tipping or passing on material information to
someone else without public disclosure. Provision is also made for
compensating third parties.
On February 15, 1988
amendments to the Securities Act relating to insider trading were
proclaimed by the Minister responsible. These amendments expand the
definition of what an "insider" is to include a broader range of
individuals, and for the first time, the legislation covers "tipping".
The amendments provide for a minimum fine equal to
the profit involved. The maximum fine has been set at the greater of $1
million or three times the profit.
Other penalties have also been revised. Thus, the
maximum penalty for most offences under the Act has been set at $1 million
and two years in jail.
HEARINGS, REVIEWS AND APPEALS
Under both the Securities Act and the Commodity
Futures Act, the Director of the Commission, the Commission, or a stock or
commodities exchange are given the power to make binding decisions at
their discretion. In each instance, the Acts provide that such decisions
can either be reviewed or appealed.
Thus, where the Director makes a decision, that
decision can be reviewed by the Commission upon the request of any person
directly affected by the Director's decision, or on the initiative of the
Commission. The decision of the Director takes effect immediately, though
the Commission may grant a stay.
Any decision of the Commission can be appealed to
the Divisional Court, except those decisions that grant exemptions from
prospectus and registration requirements.
Moreover, a decision by a stock exchange can be
reviewed by the Commission upon application by any person directly
affected by the decision of the stock exchange.
Under the Commodity Futures Act the
review and appeal procedures are similar
to those under the Securities Act. The one additional procedure provides
for review by the Commission of
decisions made by a recognized self-regulatory body, upon application by
any person directly affected by the decision.
FINANCES AND BUDGET
Under the regulations to the Securities Act and the
Commodity Futures Act, the Commission is empowered to charge fees for
certain administrative services performed by the Commission. In years
past, the revenue collected from fees and other charges not sufficient to
cover the Commission's was operating expenses. On July 1, 1986, the fees
were increased substantially. The results are revealed in the following
|Registration - Brokers and
|Disclosure - filing, etc.
|Commodity Futures Branch
These moneys, however, are not retained by the
Commission but are remitted to the Consolidated Revenue Fund. In other
words, the Commission does not have a free hand in setting its budget or
in controlling its finances. Rather the Commission's financial
requirements form part of the Estimates of the Ministry of Financial
lnstitutions, thereby requiring the Ministry's and ultimately the
The Commission's overall yearly budget allocation is
set by the Ministry, subject to Management Board approval. Over the last
several years, the allocations have been as follows: 1987 - $6,149,600 and
1986 - $5,461,200. In each of these years, the allocation has been
exceeded: in 1987 by $242,115 and in 1986 by $94,229. In 1986 the
expenditure overrun should be compared to the revenue intake of
$2,264,648. Clearly the fee structure in that year (and in previous years)
was set too low. In 1987, however, the revenue intake was $8,794,906, and
if the Commission had been able to set this revenue against its
expenditures, it would have had a substantial surplus.
Following the standard accounts categorization, the
Commission's actual expenditures in the last two years are as follows:
|Salaries and wages
|Supplies and equipment
The increase in salary levels reflects the fact that
the Commission was authorized to increase its staff complement by 23
positions. The need for increased staffing levels is due to the fact that
the Commission's regulatory responsibilities were substantially increased
as a result of the deregulation of the securities industry that allowed
banks, loan and trust companies and insurance companies to participate in
activities which were formerly restricted to securities dealers.
At the same time, the Commission has experienced
considerable turn-over with respect to its professional staff, who have
taken advantage of more lucrative job opportunities in the private sector.
The Commission has recognized, and the Ministry has approved, the need to
increase the salary levels in order that they be more competitive with the
ACCOUNTABILITY AND CONTROL
Management Board of Cabinet has designated the
Ontario Securities Commission as a Regulatory agency within Schedule 1.
Agencies within this schedule are funded out of the Consolidated Revenue
Fund or out of monies collected from the public by means of levies. In the
case of the Commission, the former case applies, so that the expenditures
of the Commission are part of the expenditures of the Ministry of
Financial Institutions. Monies for the Commission are appropriated by the
Legislature and the Estimates of the Commission form part of the Estimates
of the Ministry of Financial Institutions. Another characteristic of
Schedule I agencies is that they are able to adhere to all management
directives established by the Management Board, and have their
administrative-support services provided by the responsible ministry,
unless the agency is of a sufficient size as to be able to provide its own
support services in a more efficient and effective manner. The Commission
is of a sufficient size to have its own staff, though some services are
provided by the Ministry.
