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“Securities Enforcement in Canada: Strengthening the System”
Keynote Address by David Wilson
Chair, Ontario Securities Commission
Economic Club of Toronto
April 16, 2008
Check against delivery
Thank you, Mark, and good afternoon everyone.
It’s a great honour to have the opportunity to speak to the Economic Club of Toronto today.
Your invited speakers come from a variety of fields - from politics, medicine, the law and business.
I’m Chair of Canada’s largest securities regulator, but my background is in business.
And so, my preference is to get down to business.
Right now, there’s a public discussion under way about securities regulation in this country.
A big part of that is about securities enforcement.
I welcome the opportunity to talk about enforcement.
Because, to make this discussion meaningful and useful, there needs to be greater understanding about how enforcement works within the regulatory framework.
But even more than that - I want to talk about strengthening enforcement in Canada.
Because we know that has to be done. We know how to do it.
It’s time for action.
My main goal today is to add some clarity to this public discussion by dealing in facts.
Because informed discussion is welcome.
It generates ideas that can be turned into actions that can support confidence in our capital markets.
That confidence is essential to the efficiency of our markets and our economy.
I’m focusing my remarks today on the area of enforcement simply because enforcement draws the most attention.
But enforcement is to securities regulation what open-heart surgery is to health care.
It’s a critical part of it, of course, but far from being the whole story.
So, I’m going to put enforcement in context.
First, I’ll talk about where enforcement fits in the spectrum of securities regulation.
Just as having open-heart surgery is not the first step to good health, enforcement is not the first step to maintaining a healthy market.
That front-line role goes to compliance – our version of the regular check-up.
Second, I’ll provide an overview of the Canadian securities enforcement system, because it’s a source of myths and confusion about who does what.
I’ll describe how we securities regulators use our powers to protect investors and maintain market integrity.
Could Canada’s enforcement system work better?
We all know it could.
So, I’m going to conclude by outlining some steps that can be taken to strengthen securities enforcement.
Steps that can – and should - be taken now.
In this country, we have the resources, the skills, and the ideas to make securities regulation more effective.
It seems all we need is the will to make it happen.
So let me begin with the role of enforcement in our system.
The job of a securities regulator is frequently seen solely as enforcement.
But it is really at one end of a continuum of the work that we do.
At the front end of that continuum is prevention and remediation: That is, compliance.
Compliance is about making sure the rules are followed so that we need to use our enforcement tools less often.
Compliance isn’t glamorous.
It doesn’t generate the same kind of headlines as enforcement.
But compliance does prevent abuse before investors are harmed.
So, compliance is taken very seriously by the OSC and its partners in the Canadian Securities Administrators - the CSA.
It’s also taken seriously by the self-regulatory organizations - the SROs - the Investment Dealers Association, Mutual Fund Dealers Association and Market Regulation Services.
CSA members and SROs work closely with issuers and registrants – including some of you here today – on the crucial task of fostering a culture of compliance among capital market participants.
Here are some examples of compliance in action:
Across Canada, CSA members completed 325 continuous disclosure reviews of public issuers in the six months up to September of 2007.
Look at the slide.
And note that only 4% of the issuers examined needed to be referred to enforcement.
The OSC has been active with its CSA partners in rigorously checking the valuation of non-bank ABCP holdings on the books of public companies - to assure fair presentation of these assets in financial statements and MD&A.
The OSC has also conducted full and special compliance reviews of portfolio managers over the past three years.
The slide tells the story.
And note again: just 2% of the portfolio managers reviewed needed to be referred to enforcement.
The OSC Compliance team recently did a sweep of portfolio managers to examine marketing practices.
Staff uncovered some misleading and inaccurate promotional claims.
So we’ve made our expectations crystal clear.
Also, the OSC has been taking a hard look at options-timing practices of public companies.
I can tell you that a number of these files have already been referred to Enforcement.
The SROs are also very active in compliance.
For example, every year, the Investment Dealers Association – the IDA – conducts nearly 50,000 hours of on-site compliance audits of its member firms.
It assesses more than 1,500 inquiries and complaints.
Right now, the IDA is conducting intensive compliance reviews of those member firms involved in the trading and distribution of non-bank ABCP.
Now, if compliance staff at the regulatory bodies are not able to resolve their concerns from these types of reviews, they have other tools.
For instance, we can issue a cease trade order on an issuer… impose terms and conditions on a registrant… and we can order a public company to restate and refile its financial statements.
Or, we can go on to use the “big hammer” in the toolkit – Enforcement.
These examples show that compliance is where most of the action is when it comes to preventing misconduct in the market.
Enforcement is really the tip of the regulatory iceberg.
That’s what we mean by the “compliance-enforcement continuum”.
Prevention at one end.
Investigation, prosecution and punishment at the other.
We recognize that it’s hard for observers to comment on things that don’t happen; abuses that don’t occur.
Like most people, I’m less likely to read a story about all the houses that did NOT burn down last night, than about the one that did.
But it’s important to maintain a balanced perspective and think about prevention.
And compliance is prevention.
