Key challenges

The OSC recognizes that we must address a number of key trends and changes affecting our business environment, capital markets, market participants and the global regulatory framework.

Enhancing public confidence in capital markets
The need to promote public confidence in our capital market continues. In March 2004, the OSC finalized three rules as part of its investor confidence initiative. We need to ensure that we actively monitor compliance with these new requirements. The Securities Act has been amended to include provisions that strengthen the regulatory framework and enhance investor confidence. The OSC will also need to ensure that we apply and administer these powers in an appropriate and balanced fashion.

Streamlining the securities regulatory process
The costs and complexities associated with doing business with as many as 35 different regulators with differing rules and regulations across Canada are generating increasing dissatisfaction with the structure of financial services regulation, and in particular, securities regulation, in Canada. This fragmented regulatory environment is cumbersome, costly and frustrating for stakeholders. It negatively impacts the competitiveness of our capital market and ultimately the ability of our market participants to raise capital on a cost effective basis.

Global integration of markets and market participants
Financial markets are global. Borders no longer serve as barriers to capital flows. Those seeking to invest and those seeking capital go where they see the opportunity for the best returns for the risks assumed. As capital flows become global, so do the market intermediaries and infrastructure servicing the business. Many of the largest intermediaries are global conglomerates combining banking, insurance and securities services in one entity.

Changing investor demographics
The past decade has seen significant growth in the investor community in Canada. Institutional investors are becoming larger and more sophisticated, while investment in the markets by retail investors has grown significantly - both directly and through the purchase of investment funds. Both groups need to have confidence in the integrity of the capital market, but their informational and educational needs may be very different.
 

Rapid pace of innovation
Competition is driving market innovation both in terms of radical changes to the form, risk profile and presentation of traditional products as well as in the creation of ever more sophisticated financial products, trading techniques and strategies. Technology facilitates these changes, making innovative products and services easier and cheaper to design, market and deliver to the consumer. The functions of intermediaries are changing. Trades can be executed directly from any location. The emergence of direct links into existing trading platforms, bypassing investment dealers, and the proliferation of alternative marketplaces have fundamentally altered the structure of the financial environment.

What this means for the OSC

For Canadian financial markets to be attractive to all market participants, they must be and be seen to be fair and efficient while still protecting investors. Given the trends and challenges outlined above, we need to find creative and innovative solutions to new issues, be willing to re-evaluate existing practices in light of changing circumstances and to make decisions at the pace at which our markets are changing. We need to operate in a transparent and accountable manner and to enforce clear rules in a consistent and visible manner.

To meet the challenges facing our capital market, we will focus on:

• Maintaining a globally competitive regulatory regime that effectively addresses investor protection,
• Developing and distributing targeted, understandable and relevant public education programs and resources designed to help investors with financial decision making so they can protect themselves,
• Insisting that investors have access to understandable, accurate and complete disclosure they need to make informed investment decisions,
• Preventing, detecting and deterring abuses in our capital market,
• Ensuring that our reliance on self regulatory organizations (SRO’s) is providing appropriate results for market participants,
• Fostering cohesive regulation to minimize the burden on market participants,
• Facilitating the fair and efficient operation of exchanges, clearing and settlement functions and other elements of the market infrastructure,
• Building on our relationships in the regulatory community, both domestic and international, making use of the best lessons from each and relying on their expertise when practical.

The identified trends and challenges also underscore the ongoing need for us to ensure that our operations are efficient and effective and to continuously work to improve our client service delivery. As part of this process we will work to develop appropriate responses to the issues identified in the Report of the Five Year Review Committee, the Insider Trading Task Force Report and the Regulatory Burden Task Force Report.

Our goals

The OSC is committed to achieving our vision. To do so, we have developed a four-year strategic plan. In implementing it, we will at all times act consistently with our mandate. Fundamentally, the OSC will focus on making our capital market safer, more efficient and easier to access and use for market participants. Our plan calls for stepping up our efforts in the following areas:

• Promoting harmonization of regulatory systems both domestically and internationally, including pursuing a single securities regulator administering a Canada-wide securities code,
• Undertaking prevention-oriented activities, including proactive public education,
• Taking a risk-based approach to regulation, and
• Being less prescriptive and more flexible in our regulatory approach wherever practical.

