The View From the Ontario Securities Commission

Introduction:

To adapt an American story, "A Bay Street security analyst is as cautious as an Indian elephant. When one of these sagacious mastodons comes to a bridge, he tests it first with his trunk. If it holds firm, he next plants his front feet on it. If it still stands, he sits on it. After that, he sends another elephant over first."

It seems to me that the fundamental purpose of the securities business is to provide capital in order that companies may grow, develop and make a profit. At least that's what my father told me when he helped me to buy my first Bell Telephone stock. In those days the small investor was encouraged and government regulations and taxation were minimal.

Today life in the markets is much more complex. Financial manipulation, inside information, and changing governmental regulation and taxation make this whole area a minefield for the small investor. The result is that such investors are harder to find now.

The primary function of the Ontario Securities Commission is to protect the small investor and police the largest financial market in Canada. Since September 1, 1989, the Chairman of that Commission has been Robert J. Wright. He is a lawyer who graduated from Trinity College with first class honours in Philosophy and History and then in 1961 was the Gold Medallist graduate from Osgoode Hall Law School. He was called to the bar in 1963.

Since 1964 Mr. Wright has been a partner of Lang, Michener Lawrence and Shaw and was a full-time faculty member of Osgoode teaching in the fields of corporate law, environmental law and mining law. His main areas of law included corporate, securities and commercial practice. He was a director of several corporations and a Governor of the Board of Lyndhurst Hospital and Foundation.

Well into his three-year term Mr. Wright has contributed several initiatives to improve and protect the Securities Industry and individual investors.

He has worked to achieve more adequate funding of the Commission by seeking financial support from the industry itself rather than government.

The Commission has issued policy 9.1 by which they hope to have the industry regulate itself to speak for and to protect small investors during "related party transactions."

At the international level, under his leadership the Commission has worked to remove hindrance to security transactions between Canada and the United States by the implementation of the Multi-Jurisdiction Disclosure System so that Canadian information can be used to market securities in the U.S.

Mr. Wright has a reputation for being fair, imaginative, and hardworking. We welcome him to The Empire Club of Canada.

Robert J. Wright:

I would like to thank The Empire Club for giving me the opportunity to talk today about some of the issues which are very much before me in my position as Chairman of the Ontario Securities Commission. The end of one year and the beginning of another is always a good time to take stock, and these remarks are part of this process for me. It is in this context that, when asked to come up with a title for my remarks today, I arrived at "The View from the OSC."

As I look at my job, I am somewhat bemused by what appears to be a conflict in expectations. On the one hand, it is clear that there are growing concerns about the cost of regulation. On the other, there are increasing demands for more and more service by the various existing branches of the Commission and increasing public expectations for new initiatives by agencies such as the one I chair. All of this is occurring in an increasingly complex management and administrative environment and requires that people in the public service use creativity in making and explaining difficult choices. This is what I would like to discuss with you today.

Let's consider for a moment the increasing public expectations for more and better services from regulators. We at the OSC see this from each of our constituencies. One of them is the Government. The expectation of the Government is that we will perform our mandate in an efficient and effective way and that, having regard to the other competing demands on the limited resources of the Government Treasury, we will keep demands for funding to a minimum. There is an expectation that we will utilize the resources that we have imaginatively and that we will on a periodic basis re-evaluate the way in which we are doing our job--to see if there are better ways that we can do it, if there are things that we are doing that we should not be doing, and if there are things that we are not doing that we should be. In short, the Government's expectation is that we perform our mandate of investor protection and maintenance of the integrity and health of the capital markets with a maximum of efficiency and a minimum of cost. The Government in Ontario has made it clear that it considers the protection of the small investor to be a top priority--one with which we agree but all of this puts demands on our resources and, in particular, our human resources, which at times are very difficult to meet.