Of course, it’s naïve to think compliance could be enough alone.
That regulation could work as compliance without enforcement.
It would be like having a referee without a penalty box.
Some matters do have to be referred to enforcement…so let’s look at that.
The first question is: who’s responsible for securities enforcement in Canada?
See for yourself:
There are 13 provincial and territorial securities commissions, including the OSC.
There are three SROs.
There are provincial and territorial police forces.
There’s the RCMP with both its Commercial Crime Branch and Integrated Market Enforcement Teams – IMETs.
It’s crowded.
And what you see here is only for the investigative phase of enforcement.
Now, here’s a simplified version of what the system looks like when you add on the prosecution and adjudication of securities enforcement.
We now add 13 provincial and territorial Crown prosecutors and their corresponding courts.
And then we have the federal Crown prosecutors and the federal courts. These all are dealing with different laws …and different interpretations of the same laws.
This, ladies and gentlemen, is what has come to be known in Canada as the “securities enforcement mosaic”.
You may have your own description.
Let me focus now on one part of the mosaic – the securities regulators.
The OSC is the largest securities regulatory body in the country.
But when it comes to national matters we’re just one of 13 members of the CSA.
Each CSA member is accountable to its own provincial or territorial government.
Each has its own priorities, depth of resources and level of expertise.
The overall securities enforcement mosaic is, in its way, very Canadian: complex and heavily reliant on collaboration and cooperation.
Can this complex – Byzantine – structure be changed or organized to function better?
Yes.
But, for now, this mosaic is the system we have to work with.
It’s the hand we’ve been dealt.
So let’s look at the role of securities regulators – both the statutory regulators like the OSC and the Self-Regulatory Organizations – within that enforcement mosaic.
And that will take me to pointing out the very important distinction between regulatory law and criminal law.
There are three main avenues for securities enforcement.
Two are statutory and are distinctly different: Regulatory law and criminal law.
The third is enforcement carried out by SROs, which is non-statutory.
SROs are governed, in effect, by contract.
First – regulatory law enforcement.
The OSC and its CSA partners are the “regulatory enforcers” in the mosaic.
Put simply, we have the administrative power to pursue abusers and take them out of the market.
We remove wrongdoers from leadership in public companies – temporarily or permanently.
We impose fines.
These have limitations dictated by regulation – at the OSC, it’s up to a maximum of one million dollars per offence.
We order abusers to cough up ill-gotten profits and to pay for investigative and hearing costs.
CSA members use these regulatory enforcement powers with great care, but also with considerably greater effect than is generally recognized.
Here’s an example that illustrates how the OSC has worked effectively within the mosaic - Portus Alternative Asset Management – a familiar name.
First, a routine compliance check by another provincial commission raised suspicions and an investigation began.
Shortly after, the OSC froze assets held by Portus … and had a receiver appointed.
We worked with the SROs to force the return to investors of Portus commissions by dealers.
The police investigated, and the Crown launched a criminal prosecution of alleged fraud by the individuals connected with Portus.
A process quite separate from the regulatory case.
One of the principals pleaded guilty to criminal fraud and has been jailed for two years.
The other principal is awaiting his criminal trial.
The regulatory cases against these two individuals are continuing.
The Portus case involves approximately $730 million in investor assets.
In the end, Portus investors are likely to receive about 90% of their money back – money that would be gone without vigilant compliance… and effective enforcement.
Portus shows different regulators working together, compliance and enforcement working together, and regulatory and criminal law working together.
But I can’t emphasize enough the profound distinctions between regulatory law and the different rules, procedures, penalties and burden of proof of criminal law.
They are fundamentally different.
I believe that, as regulators, we need to more clearly articulate the difference between misconduct that requires a regulatory response and regulatory sanctions and misconduct requiring a criminal response and criminal sanctions.
In the next few months, the OSC will be doing just that.
The OSC and some other CSA members have the statutory authority to take enforcement proceedings to court as prosecutions for offences under securities law.
It’s a power used in a relatively small minority of cases – cases of severe wrong-doing.
We go to the courts and seek jail sentences to punish offenders… and to send a strong message of deterrence.
For example:
Here in Ontario, Michael Mitton is serving a seven-year jail sentence for stock fraud.
Also in Ontario, Jose Castenada was sentenced to two years less a day for fraud and ordered to pay restitution of almost one million dollars.
In Quebec, the AMF secured a 12-year jail sentence for the founder of Norbourg Asset Management for a $115-million fraud.
This was the longest jail sentence for a securities fraud conviction in Canadian history.
The third area of securities enforcement involves the Self-Regulatory Organizations.
SROs operate under the oversight of the statutory regulators.
They’re responsible for enforcing compliance with SRO by-laws, regulations and policies by their members and their members’ registered employees.
They have the power to impose sanctions – fines, reprimands, suspensions and permanent membership bans – which means the member firm or adviser is out of the business.
The IDA currently has 130 ongoing investigations and 96 disciplinary cases under review.
There will always be people who will knowingly break the rules.
