News & Events
Remarks to the Standing Committee on Government Agencies
David Wilson
Chair, Ontario Securities Commission
December 2, 2008
Check against delivery
Madam Chair, members of the Standing Committee, ladies and gentlemen, my name is David Wilson and I am Chair of the Ontario Securities Commission.
With me here is Peggy Dowdall-Logie, who’s the OSC Executive Director and Chief Administrative Officer, and the OSC’s Vice-Chairs, Jim Turner and Larry Ritchie.
Also in the room today from the OSC are Lead Director, David Knight, the Chair of the Commission’s Human Resources and Compensation Committee, Margot Howard and Ken Gibson, the Director of Corporate Services.
We welcome the opportunity to appear before the Committee and to answer any questions you may have about the OSC… our authority and how we’re using it… our responsibilities and how we’re meeting them.
With the recent events in the financial markets worldwide – including those in Ontario – our invitation to appear before you is very timely indeed. I will, of course, talk about the current crisis in the markets. But before I do that, I’ll review the mandate of the OSC, because the key aspects of our mandate are highlighted by the current situation.
I’ll touch on two high profile aspects of securities regulation – enforcement and the potential reform of the Canadian securities regulatory structure.
And finally, I’ll discuss the OSC’s accountability to the Legislature and the people of Ontario.
It’s a lot to cover and I respect the Committee’s time. I hope to finish my remarks in about 25 minutes. So let me begin.
1. OSC Mandate
First, the mandate of the Ontario Securities Commission. The task assigned by statute to the OSC is twofold:
- To provide protection to investors from unfair, improper or fraudulent practices…and;
- To foster fair and efficient capital markets -- and confidence in capital markets.
We’re fully accountable to the Legislature and responsible to it through the Minister of Finance.
Unlike most government agencies, the OSC is not funded by the taxpayers of Ontario. We’re self-funded through fees charged to the participants in Ontario’s capital markets. That includes anyone who sells securities in Ontario, or gives advice about investing in securities, as well as companies that issue securities to the public.
As a securities regulator, the Commission makes rules that have the force of law and adopts policies that influence the activities of market participants. All rules must be submitted to the Minister for his consideration and approval.
We also have oversight of two self-regulatory organizations for the securities industry in Ontario, as well as the Toronto Stock Exchange.
The OSC is also an adjudicator of administrative proceedings involving breaches of securities law. In that role, the Commissioners act as independent adjudicators on panels.
However, there’s a strict separation between the adjudicative function and the enforcement activities of the OSC. Commissioners involved in one do not participate in the other: we do not act as both prosecutor and judge.
While the OSC is the largest securities regulator in Canada, we’re certainly not alone. As you know, every province and territory in Canada has a parallel agency. Together, the 13 securities regulators make up the Canadian Securities Administrators, the CSA.
2. The Markets Crisis
Now let me turn to what’s uppermost in people’s minds these days: the current crisis in financial markets around the world.
There isn’t time to give you a full review of the recent events and their ramifications.
But I can tell you this: no one anywhere has all the answers to the obvious and fundamental questions: “How did this happen?” and “What should we do about it?”
I can, however, identify the root causes of the crisis and tell you what the OSC has done in response.
Although it’s clearly being felt in our markets, the crisis did not start here and it did not start in the stock market. It’s a crisis caused by excess leverage – too much borrowing and too many people living on credit.
In the past few years, the amount of total debt in the United States has grown to three and half times its annual gross domestic product. That’s up from a norm of about one and half times that prevailed from the 1940s to the 1990s.
Debt is not always a bad thing, in and of itself. But excessive and unsupportable debt certainly is.
And that’s where things began to go wrong.
The catalyst for the crisis can be traced back to the lowering of lending standards in the United States. With increasingly complex debt products and increased connectivity between markets, more markets in more places became vulnerable to the collapse of the U.S. housing market.
When that bubble burst, the whole house of cards began to fall.
This isn’t just a problem for Wall Street or Bay Street. It has erased billions of dollars of market value and affected the pensions and savings of millions of people.
It has – and will – cost jobs for people who have never heard of a credit default swap – the derivative instrument that was very much a part of the crisis. And it’s already affecting governments and their programs, including here in Ontario.
