OSC | News & Events - Speeches & Events - 2008 - “Twelve Months in Twelve Minutes” - Law Society of Upper Canada

News & Events

Introduction

It’s great to be here.

Note that I get more than 12 minutes. I am honoured, but also recognize that at these events, when a speaker is given extra time, it imposes on us a great responsibility, so I will use it sparingly.

I should also add that while much of what I am going to talk about today reflects Commission policy, much will also reflect my own thinking about it. So I need to emphasize that the views that I express are my own and not necessarily those of the Commission or its Staff.


One Year at the OSC

I joined the OSC in April of 2007. It’s an exciting time to be a securities regulator:

• increasingly integrated global capital markets;
• stock exchange mergers;
• yoyo-like variations in stock prices;
• an international liquidity problem sparked in part by the subprime situation south of the border;
• the ABCP market meltdown;
• consolidation of self-regulatory organizations (SROs);
• the ever persisting, but never resolved, single, or common, or national regulator debate;
• and, of course, the continuing calls for more coherent, coordinated and therefore more effective enforcement of securities and other white collar crimes.

It certainly is an exciting time to be a securities regulator, and the challenges are significant.

In the short time that I have, I’d like to touch on some of the matters which we have been working on over the past year and try to predict where things may go from here.


Understanding Our Mandate

The Ontario Securities Commission has the responsibility to administer, among others, the Ontario Securities Act and the purposes of the Act as set out in section 1. It is often a challenge to properly balance the need to “provide protection to investors from unfair, improper or fraudulent practices” and to “foster fair and efficient capital markets and confidence in capital markets.” There is an ever over-arching concern, in particular, to protect retail investors and to ensure they have fair access to the capital markets. Our efforts in doing so, however, should not be so overwhelming so as to cut off innovation and the promotion of legitimate and proper means of attracting capital and capital raising this province.


My Perspective

Before I go on further, I should give you some context for what I do, and my background to doing it. Like the other Vice-Chair, Jim Turner, I contribute to policy formulation, development and implementation as a member of a four-person executive team. But Jim and I are not part of Staff, nor do we have Staff reporting to us. Staff ultimately report to two other members of the executive team – the Executive Director, Peggy Dowdall-Logie, and the Chair, David Wilson. Like David, Jim and I are members of the 13-person Commission which oversees the OSC’s activities, sets overall policies and priorities and has rule-making authority. Jim and I also sit on Commission tribunals, with other Commission members (except the Chair). Because we sit on hearings, we have no day-to-day involvement with our Enforcement Staff. However, we are involved in the “big picture”, policy matters, including the area of enforcement.


Understanding the Context

In this country, as you know, securities regulation is currently a provincial and territorial responsibility. As a result, there are 13 securities regulators with virtually identical functions and with a potential for overlapping of activity. We seek to harmonize and coordinate activities amongst ourselves, but it can be a struggle. Of course, our system feeds the perennial question of whether, how and when a single regulator will arrive.

We all know that the answers to those questions are in the hands of the politicians. We, at the OSC, like the Government of Ontario, support the creation of a single, common regulator.

Until we have one though, we work hard to coordinate our activities with our other provincial regulators, within the CSA. More on this to follow.


Statement of Priorities

On an annual basis, the OSC publicly states its key priorities for the coming fiscal year. This is one way we communicate to the Street and public about our directions and key initiatives.

• We’re working on finalizing the Statement of Priorities for the current fiscal year (2008-2009).
• We have published a notice in the OSC Bulletin inviting written comment on our proposed priorities for the coming year.
• The comment period for the 2008-09 Statement ends on June 3.

Draft 2008/2009 Statement of Priorities

The Statement of Priorities is an opportunity for the OSC to articulate:

• Our organizational goals for the coming year.
• Our key challenges;
• The major projects we will undertake; and
• The resources required to complete this work.

This year, we have proposed four key goals for the current fiscal year in our draft Statement:

1. Identify the important issues and deal with them in a timely way;
2. Deliver fair, vigorous and timely enforcement and compliance programs;
3. Champion investor protection, especially for retail investors; and
4. Support and promote a more flexible, efficient and accountable organization.

The Statement also outlines the strategies related to achieving these goals.

I urge anyone who is interested to go to our website and take a look at the fuller document, and to comment if you are moved to do so.

So that is a look ahead, and a bit of a context.


Major Regulatory Initiatives

So let’s take a look back at some of the OSC’s initiatives and activities over the past year. It has been a very busy year with significant matters that reflect our continuing priorities.