The sad reality is that no one can eliminate fraud from the capital markets.
As U.S. Treasury Secretary Hank Paulson said, “Every town with 20,000 citizens has a jail.”
But we are making significant headway.
Right now, one of our priorities is to protect senior citizens - they’re a favourite target for scam artists.
These aren’t the big fraud cases that attract headlines.
But you can be sure they’re important to the intended victims.
At the OSC, we’ve had particular success in our new specialized unit that identifies and shuts down “boiler room” operations.
Since last July, the Unit has secured interim cease-trade orders against more than 50 firms and individuals for suspected violations of the Securities Act.
Securities regulators – both statutory and the SROs – are doing a lot of things right in enforcement.
And Canadian investors are the direct beneficiaries because they can be confident that we’re collectively hard at work doing our job every single day.
But are we doing all we could to protect investors and preserve market integrity?
There is, I think, a common misconception that Canada doesn’t treat securities regulation and enforcement seriously enough.
Especially when compared with the United States.
We are making a comparable investment.
The resources dedicated to securities regulation in Canada are very much in line with the U.S. - based on the relative market capitalization of the two countries.
Nevertheless, there’s a debate about whether resources are used effectively.
Can we do better? Of course.
And there’s no shortage of ideas for improvements.
The best ideas have been presented in abundant detail in numerous studies, reports and recommendations.
Let me mention a few of them briefly.
In his most recent budget, federal Finance Minister Jim Flaherty noted arguments that the power to compel third-party witnesses could strengthen securities law enforcement.
Why?
Police in Canada cannot compel testimony during an investigation from people who may have information that’s relevant to an investigation – but who are not charged with an offence.
Ironically, securities regulators do have such witness-subpoena powers, yet the police do not.
But while we have the power, we can be severely constrained from providing police with the information we gather using these powers.
There’s also an international irony about this.
Under a Mutual Legal Assistance Treaty, Canadian police can go abroad and subpoena foreign witnesses and bring the evidence back to be used against a Canadian in Canadian courts.
And, foreign authorities can come to Canada and subpoena witnesses in Canada.
But Canadian investigators have no power to compel Canadian witnesses to testify at the pre-trial stage in Canada.
I believe it’s time to carefully study the idea of giving police some new – but very carefully circumscribed – powers to investigate economic crime.
Another example:
A 2006 paper by Peter Cory and Marilyn Pilkington called for the creation of a cadre of expert provincial prosecutors to concentrate on market crime.
I would hope each of the larger provincial governments would move expeditiously to organize their resources in this way.
The provinces have the authority to do it.
And another example:
The International Monetary Fund recently said, unequivocally, that moving to a single Canadian securities regulator would “improve enforcement” in this country.
The IMF said a single regulator would be in a better position to eliminate the inefficiencies created by the current fragmented system.
As you all know, the Government of Ontario and the OSC’s Minister – Finance Minister Dwight Duncan – have expressed strong support for a common securities regulator.
I fully support them on this issue.
While not a silver bullet, there is no doubt that a common regulator would improve enforcement in Canada.
The debate about a common regulator is now squarely in the hands of the politicians.
When I look at the debates about securities enforcement over the past several years, I’m reminded of something Mark Twain said:
“Everybody talks about the weather, but nobody does anything about it.”
The difference is that we CAN do something about enforcement.
We don’t have to just talk about it.
Those of us in the securities law enforcement mosaic can take steps now to improve the effectiveness of the system in Canada.
Here are some of what I consider to be the most useful – and most achievable – ideas.
Things we could do now, if we would only choose to:
- Unite: Create a common securities regulator that would strengthen the enforcement system.
- Consider new tools: Study the idea to give investigators the circumscribed authority to issue an investigative summons to third-party witnesses.
- Communicate: Improve the processes for sharing information between securities regulators and police while avoiding triggering Charter issues.
- Organize: Streamline the assessment – at intake – of enforcement cases to reduce overlap, duplication, delays and gaps.
- Build skills: Develop and share highly-skilled, specialized resources among prosecutors across Canada; and
- Get the money back: Make better use of existing statutory powers to force the forfeiture of the proceeds of crime.
Ladies and gentlemen:
We know what the problems are.
We know what the solutions are.
It’s time to act.
Fortunately, I’ve seen the appetite for change within the enforcement mosaic.
Regulators and experienced observers are talking.
Governments are listening.
Listening is good. Action is better.
We at the OSC recognize that, as the largest securities regulator, we have a responsibility to lead as well as to co-operate effectively within the current enforcement mosaic.
We accept that responsibility.
The OSC is preventing abuse and non-compliance and we are protecting investors.
We are preserving the integrity of the market.
We are working to maintain confidence in our markets.
But we need to do more.
We all need to do more to increase understanding of the regulatory system as it is, and to urge reforms that will make it better.
As Chair of the OSC, I want to contribute to that effort.
That’s why I’m here today.
Thank you for your time, your attention and your continuing support in this essential work.
If you have any questions about my remarks – or any recent developments in the capital markets – I understand we have a few minutes for questions.
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