As a Schedule I agency, the Commission is required
to have a Memorandum of Understanding with the Ministry. The existing
Memorandum signed in 1986 establishes the relationship and
responsibilities of the Commission and the Ministry. The role of the
Minister is to present the Estimates of the Chairman of the Commission to
the Legislature as part of the Estimates of the Ministry of Financial
Institutions; to ensure that the Commission is informed of Ministry and
Government financial and administrative policies, procedures and
directives that have, or will have, an influence on the Commission; and to
provide direction and/or consent for any court proceeding that may be
instituted under section 118 of the Securities Act.
On the other hand, the Commission is made
ensuring the Canadian securities and commodity futures
markets operate efficiently, with integrity and as free as possible from
dishonest activities; providing protection to investors by setting minimum
standards of conduct expected from persons and companies registered with
the Commission, and providing information to investors by requiring
disclosure of risk to all classes of investors; carrying out its
responsibilities within the limits of its jurisdiction, in accordance with
relevant law, responsibly and fairly, and in the public interest; ensuring
that the Toronto Stock Exchange and the Toronto Futures Exchange operate
efficiently and with integrity and in the best interests of the investing
public; ensuring that matters relating to the Commission and considered by
the Commission or by legislation to be of importance to the Minister, are
brought expeditiously to the attention of the Minister; preparing such
reports as are required under the Ontario
Securities Act or the Memorandum to be filed with the Minister; and
through its Director, ensuring its administrative staff are knowledgeable
about and adhere to Ministry and Government financial and administrative
policies and procedures.
With respect to financial arrangements, the
Commission is required to prepare plans and an annual budget, and Ministry
staff shall assist the Commission in the preparation of those plans, the
annual budget and Management-By-Results forecasts.
Moreover, the Commission is required to operate
within the voted appropriations or assigned budget, and where changes are
sought the Commission must seek the advance approval of the Ministry.
Also, the Commission must abide by the financial policies expressed in the
Ontario Manual of Administration, the Manual of the Office of the
Treasury, the Ministry Financial Manual, and other Ministry directives,
save those policies that are exempted in the Memorandum.
Under audit arrangements, the Memorandum requires
that the Commission be subject to the Ministry's Internal Audit Branch, as
well as audits by the Provincial Auditor.
In terms of reporting relationships, the Commission
is required to report to the Minister through its Chairman. The Director
is made the chief administrative officer of the Commission and reports to
the Commission on operations and the implementation of policy. The
Chairman must obtain the approval of the Deputy Minister where approval is
required under the Manual of Administration. The Chairman and/or the
Director can ask the Ministry for support on day-to-day administrative
With respect to administrative relationships, the
Commission is subject to all the administrative policies of the Manual of
Administration. The Ministry is required to provide the Commission with
administrative support, including access to professional and technical
Ministry staff to obtain advice. However, any advice offered does not
alter the Commission's sole responsibility for making decisions.
Staffing by the Commission is subject to all
personnel policies set out in the Manual of Administration and in Ministry
personnel policies, and the Vice-chairmen and staff of the Commission are
appointed under the Public Service Act.
The Commission is assisted by the Financial
Disclosure Advisory Board and the Commodity Futures Advisory Board. These
two bodies were subject to sunset review,
on or before March 31, 1987.
The Chairman of the Commission is also required to
provide timely information and advice with respect to matters within the
jurisdiction of the Commission and which require the attention of the
Minister or that may raise questions in the Legislature. The same
requirement applies to the Director in relation to the Deputy Minister. In
addition, the Chairman is required to provide the Ministry with various
reports, including: annual calendarizations, quarterly variance reports,
annual Ministry planning submission, and an annual report of the
Commission's affairs for inclusion in the Ministry's annual report.
Apart from any requirement of the Securities Act and
regulations, and the Memorandum of Understanding, the Commission in its
capacity as an administrative tribunal, makes decisions independently of
government. While its decisions are not reviewable by the government, it
is subject to the courts. All decisions of the Commission, save those in
respect of rulings under section 73, can be appealed to the Supreme Court
of Ontario, by a person directly affected. Moreover, any decision of the
Commission including section 73 rulings is reviewable by the courts under
the Judicial Review Procedure Act.
The last several years, but particularly the last
year, have been a time of change and transition for the securities
industry and the Ontario Securities Commission. Reregulation has resulted
in the opening of the industry to several new intermediaries in addition
to the traditional investment firms and brokerage houses. Now federally
chartered banks, trust and insurance companies can offer investment
services through approved subsidiaries, and a number of banks have already
acquired several prominent Canadian investment firms. At the same time,
foreign investment firms can acquire full ownership of their Canadian
equivalents. This reregulation has come in the wake of the deregulation of
commission rates that investment dealers can charge their clients. The
overall effect of these changes has been to increase the level of
competition within the Canadian securities industry itself and in relation
to other markets elsewhere, in particular American markets.
Most of these changes were contemplated and
introduced during the stock market boom that preceded the collapse of that
boom in October of 1987. The long-term repercussions of policy decisions
taken by federal authorities and the Ontario Government, along with the
implications of the stock market crash, are yet to be fully understood.
