I want to thank Charlie for his review of the OSC promises made and kept over the past year. And I especially want to thank Charlie and the entire Commission staff for working so hard to turn these promises into reality.
I'm grateful to our speakers and panel participants. I want to join Charlie in welcoming my colleagues from the Canadian Securities Administrators - Pierre Godin and Doug Hyndman. The three of us may not always agree on everything, but at least we have a good time when we disagree. I welcome both of you, and I look forward to our session.
I'm delighted at the attendance for today's session. More and more people in the market are recognizing the role regulation must play in ensuring our ability to compete.
We don't regulate in a vacuum. One of our goals is to foster dynamic capital markets. And dynamic capital markets are a key to Ontario's future.
Countries all over the world are chasing after overlapping pools of investment capital. It's important for regulators - and for all policy-makers - to continually keep in mind that our policies have an impact on job creation and standards of living. What we do has an impact on how Ontarians live.
Given the globalization of capital, regulators must continually examine our policies and operations, and apply twin tests: Are we creating a market that is attractive to Canadian and foreign investors? Are we helping our market participants compete for capital?
To do those things, it is crucial that we give people the opportunity to take a risk. But it is equally important that we seek to prevent and eliminate unfair risk.
That is a crucial distinction. It is especially important in light of the recent U.S. market scandals involving financial reporting and mutual funds.
Investors are becoming more discerning. They are becoming more vocal. To a greater extent than ever they are prepared to participate in the capital market. They are prepared to make the effort to do it thoughtfully. But they are not prepared to be taken for a ride.
Investors are willing to accept the idea of investment risk. What they are objecting to is something I will call "unfair risk".
Investment risk is what you take when you make decisions by assessing a company on its prospects, on the risks it faces in its competitive environment. That's investment risk – the type markets thrive on. The type they intermediate.
Unfair risk is what stems from the potential abuses that the investor does not - or can not - know about. These risks arise from unfair and unforeseen practices like fraud, illegal insider trading, market manipulation and other forms of malfeasance.
Fair risk is crucial to economic growth. But unfair risk contributes to stunted growth, by diminishing investor confidence. Market liquidity is reduced and capital becomes more expensive. We are determined to combat unfair risk, whether it be in the form of improper financial disclosure, illegal insider trading, or mutual fund pricing practices.
Ensuring fairness in our markets is crucial to investors, and vital to our economy.
Throughout history, one of the most important factors in determining how much material progress a society made was its ability to maintain a vigorous capital market. Creating prosperity has largely been a matter of bringing together people who are prepared to invest capital with people who are able to use it to create wealth.
Why was Florence one of the leading economic centers of the Renaissance?
What allowed the Netherlands to become an economic power in Europe in the late 15th and early 16th centuries? How was a tiny nation that had just recently won its independence able to attain such a lofty status?
Or consider Britain - which let's not forget, is a small island nation. How was it able to become one of the world's leading powers? Some would point to its navy. But battleships don't appear out of nowhere. They have to be built and paid for.
What Florence, the Netherlands, and Great Britain had in common was a status as the home of the leading capital market of its era.
A society that is able to raise capital is a society that is able to create.
One way to demonstrate the importance of capital markets to the Ontario economy is by looking at the number of jobs it generates. In that respect, it is impressive to consider the resilience of the financial sector in Ontario over the past three years - three years of considerable volatility.
Payrolls for companies in the financial sector have grown by 1 per cent a year. The growth of new financial service products - in areas such as wealth management - has created the opportunity for considerably greater job creation in the years ahead.
To get a sense of the importance of the capital markets to Ontario's economy, consider this: The OSC has over 60,000 individual registrants here in Ontario - people who work in the securities and mutual fund industries. That's about half the total for the entire country.
There are about 1,700 securities firms in Canada. More than three-quarters of them do business in Ontario.
How big a share of Ontario's economy does the financial sector make up? Financial services - including finance, insurance and real estate - accounts for 20 per cent of Ontario's GDP, one-fifth of all economic activity in the province.
Equity trading on the TSX amounted to over $640 billion last year. That's equal to two-thirds of Canada's GDP. Bond trading across the country came to even more than the Canadian GDP, at more than a trillion dollars in value.
The numbers provide concrete proof of something that has become increasingly apparent -- capital markets are a vital element of the Canadian economy. They are an especially important part of Ontario's economy.
Dynamic capital markets make it possible for new industries to get off the ground. They make it possible for the average member of the workforce to get a financial stake in the ground. They make it possible for Ontario and Canada to attract capital.
To achieve these things, markets have to be regulated. Ultimately, the ability to attract capital depends on how our markets are perceived - both at home and abroad. One of our most important responsibilities is to avoid a market credibility gap.
