Securities in Ontario: The Role of the Commission

MR. MACDONALD:

"The securities industry is a central feature of the capital market in an advanced economy. The extensive reviews of securities legislation in recent years are a consequence of growing awareness of the importance of the (industry's) role .... Capital investors, both domestic and foreign, are demanding more adequate information as well as greater protection." Such was the view of the Kimber Committee in March, 1965. A lot of water has flowed under the securities' bridge in five years, but one of the most important contributions to the mainstream of that flow emanated recently from one of the banks, in this case, the Bank of Montreal, in the form of Ted Royce.

Col. Royce is with us today as Chairman of the Ontario Securities Commission. Equally important, however, is the fact that he was the President of the Empire Club of Canada in 1965-66. There is a certain good-natured licence among Past Presidents of the Empire Club and, since I am shortly to be retired to that category, perhaps I may be permitted a poetic commentary:

"A former banker called Royce,
Was thought an extremely good choice;
To ensure full disclosure,
The whole province over,
And the shareholder a meaningful voice."

Sir, by virtue of your distinguished career prior to assuming the Chairmanship of the Commission last summer, the people of this province are assured of creative leadership in the securities industry.

As a fellow insider on the Empire Club Board, I am obliged to provide full disclosure of any knowledge of our speaker's personal prospectus. There may be those present today who are better equipped to do justice to that task, but I prefer not to discharge that responsibility by proxy. Ted Royce has divided his career between the Bank of Montreal and the Canadian Army. His senior appointments have included that of Manager of the Bank of Montreal in London, England from 1958-1961 and Deputy General Manager in charge of the Ontario Division from 19611963. In 1963, he was appointed General Manager for Ontario and, in May 1967, Senior Vice-President of the Ontario Division. At the same time, he served as Chairman of the Toronto Advisory Board of the Royal Trust Company.

As a young man, Ted Royce was a member of the Canadian Militia, first in Cavalry and, later, in the Royal Canadian Artillery. Both associations might be considered fitting preparations for his recent post; the behaviour of horses, like securities, is unpredictable and, when the stock market explodes, the detonation is likely to shock innocent by-standers as well as obliterating those directly on target. Called into active service in August 1939, Col. Royce served in Canada, the United Kingdom and Western Europe until 1945. Today he retains his military interest as Honorary Colonel of the 7th Toronto Regiment, Royal Canadian Artillery.

Col. Royce assumed his present responsibilities at a time when the securities industry faced an immense set of challenges born of technological change, constitutional review, the growth of mutual funds, the increasing demand for more meaningful disclosure, and a host of other developments. A former Chief of Justice once described the role of an auditor as "a watchdog but not a bloodhound." In such an era, the Chairman of the Commission must be both.

I recall, as a member of the Kimber Committee, working over the closing stages of our Report. We were in England, at the time, where we laboured through draft after draft (certainly, there is no better place for that process than England). Finally, as we were pondering a rather fundamental point, one of our typists said: "I don't know why you are having such trouble. Surely a stock exchange is not intended to be a gambling casino?" In that sense, perhaps I should now introduce Ted Royce as "The Spoiler", but I prefer to say that we welcome him as an accomplished financial leader and a sensitive public servant.

LT. COL. ROYCE:

Mr. President, Mr. Minister, distinguished guests, and gentlemen: having either introduced or thanked speakers on many occasions such as this on behalf of the Empire Club of Canada, I can only hope that I shall today manage to live down the introduction and in due course merit the customary thanks. In any case, it is a great pleasure and honour to be here with the Club and its,_ members today.

You will remember the story of the chap who arrived home rather late and rather high and was asked for an explanation by his wife. He stated that he had been to a dinner meeting of a well-known organization which had gone on rather longer than expected. He explained that the speaker had been a man of great charm and culture and there had been a bar afterwards. The wife thereupon, still suspicious, said, "And what was the speaker's subject?" To which after a good deal of thought, our friend replied, "He really didn't say." To avoid this pitfall, may I say at once that the subject today is the Ontario Securities Commission--Its History, Its Composition, Its Organization along with a description of its work and its plans for the future.

While the first securities legislation in the western countries appears to have been the Act of 1285 authorizing the licensing of stock brokers in the City of London, the real need for such legislation did not appear until the Middle Ages, when the gradual development of large enterprises made it necessary to obtain funds from a number of persons. Originally, the subscriber to such a fund received no written instrument but had to rely entirely on the books of the user of the funds. However, by the end of the seventeenth century it had become the custom to give the subscriber a certificate that identified the fund, the amount of his participation and the payments to which he was entitled. And early in the nineteenth century, it became the practice not only in England but also in the United States to employ the term "securities" to cover a very wide variety of such instruments and the definition of what constitutes a "security" seems to be widening rather than narrowing; for instance, the State of California has now declared franchises to be securities--a step taken primarily to assist in the regulation of the wide variety of ingenious arrangements put forward in this field.