In the meantime, another of our constituencies, the issuers who use Ontario's capital market, are making increasing demands that we respond quickly and effectively to their capital raising requirements and to the new realities which globalization has brought to us. This involves a level of cooperation with other provincial and international regulatory agencies which is quite new for us. It is evidenced domestically in the efforts by the Canadian Securities Administrators to improve procedures and internationally by our active participation in the work of the International Organization of Securities Commissions and by such initiatives as the multi-jurisdictional disclosure system which the Ontario and Quebec Securities Commissions are presently negotiating on behalf of the Canadian Administrators with the Securities and Exchange Commission of the United States. All of these efforts require tact, diplomacy and time at all levels, as well as a substantial commitment of resources.

A further constituency is our co-regulators, both nationally and internationally and the rapidly increasing need for improved investigative and enforcement cooperation as world-wide trading escalates. Our response to this has been to increase our efforts to conclude Memoranda of Understanding with other jurisdictions. We are currently negotiating two. The additional load on our resources in this area is exacerbated by our role in intermediating on behalf of such jurisdictions with other provincial regulators who might wish to become parties to these MOUs. We take on this responsibility as part of our efforts to promote a consistent and coherent body of rules and procedures throughout Canada.

Minority shareholders constitute another of our constituencies. This group has increasingly made demands that we as regulators take steps to promote fairness in the marketplace in an environment where, to say the least, that characteristic has not always been widely perceived as being present. The way in which we respond to this challenge will be an important yardstick by which our performance as regulators is measured.

Investment dealers have a right to require that we be responsive to the competitive pressures upon them, competitive pressures which are both domestic and international in nature--in a manner which will enable them to survive and thrive in an increasingly competitive climate. It is important for the economic well-being of this province and indeed of Canada that we meet this challenge.

Registrants, another of our constituencies, have the right to expect of us a registration system which deals with registration applications in a timely and effective way--an expectation which we have not been able to meet effectively for some time now, but which we are striving to meet by developing new policies and procedures.

From this thumbnail sketch of some of the constituencies which we serve, I think you can see that we are under increasing pressure from the public for more and better services at a time when those who fund us are increasingly concerned about the cost of regulation, understanding that by "those who fund us" I mean those who pay fees to the Securities Commission as well as the Government of which we are an agency.

All of this occurs against the backdrop of an increasingly complex management and administrative environment. Securities markets have been radically changed over the last 20 years, reflecting major social, technological, economic and political trends. Automated systems have been put in place, institutions have emerged as dominant investors, new kinds of financial instruments have been devised and there has been a far-reaching deregulation breaking down the historic four pillars of the Canadian financial regulatory regime and blurring distinctions between various financial services. Securities and future markets have become linked through computer assisted trading strategies. There is no doubt that the decade of the nineties will bring even greater challenges for both the markets and their regulators as foreign competition becomes intense and electronic trading systems mature.

This is what I consider to be the administrative environment in which we operate and it is obviously increasingly complex It in turn leads to a complexity within the structure and organization of the OSC which makes it a much more interesting, albeit much more difficult, place to manage. We have to react with speed, sensitivity and a high degree of expertise to market realities in a way unthinkable a few short Years ago, raising management requirements of flexibility and adaptability which are not easy to attain in the context of an agency governed by policies and practices rooted perhaps in different values and objectives. We are striving to meet these challenges.

All of this leads to the need to be creative in making and explaining difficult choices. At the OSC we are attempting to behave in exactly this way. We are re-examining much of what we do and considering whether or not there are devices which, while not lessening our effectiveness as regulators, will put part of the burden where it more properly belongs, namely with that part of the public that is vitally concerned. An example of this is the reform of the insider reporting review program which we have instituted at the Commission. Where previously we spent a great deal of time and effort examining to see whether insiders were reporting correctly, notifying them if they weren't and asking them to correct their filings, we have instituted a program whereby we are putting the burden for correct reporting back on the insiders in question. We hope to deploy part of the resources saved to perform a compliance function and part to detect and prosecute insider-trading offences, which is where the problem really is. I believe that with no lessening of the protection we provide the public, we can more appropriately utilize our existing resources to perform our mandate. This is just an example of the kind of management creativity which we are attempting to bring to our responsibilities to enable us to meet our challenges.

