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Ontario Securities Commission

Notices/Press Releases

(1988), 11 OSCB 3544 #34/88  

 
Report of the Standing Committee of the Ontario
Legislature on Government Agencies

 
Notice

 
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 Commission.

Standing Committee on Government Agencies

 
Report on Agencies, Boards and Commissions (No. 14)

 
1st Session, 34th Parliament
37 Elizabeth II

I. INTRODUCTION

   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 themselves.

   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

BACKGROUND

   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.

FUTURES MARKET

   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 Canadian economy.

MANDATE OF THE COMMISSION

 
 

The Commission has explained its mandate as follows:

 

 
 

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 capital markets.

 
 

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 70,000.

 
 

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 summarized below:

 

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 policies.

 

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 GAAS.

 
 

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 rapidly increasing.

 
 

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 include:

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 staff.

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 registrants.

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 company.

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 requirements.

   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, etc.

   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 requirements.

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 basis.

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 proclaimed.

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 and enforcement.

   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 revenue figures.

  1987 1986  
  ---- ----  
Registration - Brokers and $2,888,577 $976,853  
Salesmen      

 
Prospectus filings 4,502,959 1,058,346  

 
Rulings 171,732 43,486  

 
Disclosure - filing, etc. 1,125,048 29,939  
fees      

 
Commodity Futures Branch 89,501 135,828  

 
Miscellaneous 17,089 20,196  
  ---------- ---------  
  $8,794,906 $2,264,648  

   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 Legislature's approval.

   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:

  1987 1986  
  ---- ----  
Salaries and wages $4,443,751 $3,952,206  

 
Employee benefits 650,662 548,976  

 
Transportation and 265,326 208,031  
Communications      

 
Services 831,368 708,397  

 
Supplies and equipment 200,608 142,319  
  ---------- ----------  
  $6,391,715 $5,555,929  

   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 private sector.

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 responsible for:

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 matters.

   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.

RECOMMENDATIONS

   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 recommendations.

   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 regulations.

   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 provides.

   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 participants.

   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:

1.  

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:

2.  

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 organizations.

   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:

3.  

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 million.

   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:

4.  

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 Contingency Fund.

 

   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:

5.  

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:

6.  

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.