Across the planning horizon we will strive to achieve the following outcomes:

We will achieve this outcome by:

1. Engaging regulators, governments and industry participants in moving towards a single securities regulator or a more effective national securities regulatory system with a uniform securities code,
2. Participating actively in the International Organization of Securities Commissions (IOSCO), the Council of Securities Regulators of the Americas (COSRA) and the national and international Joint Forum of Financial Regulators and, where appropriate, providing leadership on initiatives. Fostering inter-jurisdictional co-operation to reduce impediments to information sharing and enforcement support.
3. Providing an effective enforcement deterrent through increased coordination with other enforcement agencies and regulators, including participation with the RCMP on Integrated Market Enforcement Teams (IMETs) designed to respond to major capital markets fraud and market-related crimes.
4. Continuing to improve the national electronic information systems (e.g. SEDI, SEDAR, NRD) and to lever these investments to facilitate the activities of market participants, and
5. Pursuing measures to strengthen the Canadian securities clearing and settlement system, including leading CSA initiatives to support implementation of a Uniform Securities Transfer Act and regulatory measures to facilitate the implementation of fully electronic, straight-through processing of securities by June 2005.

We will measure success in achieving this outcome by the following:

• Market participants will use fewer points to access the market conduct regulatory system in Canada
• As impediments to investigation and enforcement initiatives created by international boundaries are reduced, we will re-focus resources on other initiatives.
• Harmonized measures developed internationally will be implemented domestically.

2. Market participants and investors will have confidence in the integrity of Ontario’s capital market.

We will achieve this outcome by:

1. Working with the provincial government and our CSA colleagues to respond to the Report of the Five Year Review Committee and to develop legislative initiatives to strengthen our regulatory system and improve investor confidence.
2. Appropriately applying the new powers arising from changes to the Securities Act,
3. Actively monitoring compliance with new rules and placing increased resources into their enforcement,
4. Adopting project management techniques to increase the efficiency of the investigation process,
5. Working with our regulatory partners to respond to the recommendations of the Insider Trading Task Force by March 2007,
6. Developing and proposing a revised framework for regulating mutual funds and their managers that relies on independent oversight as a means to address conflicts of interest,
7. Examining the "best execution" issue, including assessment of the impact of "soft dollars", market structure, and market fragmentation and developing strategies to address the findings.
8. Developing a revised regulatory approach to address the emergence of alternative investment products, and
9. Working with our CSA colleagues and the SRO’s to put in place by 2006 the four pillars of a Fair Dealing Model which are:
• Clarity of relationship (on both sides)
• Transparency of compensation and conflict
• Transparency of performance against promise, and
• Simplified, harmonized and streamlined approach to registration.

We will measure success in achieving this outcome by the following :

• Public surveys of market participants will show an increase in confidence.
• The revised framework for regulating mutual funds will significantly update and simplify product regulation for mutual funds in the area of conflicts of interest and result in fewer requests for exemptions.
• Implementation of a revised and re-focused national regulatory regime for securities intermediaries.

3. Regulatory interventions in Ontario will be balanced and merit-based.

We will achieve this outcome by:

1. Making appropriate changes to our practices as a result of the recommendations of the Regulatory Burden Task Force,
2. Consistently applying risk-based criteria in enforcement cases to ensure matters pursued by staff give appropriate consideration to Commission priorities, and
3. Improving accountability through the use of rigorous cost benefit analysis, impact analysis and risk based assessments for all proposed initiatives.

We will measure success in achieving this outcome by the following :

• It will be clear to investors, issuers and intermediaries that the benefits of regulation measurably and significantly outweigh the costs of regulation.
• We will be a leader in fostering and implementing non-regulatory alternatives where such action is supported by a better cost/benefit relationship than new regulation.
• The effective cost and burden of regulation will be competitive with our peers, without undermining investor protection and confidence.