Another example is seen in the publication for comment of the most important policy initiative of the OSC since I have been Chairman--the policy regarding various aspects of what we call related party transactions. The intent of this policy, rooted in the unique nature of the Canadian business community, is to make it possible for shareholders and others interested in the capital markets to evaluate for themselves certain corporate situations on the basis of full and frank disclosure, while at the same time putting the onus on members of the public to take a more proactive role in asserting their own rights in the event that they feel that they have been improperly treated. This initiative paralleled a proposal by the former Government in Ontario and one which I personally hope will be adopted by the new Government, namely recognition in appropriate circumstances of class actions and contingency fees which together would make it more possible for shareholders to undertake litigation to assert their rights.

This policy initiative has been published for comment and has received wide publicity. Our process of publishing for comment is one which we believe permits and encourages involvement by the public in our processes and helps us to make the difficult choices which are necessary if we are to perform our responsibilities. We believe strongly in this process. We do not just "go through the motions." We know that much of what we do can have a strong effect on the business and livelihood of those affected, and we do our best to listen. We believe this is a process others might consider to involve more people in regulatory and government life, to obtain views and input before positions have been cast in stone. We believe that we are providing in this way leadership in an appropriate form ensuring the ability of the public to have an input into our policy deliberations.

As I have already mentioned, all of our activities take place in the context of concerns relating to the cost of regulation. We are no different than any other part of the Government. The industry which we regulate and which provides significant financial support for the operations of the OSC is quite rightly concerned about the total cost of regulation, not only at the OSC but at other commissions throughout Canada. While government provides some financial support in Ontario, the bulk of the cost for regulation falls on the industry and other interested parties. We are presently considering, as has been widely reported recently in the financial press, how and whether it is appropriate to broaden the base of the cost of regulation. Moves such as this may be controversial. No one likes regulatory fees but it seems to me--that it is appropriate and necessary to ensure that there is a degree of fairness not only to the way in which we regulate, but in assessing the costs of that regulation. The appropriate allocation of costs will put a spotlight of accountability on the OSC and on the cost of regulation.

Another thrust in the environment in which we operate is a view held in certain circles that better regulation means less regulation. Some of our recent initiatives have caused some to complain that we are not following the path of deregulation that is, in some circles, thought to be the way things should be going. We are often accused of being too intrusive. Again, I make no apologies for the OSC. My experience as a regulator is that behaviour in the marketplace is what makes a regulator intrusive. Many of the initiatives which we take respond to problems which have been created, not by the Securities Commission or the Government, but by those whom the Securities Commission regulates. Regulators tend to be intrusive to the extent that concerns and abuses are perceived to exist. We at the OSC are certainly not looking for more work to do. To say the least, we have our hands full with what we are doing now. On the other hand, we have a responsibility to respond effectively to the reality of what is happening in the marketplace, and this we intend to do. Those who would have us be less intrusive should do their part to make sure that conditions requiring our action do not exist. I might add as a final thought in this regard that I have found that often those who take the view that we should be less intrusive are the first to demand action when their particular ox has been gored.

These then are some of the pressures on us as we seek to perform our responsibilities. I would now like to turn my attention for a moment to what I see as the role of governments in putting institutions such as the OSC in a position where they can do their jobs effectively.

Firstly, there must be an understandable, agreed and effective funding base--one which can be counted on and which is a reflection of the understanding between the Government and its agency of the job that is to be done. This is not an easy requirement given the ever-voracious appetite of agencies for funding and the natural reaction of others that we are greedy, over-reaching and trying to empire-build. However, without this challenge having been met and an acceptable understanding having been reached, it is difficult to run an effective agency. It is clear that no matter how efficient and effective one may be, funding sets limits on what can be accomplished and expected.