There may well be a need for further changes and adjustments, particularly
of a regulatory nature.
It is the contention of the Committee that
maintaining public confidence in the securities industry and in the
regulatory role of the Ontario Securities Commission should be one of the
overriding objectives of the Ontario Government and the Commission. In
light of this concern, the Committee makes the following observations and
One of the principal objectives of the Commission is
to provide a regulatory framework for the securities industry that will
protect the investing public from fraud and stock manipulation.
Undoubtedly the securities industry is highly complex, in part reflected
in the detailed and technical language of the Securities Act and
It has been frequently noted that relatively fewer
Canadians invest in the stock markets than Americans. Moreover, it has
also been noted that the public's perception of stock markets has been
negative to some degree. There is the nagging doubt as to how "safe" stock
markets are as an investment vehicle. In this context, the Committee
believes that the Commission has a role to play. It may be that not only
do Canadians need to learn how the securities industry and the stock
markets work, but, just as importantly, there is a need for the general
public to know the regulatory framework the Ontario Securities Commission
The Committee is encouraged that the Commission has
begun to take a more proactive role with respect to the public's
understanding of the regulatory process. In 1987 the Commission issued its
first separate annual report, containing comprehensive information on the
Commission's activities. Moreover, the Commission has published a pamphlet
outlining how the securities industry operates and the role of the
Commission in maintaining high standards of conduct on the part of the
The Committee believes that the Commission should
take a proactive role in communicating with the general public. An
informed public that better understands the regulatory functions of the
Commission is much better placed to assess the relative "safety" of
investing in stock markets.
Your Committee, therefore, recommends that:
The Ontario Securities Commission adopt a proactive
policy of communicating its regulatory role to the general public.
Commensurate with a more proactive communications
policy, the Committee is of the opinion that the Commission should adopt a
more proactive regulatory stance. As has been already noted, the
securities industry is in a transition period characterized by the
internationalization of capital markets, new and sophisticated security
vehicles, and by the reregulation of financial intermediaries. At the same
time, the Securities Act has been amended to provide the Commission with
more regulatory authority with respect to such matters as insider trading
and take-over bids. The Committee believes that during this period of
transition the Commission should take the opportunity to assert its
regulatory functions and to give a strong signal to the securities
industry that the Commission is in a strong position to demand the highest
standards of conduct and integrity. The collapse of Osler Inc., a major
Toronto investment firm, that could result in a potential loss to its
creditors of some $65 million, underscores the need for the Commission to
review the way it administers the
Securities Act, and the roles of the Toronto Stock Exchange and the
Investment Dealers' Association.
The Committee believes that the Ontario Securities
Commission should begin by ensuring that its operational and
administrative capabilities are functioning effectively. In this regard,
the Commission will have to resolve its staffing problems. Over the last
year it has lost a significant portion of its staff to the private sector,
staff that were experienced in enforcement and audit matters. Not only
does the Commission need to fill these positions as quickly as possible,
but it will need to train any new staff in the intricacies of the
Securities Act and the procedures of the Commission.
At the same time, the Committee is aware that the
Commission will soon computerize its documentation flow and procedures,
thereby enhancing and strengthening its internal administrative and
decision-making processes. The Committee welcomes this development in
light of its observations and recommendations.
The Committee believes that as a result of these
internal changes, the Commission will be able to deal with public
complaints and other information sources that allege breaches of the
Securities Act in an orderly and expeditious manner. Additional staff and
computerization should place the Commission in a position to deal more
effectively with its caseload. An opportunity will exist for the
Commission to streamline and prioritize its investigations of alleged
breaches of the Act.
Your Conimittee, therefore, recommends that:
The Ontario Securities Commission undertake to
streamline and prioritize its investigations of alleged breaches of
the Securities Act.
The Osler Inc. collapse has highlighted the need for
a thorough review of the Commission's
enforcement and audit procedures. Moreover, since some of this work is
delegated to the self-regulating Toronto Stock Exchange and the Investment
Dealers' Association (Ontario), the Commission will have to
review its relationship with these
The Committee believes that the Commission's
responsibility to ensure that investment firms are financially solvent
requires an audit process that acts as an "early warning system" for the
regulators and the firms in question. It is not inconceivable that under
present market conditions and as a result of deregulation and
reregulation, other investment firms may find themselves in a situation
similar to Osler's.
Your Committee, therefore, recommends that:
The Ontario Securities Commission undertake a
comprehensive review and study of
its enforcement and audit procedures with a view to creating an "early
warning system" for financially troubled securities firms.