When one thinks of securities one thinks of the Stock Exchange, and it is interesting to note that the London Stock Exchange came into existence as such in 1773 when, leaving Jonathan's Coffee House where they previously met informally, the brokers moved into the stock exchange coffee house and caused the term "stock exchange" to be "wrote" over the door. The New York Stock Exchange came into existence in 1792, when 24 brokers who had assisted in refinancing the cost of the revolutionary war decided on a more formal relationship. Our own Stock Exchange was formed in 1852 and last year did about 70% of the trading in listed securities in Canada.

Initially, legislation designed to protect the public in the securities field was embodied in various company laws. In 1844, the British Companies Act required registration of companies' prospectuses and by 1958 we find the Prevention of Frauds (Investment) Act and the Companies Act 1948 governing the sale of securities in Britain. In the United States, the first State to adopt a really comprehensive act was Kansas which in 1911 produced the "Blue Sky Law" so-called "because it was directed to speculative schemes that had no more basis than so many feet of blue sky." By 1933 every State except Nevada had a Blue Sky Law, but no federal securities regulation as such appeared until after the stock market crash of 1929. The result of this was the Federal Securities Act of 1933 and the Securities and Exchange Act of 1934 which latter created the Securities and Exchange Commission, the S.E.C. In Ontario, 1928 saw the passage of the Security Frauds Prevention Act, which served as a basis for securities legislation for eight of the provinces shortly afterwards. Later, the Ontario Securities Act of 1945 represented a most important advance in this field--it permitted closing the Stock Exchange although this was never necessary--and its legislation seems to have worked pretty well until the 60's produced the Windfall disaster, the Atlantic Acceptance tragedy and the Prudential Finance fiasco to mention only some of the more notorious cases.

During the post-war era also, automation and the advent of the computer plus the great upsurge in business generally has introduced many problems for the exchanges and for the securities commissions responsible for them. In Ontario, a number of commissions and committees were set up in the early 60's, of which the most important from our point of view was the Kimber Committee set up in 1963 and the Royal Commissions under Mr. Justice Kelly and Mr. Justice Hughes constituted to enquire into the Windfall affair and Atlantic Acceptance respectively.

The Securities Act, 1966, came into force on the 1st May 1967 as the result of the Kimber Report. Of the act that unique authority Williamson says, "The legislation was preceded by a thorough study conducted by a committee whose care and good judgment are reflected in the fact that even after a long period of drafting, after consideration of critical briefs, and extensive work by the Committee of Legal Bills, the final legislation was almost exactly what the committee recommended in its report." This is the statute that the commission administers. It has been taken into use in five provinces with only minor variations and will probably be adopted by at least two others in the near future. Since it is a new act, we have not yet that body of judicial decisions from which to determine whether certain sections should be rewritten. I refer particularly to Part XII which deals with disclosure in its various forms--this is a complicated subject and it may be that, in some areas of corporate accounting, clarification and strengthening are indicated. To digress for a moment, you will be interested to know that we now have a Financial Disclosure Advisory Board with Mr. Alan Watson, F.C.A., as Chairman and composed of four eminent members of the accounting profession and one outstanding financial analyst. Your Commission hopes to derive great benefit from consultation with these men.

Turning to the commission itself, to quote from the act: "The Commission shall be composed of a Chairman and not more than five other members, one of whom shall be designated as Vice-Chairman."

"The members of the Commission shall be appointed by the Lieutenant-Governor in Council."

"Two members of the Commission constitute a quorum."

"The Chairman who shall be the chief executive officer of the Commission shall devote his full time to the work of the Commission and the other members shall devote time as may be necessary for the due performance of their duties as members of the Commission."

At the present time, the Commission consists of D. S. (Tim) Beatty, formerly of Burns Bros. and Denton, who is well known to you and who is incidentally an extremely important member.

Mr. Harry Bray, Q.C., who is Vice-Chairman is beyond doubt the outstanding expert on securities law in Canada.

Gordon Grundy is a Director of this Club and the very efficient Superintendent of Insurance.

The fourth member, Mr. Forbes McFarland is Mining Commissioner of this province and has served under four chairmen. He is a man of wide experience and excellent judgment.

Finally, and I have done this in alphabetical order, we have Professor John Willis, Q.C., of the University of Toronto Law School. An authority on administrative law, Professor Willis is independent, dedicated and possessed of great charm. He is one of my most trusted advisers.

The Commission meets every Thursday morning and as often as necessary in addition. Members of the Commission submit a list of stock holdings including those of their immediate families on a regular basis. This is no great effort for your speaker whose portfolio consists of 50 shares of the Granite Club required for membership purposes! In this regard, I should say also that the White Paper which is causing so much alarm and despondency in pretty well every walk of life has fewer terrors for me than it had when I was a business executive--indeed, I take a quite detached view so far as Club memberships and so on are concerned--I now have the privilege of paying for these myself!

So much for the Securities Commission; it administers the Act, its five members are appointed by the Lieutenant-Governor in Council and only the Chairman has a definite term spelled out--on appointment I indicated a preference for not more than a five-year stint and this will end, I expect, in 1974, if I survive so long!