Secondly, government administrative and employment policies must be coherent and effective in order that agencies can attract and hold effective staff at all levels. Among other things, this involves establishing salary levels and categories which will enable agencies such as mine to attract and hold the quality of personnel necessary to do the job. A failure to meet this challenge will almost certainly involve failure to meet the legitimate expectations of all our constituencies.

And finally, there must be an understanding between the Government and its agencies of what exactly the expectations of the Government are and accountability on an on-going basis to measure if in fact the agencies are meeting these expectations. This will involve exercises in examining and re-examining the ways in which agencies carry out their responsibilities as well as defining what the responsibilities themselves may be.

We are attempting at the OSC to do our part in this exercise. We are nearing the completion of a strategic planning process in which we have re-examined who we are, what we are doing, why we are doing it, and how we might do it better. We have in this process had an extensive dialogue with those we regulate, including askng them to fill out a lengthy questionnaire on an anonymous basis indicating their views on all aspects of the Commission's operations. This questionnaire, and the answers to it, have perhaps unintentionally, turned into an accountability exercise and have given us ideas which we hope to develop which will lead to greater accountability on our part and a greater understanding of what we can and need to do to carry out our mandate.

While different people may express it in different ways, it is clear that our mandate is to protect investors against unfair or fraudulent practices while enhancing the efficiency, integrity and health of the capital markets in Ontario and Canada. Much of what we are doing now at the Ontario Securities Commission is attempting to put into place policies which will permit and encourage the public that we regulate to take steps to protect and enforce their own rights rather than always relying on the Government or its regulator to do so. In our system of corporate governance, shareholders should have the knowledge upon which to assess their rights and a clear opportunity to assert them in the event that they feel they have been breached. We are pursuing initiatives which should, in part at least, restore a balance between the role to be played by the regulator and that to be played by the private sector. This is an important part of the underlying philosophy of Policy 9.1 regarding related part transactions.

Our approach to regulation of the securities markets has been evolving, with an increased emphasis on disclosure and greater accountability. In addition to our draft policy on related party transactions, there are other initiatives that have the same thrust. To date the most visible of these programs has been the financial statement review program. Now in its third year, several hundred financial statements have been reviewed and three reports have been issued.

The methodology used to select the annual financial statements to be reviewed each year is not intended to produce a sample representative of all companies. Selection is heavily weighted towards companies on the TSE 300 list in order to ensure that companies having the most significant market impact are reviewed most frequently, but others are reviewed as well. The program involves a great deal of interaction between the OSC and the companies we regulate and it is very time-consuming for everyone involved. It will continue into the foreseeable future. In our view, this program, more than anything else undertaken in our office, is acting as a catalyst towards improving financial disclosure in the annual financial statements.

Another initiative is the policy respecting Management Discussion and Analysis which was recently adopted. It requires companies to expand their narrative disclosure concerning the nature of their business and to provide analysis and interpretation of their recent financial statements and prospects for the future. Supplemental analysis and explanation is designed to require management to explain in narrative terms its current financial situation and future outlook. We believe that MD and A can and should be written such that the investor is seeing the past, present and likely future performance of the company through the eyes of company management.

We are still in the early stages of implementing this policy. There appears to be widespread support by many investor groups for this type of information and we are confident that it is an important step forward in ensuring that investors and others interested in corporate affairs have a fuller picture of what the company is all about. We believe that MD and A will become a cornerstone document in the continuous disclosure system.

These initiatives illustrate the kind of things we are doing to meet the challenges of performing our mandate in a fast-changing environment. We at the OSC recognize that the demands on us as regulators will increase and that we will be held accountable for how we perform. We welcome the challenge and I am confident that we will measure up to it.

I want again to thank The Empire Club for giving me the opportunity to discuss some of the challenges we are facing and our responses to them. I enjoy the opportunities to discuss our role and hopefully to contribute to a public discussion of the way in which the public sector performs its responsibilities.

The appreciation of the meeting was expressed by John Campion, Partner, Fasken Campbell Godfrey and a Director, The Empire Club of Canada.