If people aren't provided with reason to believe they are in a fair game, they won't play.
A growing number of Ontarians are counting on market investments to provide for their retirement. They have demonstrated confidence in our economic system. We cannot leave them out on a limb, with no protection.
But regulation has to take into account economic reality. The goal is to ensure fairness - while encouraging growth.
That is the question regulators must grapple with: What can we do to encourage the market's ability to create wealth, while ensuring a fair process for investors?
There are bound to be complaints. Compliance with regulatory requirements costs entrepreneurs money and time. Some see it as slowing down the creative business process.
Certainly it is important to eliminate unnecessary requirements. It is important to continually review regulatory requirements, and change or eliminate those that have lost their relevance. Growth must never be tied up in red tape, or tied down by obsolete rules.
But overall, an effective regulatory environment can and should be a spur to growth. It provides one of the essential ingredients of a free market economy. It gives investors the confidence they must have in the system if they are going to put their money into it.
There is a clear relationship between regulatory policy and the economic facts of life for people in this province.
One of the most important ways regulators contribute to Ontario's economy is by dealing with issues as they emerge, and by defusing potential crises before they become actual crises. By taking the unfairness out of risk-taking.
Taking the unfairness out of risk-taking includes examining policies and procedures that mutual funds have in place to detect and prevent trading abuses such as late trading and market timing.
Mutual funds have been one of the most important elements in the recent growth of securities markets. Their growth was one of the biggest steps toward the evolution of the new investor class, now making up more than half our society. To get a sense of their popularity among middle-class investors, consider that Canadians have about $400 billion invested in mutual funds - a 10-fold increase in the past decade. That's despite a fair bit of cashing out during the market downturn.
While we do not have evidence that our mutual fund market has the same problems as the United States, we are moving quickly to make sure.
As a first step, last week we sent letters to managers of all conventional mutual funds available to retail investors in Ontario, asking them about policies and procedures they have in place to prevent late trading and market timing. We asked if they were aware of any of those abusive practices having taken place in their funds over the past two years.
We asked what investigative processes they have in place to determine whether or not market abuses were occurring. If they found market timing and late trading were taking place, we asked that they tell us the circumstances and sources of these practices, as well as what action they have taken to prevent recurrences.
We did not ask for an information dump -- binders of policies or disks crammed with e-mails. We asked for clear descriptions of their investigative processes. We're committed to more protection, not more bureaucracy.
And we committed to use the information obtained to inform our own investigation of these issues; to follow up on what we learn, based on the specifics of practices in our market. We will investigate issues identified by respondents and conduct random reviews.
There are other links in the mutual fund chain that we are also examining. We are now focusing on each link involved in the infrastructure of the industry as well as in the distribution of mutual funds.
For many, mutual funds have been a ladder of economic opportunity. We are not prepared to let it be knocked down.
Taking the unfairness out of risk-taking also includes addressing illegal insider trading. The report of the Insider Trading Task Force, released today, will help do that.
It is crucial to contain information so that insiders don't get rich on the basis of privileged access to information, while everyone outside the circle pays the bill. We cannot have two classes of investors in Ontario - those who are basking in the warmth of insider knowledge and those who are left out in the cold.
The task force on this issue was broad-based. It included not just securities regulators, but also self-regulating organizations such as the Investment Dealers Association, Market Regulation Services, and the Bourse de Montreal. And it came up with a collaborative, comprehensive approach.
The report includes 32 recommendations to combat illegal insider trading. These measures focus on prevention , detection and deterrence.
Prevention includes measures to contain non-public information to as small a group as possible. It includes guidance to those whose activities expose them to non-public information, such as directors, lawyers, auditors and other professionals, as well as enforcement staff. It recommends measures they can take to avoid situations in which information spills out and is taken advantage of.
The task force examined the risk of trading taking place on undisclosed information in the period that leads up to a major corporate project like a financing, an acquisition or a take-over. Corporations bring on advisors, then more advisors and still more as their projects approach maturity. With each concentric ripple of growth in the circle of insiders, the risk of illegal insider trading increases - not only from the people directly involved in the deals, but from others who may inadvertently become aware of them. By containing information, we can reduce these risks.
Detection includes increased and coordinated surveillance and use of technology to find illegal insider trades. It includes development of an electronic database of integrated trade and client data to make it easier to detect and prove illegal insider trading. It recommends improved inter-agency information-sharing, and educational programs to raise the profile of illegal insider trading in Canada and encourage market participants and the public to provide tips and complaints.