However, we should all understand that, compared with other countries, Canada is relatively better off.
A recent assessment by the International Monetary Fund found that our financial system is underpinned by sound macroeconomic policies and strong, prudential regulation and supervision.
These strengths have not immunized us from what has been called the “toxic mortgage contagion”, but they have, so far, protected us from its worst symptoms.
The fundamental issue here is why a setback in the U.S. housing market should lead to a threatened worldwide recession. The answer is the resulting liquidity crisis, unequalled in almost a century. That led, in turn, to a global crisis of confidence – many investors stopped believing that their investments were sound.
Now, as you heard, fostering confidence in capital markets is part of the OSC’s mandate.
But there’s an important difference between people’s confidence that they will earn a return by investing in the market, on the one hand, and the confidence of investors in the integrity of that market – that they’ll be treated fairly and protected should they decide to invest.
The OSC can’t make people want to invest.
We can’t control what happens to their investment if they do.
And we can’t eliminate investment risks.
But we can play our part in fostering confidence in the integrity of our markets.
And we have.
For example:
- We’ve done targeted continuous disclosure reviews of public companies in the banking and financial services sector, as well as highly leveraged reporting issuers.
- We initiated a review of money market funds to assess potential exposure to toxic assets.
- As the crisis reached the equity markets, the U.S. Securities and Exchange Commission (SEC) and the OSC both temporarily prohibited short selling of certain inter-listed financial sector stocks.
- The OSC led the preparation of a CSA consultation paper on non-bank-sponsored Asset-Backed Commercial paper – ABCP. The paper outlines several regulatory proposals related to the frozen ABCP market. These proposals include:
- measures to restrict the way complex short-term debt products are sold to retail investors; and
- the need to regulate and oversee credit rating agencies.
Within Canada, we’ve been coordinating with:
- the Bank of Canada;
- the federal Department of Finance;
- the Ontario Ministry of Finance;
- the Office of the Superintendent of Financial Institutions; and
- other securities regulators and the self-regulatory organizations.
3. Fulfilling the Mandate: Investor Protection
Against that backdrop, I’d now like to turn to what else the OSC is doing to fulfill its mandate.
First, in the area of investor protection.
This is one of the two main elements of our mandate. In our Statement of Priorities, we say:
| “The interests and needs of investors, particularly retail investors, will continue to be strongly reflected in all of the OSC’s operations. In addition to our enforcement activities, investor education and awareness and timely access to accurate information are important components of investor protection.” |
Now, investor protection does not mean that we hope to make investing 100% risk-free.
Risk is an inherent element of investing and an essential feature of functioning capital markets. It always has been and always will be.
Rather, our goal is to minimize practices that are, as our mandate says, “unfair, improper or fraudulent”.
It’s to create a “level playing field” for all investors – where potential risks and rewards are clearly disclosed to all, and all at the same time.
That’s fair.
We believe that good regulation protects investors and we believe that we have good regulation in Ontario. That regulation sets the standard for Canada and, according to a 2008 report from the World Bank, Canada ranks fifth in the world for investor protection. For comparison, the United States ranks seventh.
Here are some examples of steps we’ve taken to improve investor protection in Ontario:
- The OSC has been working with the other regulators to enhance the disclosure regime for investors before they buy mutual funds or segregated funds.
- We’ve brought in regulations requiring “fair value accounting” to ensure that issuers’ financial statements reflect the true value of investments.
- In 2007, the OSC and CSA imposed a minimum, consistent standard of independent oversight of investment fund managers in Canada.
- We encourage the use of plain language in information provided to investors. Disclosure isn’t useful if only a securities lawyer can decipher it.
- Similarly, we’ve worked to improve how investor complaints are handled so that concerns can be resolved efficiently and effectively.
The bedrock of our regulatory system is full, fair and timely disclosure of all information that could be expected to influence investment decisions.
As former U.S. Supreme Court Justice Louis Brandeis said: “Sunlight is the best disinfectant.”
We believe that disclosure is that sunlight.
We constantly monitor activities in the markets to ensure there’s compliance with this fundamental principle.
The logic is pretty simple:
Knowledge protects investors.
That protection fosters confidence in market integrity.
Confidence makes for an efficient market.