On the corporate finance side

• Guidance on environmental reporting and disclosure
• Proposed improvements to executive compensation disclosure
• Movement toward international financial reporting standards
• Implementation of harmonized take-over bid and issuer bid rules
• Oil and gas disclosure rules

On the market conduct and intermediary side

• Registration reform project
• Approval of the TSX and Montreal Bourse merger
• Approval of the Investment Dealers Association (IDA) and Market Regulation Services Inc. (RS) merger / consolidation
• Seeking public comment for changes to Marketplace Operations and the Alternative Trading System (ATS) Rules – best execution, “trade-through” requirements and direct marketplace access

Retail investor protection issues - This is always at the forefront of everything we do.

• Greater coordination / co-operation:
  
  • Point of sale disclosure project
  • SRO client relationship model
  • Strengthening the OmbudsNetwork
  • Investor Forum
  • Joint Standing Committee on Retail Investor Issues
• Increased education and outreach

Stopping here for a moment, I want to emphasize the importance of these initiatives.

Recent events – Portus, ABCP and other matters – make it clear that we must remain vigilant to ensure retail investors are treated fairly, honestly and that brokers and advisors dealing with them strictly comply with their legal and regulatory obligations.

And we regulators must remain steadfast in ensuring that those obligations are constantly reviewed and assessed, particularly to protect the most vulnerable in society – seniors and others who rely on their investments to sustain them, now or for their retirement.

The OSC has and continues to take steps to do this:

• to broaden financial education in our public school system;
• ensuring more meaningful disclosure both in respect of products through projects like our mutual fund point of sale initiative, as well as in relation to costs, potential conflicts of interests, and services to which clients are entitled, through programs that better clarify the “client-relationship” as those being advanced by the IDA and the Mutual Fund Dealers Association;
• to support more efficient complaint handling and dispute resolution.

There have also been a number of important cases that are worth noting:

1. the AiT Advanced Information Technologies matter (before the Commission) (disclosure of merger negotiations);
2. Sterling Centrecorp (hopefully seeking to better clarify the “joint actor” provision of the take-over bid requirements);
3. the Danier Leather case (before the Supreme Court of Canada), dealing with disclosure issues in the context of a class action.

We have been very busy as a Tribunal – this past year, our Commission dealt with 64 matters, over 168 hearing days – an increase of 36% over last year.


Asset-Backed Commercial Paper

The credit market turmoil was, and remains, a major issue – unprecedented, unpredictable and global.

Securities regulators in every part of the world are looking at credit market problems, working to create a coordinated – and appropriate – international response to the credit market turmoil. Ontario and its partners in the Canadian Securities Administrators (CSA) are very much part of that initiative.

The situation has raised numerous important issues, including:

• the role of credit rating agencies in our securities markets
• the appropriateness of the commercial paper exemption of complex, structured products
• disclosure issues and abilities to properly assess and price risk for these products, and
• the appropriateness of such products for retail investors

A CSA committee, led by my fellow Vice-Chair Jim Turner, is looking at many issues raised.

The Committee is very much working within and with regard to international developments and it is expected that the Committee will report on its findings in due course.

The CSA also conducted focused continuous disclosure reviews, focusing on a number of disclosure and financial assessment issues.

The IDA is also looking at the question of whether intermediaries complied with suitability requirements in recommending purchase of ABCP, which review, we understand, would include examining how firms fulfill their gatekeeper obligations.


Enforcement Perspectives

Finally, I would now like to talk about enforcement.

With respect to enforcement litigation generally, Canada’s proximity to the U.S. gives rise to comparisons and criticisms relating to securities regulation.

In my view, such comparisons can be unfair. Without trying to be too defensive, the comparison usually does not take into consideration the political and cultural differences between the two countries. Simply put, we have a different system, and, historically, a somewhat different approach to regulation, and law enforcement generally.

At the OSC, we have recognized that there is a “compliance-enforcement continuum”. At the end of the continuum is compliance; on the other is pure enforcement. This essentially means that there is a full range of tools available to regulators to fulfill our mandate – and where we rest on that continuum sometimes changes depending on the impact an issue has, or may have, on the double mandate of investor protection and emboldening capital markets. Just because our approach may weigh more heavily towards the compliance end of the spectrum doesn’t mean that the OSC is not effective.

Members of the CSA conducted 325 continuous disclosure reviews of public issuers in the six months up to September 2007. Of those reviews, only 4% examined needed to be referred to enforcement.

As well, over the past three years, only 2% of portfolio managers reviewed by OSC compliance staff needed to be referred to enforcement.

Compliance sweeps like these provide us with an opportunity to make our expectations clear and they help market participants help themselves.