4. Our stakeholders will be confident that the OSC is a fair and effective regulator with superior and transparent governance and accountability mechanisms and strong investor education programs.

We will achieve this outcome by:

1. Continuing to promote a customer focused approach to our communications and service delivery,
2. Expanding the use of partnerships to deliver investor education products to target groups,
3. Continuing to enhance the transparency of OSC corporate governance practices, adjudicative policies and accountability mechanisms,
4. Continuing to tailor the form and method of access to OSC communications to the needs of OSC constituents, including implementing predominantly electronic-based communications vehicles, and
5. Completing the re-design of the OSC website in 2004 .

We will measure success in achieving this outcome by the following:

• Investors, issuers and other market participants who use the Ontario capital market will be afforded access, protection, education and information at levels similar or superior to those of the best of our peer group.
• OSC governance practices and policies meet or exceed disclosure requirements for public issuers
• Public surveys of market participants will sustain positive ratings for OSC customer service.
• 100% of OSC communications will be accessible electronically by 2005.

Financial Summary

Revenues

The OSC introduced a rule which set out a revised fee structure effective April 2003. The OSC also adopted a multi-year fee setting approach where fee revenues are managed across a three-year horizon. Any deficits incurred are funded either through any surpluses previously generated or from the OSC’s reserve. When calculating the fees for the next three year period, any surpluses will be rebated and any deficits will be recaptured.

Since the introduction of the revised fee structure the OSC has collected more fees than projected. This surplus has arisen due to lower than expected expenditures as well as due to higher than projected revenues (in part due to timing issues). The deficit between revenues and expenses which is forecast for 2006/2007 reflects our plan to use the surplus fees collected in the three years since the introduction of the new fee structure to reduce the revenue requirements for the following three year period.

Staffing and Budgets

The OSC Business Plan and three-year financial forecast assumes no growth in total headcount. The OSC conducts market surveys in the markets in which it competes for staff resources. No changes are planned to our compensation strategy, which targets OSC compensation at the 75th percentile of our comparator markets.

Risk Assessment and Management

In 2002/03, external auditors were retained to conduct a risk assessment for the Commission with input from senior management. The risks identified through this process were mapped on a Risk Management Assessment Grid. The goal of our risk management activities is to address our principal business risks and confirm that appropriate systems are in place to monitor, identify and mitigate these risks. The OSC annually identifies internal audit projects to address critical risk exposures. The effectiveness of our audit program is measured by periodic updates to the Risk Management Assessment Grid.

The OSC is currently working on the following priorities to address our financial, operational, informational and organizational risks.

• Business Continuity Planning : the development of a comprehensive, practical business continuity plan and appropriate off site back up facilities for the Commission.
• Internal Audit : the co-ordination of the three high priority audits approved for 2003/04 by the Finance and Audit Committee and the management of the currency of the OSC audit plan.
• Succession Planning : the identification of critical positions, candidate lists and training requirements and the development of processes and support systems to maintain their currency.
• Security: the development and/or enhancement of procedures or policies to ensure the safety and security of OSC personnel, physical assets and information and audit of the security environment.

In addition to the four identified risk priorities, we continue to identify additional gaps in our risk control and, where required, to introduce measures to manage these risks. By successfully completing the projects and through our other risk management efforts, we expect to improve controls and reduce internal OSC operational risks and to move our operational risks to the acceptable range identified in the Risk Management Assessment Grid prepared by the auditors.

Communication Plan

Once approved, the OSC Business Plan will be posted on our Website. As well, the OSC produces its annual Statement of Priorities document which sets out the initiatives for the current fiscal year.

The OSC will continue to work in a consultative manner with stakeholders. Implementation of rules involves consultation with key stakeholders through “requests for comments”. Feedback obtained through this process is considered and, where appropriate, incorporated prior to finalizing any proposed rules. This approach promotes broader acceptance of initiatives once implemented.