The task force found that detection efforts could be improved in each of these areas. While market surveillance in Canada is performed on the equities markets electronically, it does not include the use of specific insider trading alerts. There are no across-market insider trading alerts between the equity and derivatives markets. Current surveillance practices are hampered by the lack of data mining capability, which would allow review of trading for evidence of patterns of an organized effort to avoid detection and enhance identification of insider trading involving nominee and offshore accounts. Few illegal insider trading investigations are initiated by complaints or tips, unlike the United States.
Improved technology, and efforts to increase cooperation, can provide the information that detection depends on.
Deterrence includes increased sanctions for insider trading. In Ontario, legislation was proclaimed earlier this year increasing maximum penalties under the Securities Act from two years to five years, and fines from a maximum of one million dollars to up to five million dollars. A recent court case has affirmed a provision of the Act that contains the formula used to determine the profit or avoided loss in illegal insider trading cases. When we take these cases to court, we are now able to seek a maximum fine that is the greater of either $5 million or three times the profit made on the loss avoided.
Published academic research supports the position that the incidence of illegal insider trading will be reduced through successful enforcement of insider trading laws with severe penalties. However, in Canada, sanctions and remedies vary among provinces, a problem recognized by the Canadian Securities Administrators Uniform Securities Law project. There is a difference among provinces in the maximum penalties available. As well, with the enactment of Sarbanes-Oxley in the United States, a more substantial gap has opened between the maximum terms of imprisonment in the United States and in Canada.
That is why deterrence would be bolstered significantly by passage of the Federal Government's Bill C-46, which would establish new Criminal Code offences of illegal insider trading and tipping. Both the proposed federal law and the CSA's Uniform Securities Legislation project provide opportunities to establish a regulatory framework that effectively addresses illegal trading under criminal, quasi-criminal, administrative, and civil processes, sanctions and remedies.
The task force also proposed formation of a nationally integrated working group - bringing together the securities commissions, SROs, and the RCMP - to focus on illegal insider trading. This is a very encouraging development and we applaud the federal government for this commitment. We will have more to say on this development, before year-end.
I want to thank the members of the task force for their work on this issue. We look forward to working with other regulators to determine how best to implement the recommendations.
Michael Watson, our Director of Enforcement, will be chairing a panel today on enforcement issues, at 2:15. I'm sure that will be a valuable session for people who want more detail on what we are doing to prevent, detect and deter abuses in our capital market and for more information on the upcoming RCMP announcement.
Taking the unfairness out of risk-taking includes the way we have responded to the recent corporate scandals. The scandals may have taken place on the U.S. side of the border, but the need to restore investor confidence is just as clear right here. Investors wanted to be assured that all jurisdictions were acting to protect them. And they were prepared to take that into account in their investing strategy.
The truth is, every market needs the kind of defense mechanisms that the U.S. has now put in place in the form of the Sarbanes-Oxley Act. They just need to adapt them to their own unique needs.
We've done that here in Canada. We put forward three rules:
- A rule that requires CEO and CFO certification of annual reports and interim disclosures.
- A rule that spells out the role of audit committees, and their composition.
- And a rule that provides clear support for the work of the new Canadian Public Accountability Board in its oversight of auditors of public companies.
All three rules deal with potential problems. And they do it in a way that is adapted to Canadian needs.
In addition, we have worked to build investor confidence in other areas. We supported and encouraged the accounting profession to create the Canadian Public Accountability Board to provide public oversight of the audit of public companies. We have overseen the publication by the Investment Dealers Association of new standards to reduce or eliminate analysts' conflicts of interest. We have worked with the Canadian Institute of Chartered Accountants to promulgate new rules governing auditor independence.
Our next step is to issue policy direction and guidance on other corporate governance initiatives such as board independence, codes of ethics, nominating committees and compensation committees.
These measures, taken together, have helped restore investor confidence in our markets. They have been widely endorsed by market participants both here and in the United States.
What all of these measures add up to is an Ontario market that is attractive and conducive to investment. They add up to an opportunity society in which people can build their nest egg.
We are creating conditions in Ontario that will make sure investors want to invest here. And we are creating conditions that will make sure people want to raise capital here. Ontario and Ontarians have enormous potential in the global economy. Part of the job of the OSC is to make sure you get the maximum opportunity to fulfill it.
Market confidence is hard to build and easy to squander. The post-crash reforms of the 1930s were an effort to restore confidence in the markets. That time, it took about a half-century to bring middle-class investors back. Our goal is to ensure Ontarians always have options to build their portfolio - and to make sure they have a fair opportunity to obtain the maximum return. Our goal is to ensure that the world's best capital markets do indeed provide the key to Ontario's future.
Securities regulation is about maintaining a fair investment environment and eliminating unfair risk. That advances economic opportunity. And that helps create economic growth.
Thank you.