An efficient market fuels the economy.
And a stronger economy is good for citizens and businesses.
4. Fulfilling the Mandate: Fair and Efficient Capital Markets
Fostering fair and efficient capital markets is the other half of our mandate.
We strive to find the right balance when it comes to regulation.
We clearly cannot have markets with little or no regulation – even the U.S. seems to be coming around to the idea that deregulation there went too far…in retrospect.
On the other hand, we shouldn’t over-regulate.
Weighing down the markets with too much regulation in an effort to reduce investor risk simply creates a market that’s inefficient and not competitive with other capital markets around the world.
We need to remember that Ontario is in competition with other markets and that competition is based on the efficiency as well as the safety and integrity of our markets for investors. If Ontario is too burdensome… too slow… too bureaucratic, then issuers - businesses that need capital - will simply go elsewhere.
Ontario’s financial services industry would then suffer.
And this is an important business for all of us.
The financial services industry that we help regulate is essential to Ontario’s economy. First, the investment industry has the vital function of efficiently allocating capital – people’s savings – to businesses that can use it to grow and foster economic development. That’s the alchemy of turning savings into jobs.
On its own, the financial services industry employs some 350,000 people in Ontario, jobs that are part of the knowledge economy.
And it’s estimated the financial sector indirectly supports at least an equal number of jobs outside the sector.
In the Toronto area alone, the financial services industry pays out more than $10 billion annually in employee wages.
The financial services industry paid $2.6 billion in net provincial corporate tax last year, not including provincial sales tax, GST and the personal income taxes paid by its employees.
A key priority for us is to make sure Ontario has the right regulatory framework. One that’s stable enough to be seen as reliable by all market participants, but also to be able to evolve and keep pace with one of the most innovative and dynamic industries in the world.
For example, one of the important issues we have to look at is the regulation of derivatives like the credit default swaps that played a role in the current financial crisis. These instruments were unheard of when the Commodity Futures Act was introduced in Ontario in 1979.
By striking the right balance and keeping our securities markets both safe and competitive, the OSC contributes to our economy.
5. Enforcement
Central to confidence is the OSC’s role in enforcement.
Market participants and, in fact, all the people of Ontario need to know that our rules will be enforced and that wrongdoers will be punished.
The OSC, while a leader in securities regulation, is just one part of what has come to be known as the Canadian “securities enforcement mosaic”. The mosaic is a complex arrangement that includes 13 provincial and territorial securities commissions, two self-regulatory organizations and national, provincial and, sometimes, local police services.
This is only for investigations.
For prosecution and adjudication of enforcement matters, we add 13 provinces and territories, with their own Crown prosecutors and various courts, as well as Federal prosecutors.
Our job at the OSC is to enforce compliance with Ontario’s Securities Act.
The Act gives us certain powers to enforce regulatory law - but not criminal law.
Our staff can investigate many types of breaches of regulations and policies and usually bring enforcement proceedings before the Commission’s administrative tribunals, which have a protective, public interest jurisdiction.
The powers granted under the Act can be effective at promptly stopping improper activities as well as deterring improper conduct.
We can also stop people from participating in our markets.
We can ban them from working in a public company as an officer or director.
We can impose administrative penalties on them.
We can order them to disgorge ill-gotten profits.
We can seek freeze orders to protect the assets of investors.
The Act also gives the OSC power to bring quasi-criminal charges against alleged wrongdoers in the lower Divisional Court.
But our ability to seek jail terms is limited.
Under current legislation, the power to prosecute alleged criminal wrongdoing lies with the criminal justice system, typically through prosecutions by the provincial or federal Attorneys General.
Enforcement is probably the area where the OSC comes in for the most criticism.
But much of it is based on the belief that the OSC - and the OSC alone - is responsible for all securities enforcement in Canada.
The “mosaic’ I described and the differentiation between regulatory and criminal law enforcement means that that is just not true.
We’re often compared to the SEC. The SEC operates through the entire U.S. under a very different structure and is often credited with enforcement that’s actually performed by criminal authorities in the U.S. – the Justice Department or a particular state’s Attorney General’s office.
It’s difficult to directly compare the U.S. and Canadian systems.
Within the system we have, the OSC has had a number of notable successes in enforcement.