Simply put, the OSC cannot, and should not, try to solely rely on enforcement activity to affect and change behaviour of market participants. Investigating, holding regulatory hearings, and prosecuting in court when warranted, is sometimes necessary, and effective, but is at one end of the continuum. At the other end is the cooperative, consultative approach. It means encouraging and guiding issuers to comply with the highest standards of market behaviour.

If there’s compliance with the rules, there’s less need for the enforcement tools at the other end of the continuum. Think of compliance as “fire prevention”, which is certainly preferable to calling for help once the building is in flames.

It’s less exciting maybe. It gets fewer headlines.

But it can be an effective way to protect investors.

So, what regulators can and should do is try to articulate principles and standards that help all market participants understand what kind of behaviour is expected and consistently apply and enforce them. In doing so, regulators can help market participants police themselves.

We have talked about the utility of compliance and have said that I recognize that sometimes enforcement is necessary.

When enforcement is needed, one has to ask, who is responsible for securities enforcement in Canada?

Within securities regulatory enforcement, there are three main avenues for securities enforcement.

Two belong with the courts; one before a tribunal.

This is in addition to civil remedies that could be sought as well as action taken by the SROs.

In addition to 13 securities regulators, there are 13 provincial and territorial police forces.

There’s the RCMP with both its Commercial Crime Branch and Integrated Market Enforcement Teams – IMETs.

There’s the prosecution and adjudication of securities enforcement.

There’s the 13 provincial and territorial Crown prosecutors and their corresponding courts.

And there’s the federal Crown prosecutors and the federal courts. These all are dealing with different laws … and different interpretations of the same laws.

This is what has come to be known in Canada as the “securities enforcement mosaic”.

The securities regulators are just one part of this mosaic.

The OSC is the largest securities regulatory body in the country, but we’re just one of 13 members of the CSA and each CSA member is accountable to its own provincial or territorial government.

The overall securities enforcement mosaic is, in its way, very Canadian: complex and heavily reliant on collaboration and cooperation.

Until we get our act together and could set up a single, national regulator, this is the system we have to work within and we are committed to working closely with our CSA partners to do so.

The OSC and its CSA partners are the “regulatory enforcers” in the mosaic.

On the regulatory side, Staff of the OSC can bring proceedings against alleged perpetrators before our Commission tribunal and seek appropriate sanctions against them.

As a tribunal, we have the administrative power to pursue abusers and take them out of the market, to remove wrongdoers from leadership in public companies – temporarily or permanently – we can impose fines (up to a million dollars per offence), and order disgorgement.

In summary, the Commission tribunal does have powerful tools to address violations of securities law without having to go to court, and while I think we use these regulatory enforcement powers with great care, we also use these with considerably greater effect than is generally recognized.

In contrast, a matter can be referred to the provincial court, to be dealt with as a quasi-criminal matter, or as a criminal matter, when the Criminal Code is engaged.

We go to the courts and seek jail sentences to punish offenders … and to send a strong message of deterrence.

The avenue chosen within the mosaic largely depends on the objective. Securities regulators have a preventative, prospective, forward-looking jurisdiction. Large fines and jail terms may, in certain circumstances, be useful and appropriate for deterrence, but, in my view, the desire for that deterrence should be seen to fit within the objective of protection and prevention.

In contrast, in the criminal law context, decisions do not need to be grounded in regulatory outcomes – its primary function is to punish and to affect behaviours by doing so.

These different avenues, and different policy approaches underlying them, demand that all of us within the mosaic work together, and work hard, to communicate, to cooperate, to coordinate our respective efforts – to try to promptly identify what type of behaviour requires which response, and from whom, within the mosaic, in an effective and efficient manner, and in a way that gives full regard to fairness to, and the rights of, market participants who may be the subject of investigations and resulting actions. Silos are no longer acceptable and cannot be tolerated.

It is our priority to work within the mosaic to create a fairer, more efficient and more effective system across the mosaic.


Summary

It is my view, though, that a consistent, coherent and transparent enforcement program is most effective at building and enhancing confidence in the public markets. The system must ensure that the players know the rules of the game, and understand that they will be treated fairly when those rules are enforced. This does not mean that a soft touch is or will be applied. In fact, quite the opposite is true: harsh penalties and other sanctions must be sought and obtained where appropriate.

But, as stated, we strive to give market participants better compliance tools, resources and direction to ensure that those instances are few and far between. We are trying to broaden the discourse about the relationship between enforcement and compliance, and therefore move away a bit from measuring enforcement effectiveness in terms of monetary penalties, jail terms and number of proceedings commenced. Proceedings avoided is also worthy to take notice of but is much less visible.

Again, it’s a question of balance.

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