The Osler collapse also points out the inadequacy of
the National Contingency Fund, created by the securities industry to cover
instances where the public has suffered financial losses as a result of
the actions of investment dealers and brokers. The Fund levies the
country's brokers of a percentage of their annual revenues, and has been
used in the past to cover relatively minor losses of no more than a
million dollars. The Osler collapse with a potential of $65 million loss
cannot be covered by the Fund with its resources of some $15 to $17
The Committee feels that the adequacy of the Fund is
now in some doubt, and believes that the Commission should actively pursue
with the self-regulating bodies and the securities industry as a whole,
ways to strengthen the resources of the Fund and its role in the industry.
Your Committee, therefore, recommends that:
The Ontario Securities Commission, in cooperation
with the Toronto Stock Exchange, the Investment Dealers Association
and other Canadian regulatory agencies, undertake to
review the adequacy of the National
The previous recommendations have touched on the
relationship of the Ontario Securities Commission to the self-regulating
associations, in particular the Toronto Stock Exchange and the Investment
Dealers' Association (Ontario). Under the Securities Act, the Commission
can delegate certain oversight functions to these organizations.
The Committee is concerned that these organizations
may not be fully aware of the responsibilities they have as
self-regulating associations. There may be a public perception that
self-regulation may impose a less stringent code of conduct than if that
conduct was enforced by a third party such as the Commission.
It seems appropriate to the Committee that the role
of self-regulating organizations should be reviewed with respect to the
effectiveness of self-regulation in relation to the Commission's role as
the agency charged with overseeing the securities industry.
Your Committee, therefore, recommends that:
Ontario Securities Commission, in cooperation with
the Toronto Stock Exchange and the Investment Dealers' Association
(Ontario), undertake a comprehensive review
of the effectiveness of self-regulating organizations within the
context of the regulatory framework provided by the Securities Act.
The securities industry and the Ontario Securities
Commission are entering a new phase in the development of securities
markets. The issues will be complex and varied, touching on not just
Ontario and Canadian trends and developments, but also those that arise in
a global context. This is an opportune occasion for the Ministry of
Financial Institutions and the Ontario Securities Commission to position
the latter on a strong proactive foundation.
The Committee has made several recommendations to
further this course of action. At the same time, however, the Committee
feels that several other approaches would help to achieve this objective.
The Ministry of Financial Institutions has been
recently created to oversee all aspects of the financial markets in
Ontario, and is responsible for the work of the Ontario Securities
Commission. Undoubtedly the Ministry is in the process of organizing
itself and developing policies with respect to its responsibilities.
The Committee feels that the combination of
circumstances, including the reregulation and deregulation of the
securities industry, the reorganization of the Ontario Securities
Commission along lines already contemplated by the Commission itself and
as suggested by the Committee, and establishment of the new Ministry of
Financial Institutions, creates an opportunity for a thorough
review of the Securities Aft in light of
the concerms expressed and recommendations made by the Committee.
Your Committee, therefore, recommends that:
The Ministry of Financial Institutions in
conjunction with the Ontario Securities Commission undertake a
comprehensive review of the
Securities Act and related legislation.
While such a review
would necessarily focus on the legal aspects of securities legislation,
the administrative and operational activities should not be neglected. As
the Committee has already noted, the Ontario Securities Commission is in a
transition stage, the result of reregulation and deregulation, with these
developments coming at just the time of the October 1987 stock market
"crash", which produced considerable dislocation within the securities
industry. The Committee believes the Commission should learn from these
events, and be in a stronger regulatory position in the future,
particularly with respect to how well the Commission itself functions.
Consequently, the Committee believes that the
Provincial Auditor could make a contribution in strengthening the
Commission by undertaking an efficiency audit of the Commission. He should
have access to any consultants' reports that have or will be undertaken
while he conducts his audit.
Your Committee, therefore, recommends that:
7. The Ministry of Financial Institutions ask the
Provincial Auditor to undertake an efficiency audit with respect to the
Ontario Securities Commission.
In conclusion, the Committee wishes to raise the
question of its own effectiveness. Over the years, this Committee, like
its predecessor committees, have attempted to fulfill its mandate of
reviewing the 300 or more agencies, boards and commissions of the
Government of Ontario. Served by its staff of one committee clerk and one
research officer from the Legislative Library, the Committee has attempted
to undertake comprehensive reviews of the agencies the Committee selected
for review. In some cases, the
Committee's staff resources have been adequate in providing it with the
necessary information required to conduct each
review. However, there are instances when the Committee selects an
agency that is large and complex with respect to its assigned public
responsibilities. In these circumstances, the Committee believes it should
be able to augment its staff complement. Specifically, the Committee would
like to draw on the staff resources of the Provincial Auditor. Their
accounting and operational performance knowledge and expertise would be of
great benefit to the work of the Committee. Consequently, the Committee
will undertake to discuss with the Provincial Auditor the possibility of
seconding his staff to the Committee on a project by project basis.