For example:
- Last year, we created a special boiler-room unit to find and close improper sales operations targeting unsophisticated retail investors. The unit has, so far, secured cease-trade orders – essentially shut-downs – against 22 firms and 48 individuals.
- Last year, the OSC Enforcement Branch went to the Superior Court in Ontario and obtained freeze orders totalling more than $16 million in order to prevent the dissipation of investor funds by fraudulent means.
Yes. And we will.
We have initiatives under way aimed at enhancing market surveillance and the detection of insider trading.
Right now we’re reviewing every aspect of our enforcement activities and you can expect to see changes for the better.
6. Reform of the Securities Regulation Structure
I’d like to turn now to another of the highest profile issues in Canadian securities regulation – the possible reform of the very structure of regulation.
The arguments for and against the development of a common securities regulator have been made over the past 40 years.
I don’t intend to belabour them here.
But I want to remind you where the OSC stands.
The OSC stands fully behind the Government of Ontario, which favours a common securities regulator for Canada.
The federal government also supports that change.
From the public discussion, Canada’s business community appears to support the improved oversight that would result from a common regulator.
The fact is that Canada is the only industrialized country that doesn’t have a national securities regulator. And, the need for international cooperation to respond to the current global crisis highlights the need for Canada to speak with one voice internationally.
However, until there’s structural change mandated at the government level the OSC will continue to work within the current regime to the best of our ability.
7. Accountability
Before I conclude, I want to talk specifically about accountability.
That is, after all, why we’re here – because we report to the Minister of Finance and we’re accountable to the Legislature.
And, through you, to the people of Ontario.
We see three main features of accountability. The first is how effectively we use the authority we’ve been granted under legislation and the funds we collect from market participants.
We believe we use both our authority and our revenue effectively.
The OSC currently has 438 dedicated employees and a budget of about $86 million for this year.
With these resources, we regulate the largest capital market in Canada.
We’re fully aligned with the efforts of the provincial government to strengthen efficiency and accountability in the public service.
Our structures, policies and procedures are also fully aligned with the best corporate governance practices. That’s what we expect from those we regulate so we lead by example.
Our Commissioners – currently 13 of them - are the OSC’s Board of Directors. As well as adjudicating at hearings, they meet every two weeks to review policy matters and regularly, as a Board would, to oversee the operations of the OSC. Our Board has independent committees and an independent lead director, David Knight.
We have a memorandum of understanding with the Minister which describes the roles and responsibilities of the Minister and of the Chair and Board of Directors of the Commission.
All our governance policies can be found on our website and all of our regulatory policy reviews involve public input.
Our hearings are open to the public and the media.
The second area of accountability is how well we serve market participants.
We meet their needs by fostering fair, open and efficient markets and by being responsive to changes in those markets.
Open communications with the stakeholders who are affected by our actions is an essential part of our regulatory process. Market participants are encouraged to give us their feedback on proposed rules and policies during formal comment periods.
We’re also committed to delivering dependable and prompt services to market participants. Staff have service standards to meet in areas such as turnaround times on prospectus reviews, registration applications and other filings and contacts.
The third area of accountability that we strive to meet is less specific but of paramount importance.
It’s that we recognize – every day – our need to demonstrate our public value.
Each year, we publish our organizational priorities and report on our progress in achieving them.
We require that OSC Commissioners and employees maintain the highest standards of personal integrity and to deal openly and fairly with all of our stakeholders.
In 2007, the OSC submitted to a detailed assessment by the International Monetary Fund as part of its review of the soundness and stability of Canada's financial sector. The review concluded that Canada has a robust regulatory framework for issuers, market intermediaries, secondary markets and self-regulatory organizations.
Our role in protecting investors and supporting the economy of Ontario has never been more important than it is today.
Our ability to fulfill our role has probably never been tested as it is being tested today. This global crisis has illuminated the strengths and weaknesses of regulators around the world. Under that scrutiny, the OSC compares well.
The Commissioners and staff of the OSC have the expertise, professionalism and dedication to meet the challenge.
We’re conscious that we must be an organization in which investors and market participants can place their confidence… and be an organization in which the people of Ontario can take pride.
Thank you.
We would be pleased to answer your questions.
- 30 -