Our contact with the Government is through the Minister for Financial and Commercial Affairs, Mr. A. B. R. Lawrence, Q.C., who is one of your Head Table guests today. It is the policy of the Government to encourage and indeed insist upon--a high measure of independence on the part of the Commission and, while the minister presents the monetary estimates of the Commission in the House and answers questions directed toward the Commission's activities, neither he nor his predecessor, Mr. Rowntree, who is also with us here today has ever endeavoured to influence the Commission in any way on political grounds. I am happy to say that my predecessor, Mr. Langford, reported the same complete freedom from interference.

One would assume that a commission of this sort would have terms of reference--fortunately and in keeping, I presume, with the British tradition against spelling things out meticulously and thereby creating a straight-jacket you will find no terms of reference in the Securities Act. However, Mr. Justice Hughes in his excellent Report on the Atlantic Acceptance Enquiry mentions "The Ontario Securities Commission--established to regulate the issuing of securities in the interests of the public and for its protection."

Earlier Mr. Justice Kelly remarked with great insight, "When the protection of the investors is mentioned, a question immediately presents itself--'from what?' It is obvious that the investor can never be fully protected from himself."

You will realize that securities regulation has two sides first, full true plain and timely disclosure, so that the investor can appraise what he is buying and second, the "blue sky aspect", as to the licensing of those who issue and sell securities. Judge Kelly, in addition to these felt that we should see that amounts in excess of legitimate needs are not obtained from the public, that a reasonable portion of funds obtained reach the treasury of the issuer and that we minimize the influences which inhibit a free market in securities while preventing manipulation of prices. This last concerns us and the Stock Exchange constantly and the excellent surveillance provided by the Stock Exchange is a major factor here. Investigation and enforcement as the learned Judge mentions last in his comments is one of our duties under the Act and I suppose this is the aspect which has caused my children to refer to me as the "fuzz" since I took up the appointment.

You have before you a paper showing the organization of the Commission and I shall make few comments except to say that I have found a high level of dedication and loyalty among its personnel. Some idea of the volume handled in 1969 will be obtained when' I mention that insider trading reports alone totalled 1,200 per month, while 2,000 companies report to the Commission annually, some on a quarterly and half-yearly basis. There were 39 takeover bids, 1,500 proxy solicitations received with information circulars and another 1,600 assorted reports to shareholders. In addition, 25,000 public files are cared for, while 1,500 subscribers receive the Monthly Securities Bulletin. Incidentally we are considering working more closely with the other securities commissions across Canada to produce what might be a national bulletin, again, in the interests of uniformity.

Last year, the Deputy Director, filings, Mr. Brown, accepted 687 prospectuses covering issues valued slightly over a billion dollars. This is up substantially from the year before when the total was $650,000,000. Average time from receipt to acceptance of a prospectus is about 21 days while the S.E.C. averages 76. Turning to the registration of salesmen, this increased by 12% in 1969 for a total of 5,239 with mutual fund salesmen showing the most significant increase.

The Legal Department with a complement of 30 has a highly trained staff of investigators working with our lawyers and our chartered accountants. Their day-today work is important and ranges from informal investigations usually about 200 in progress at any time--commenced because of telephone calls, or complaints of various sorts, right through the field of formal investigations, hearings and so on to appearances in court in connection with prosecutions. The last thing I wish to stress is the enforcement side of our work, but unfortunately, we have not reached that stage of human perfection where enforcement is unnecessary. I should like to say that it is my policy to recommend prosecution only when it is clearly in the public interest.

Liaison with other securities commissions in Canada is vital since everyone accepts uniformity of administration as desirable. Our Act is used by a number of administrations and we consult with them before any amendments are made. We are in close and constant touch not only through visits and conferences, but by daily telephone calls or telex messages. Our relationship with the Securities and Exchange Commission in the United States is good and I shall be spending, a week with them this month when the North American securities administrators meet at Washington.

Turning now to the important research side, in the recent past we had the Report of the Canadian Mutual Fund Committee Study chaired first by one of the former Chairmen, Mr. Kimber and later by our Commissioner, Mr. Grundy. Next we had the Beatty Report prepared in September 1968 by our Commissioner who was looking into the matter of financing mining exploration in the north.

It will not astonish many of you to learn that the Commission is not regarded with wild enthusiasm by some of our friends in the field of mining promotion. Indeed, it had been suggested that the jingle used in another place at another time is apt--it goes something like this, "We cannot but admire the grace and skill with which you take your course--you have the snaffle and the curb alright, but where's the bloody horse!?" I can sympathize with them to a degree and as mentioned we hope to have a short form of prospectus designed particularly for the mining industry in use later this year.

To further protect the public from possible defalcation of registrants who are not members of a self-regulating body, we are introducing a contingency fund after a study done by Mr. Bray and associates and this should be in operation later this year.

The study of a national uniform Canadian securities administration--CANSEC--by the former Chairman Mr. Langford and associates is dormant at the moment but since it seems to be the only sort of scheme the provinces could accept and since the need for such a scheme is obvious, we hope to revive it in due course. You will have seen the announcement that a merger study has just been published and this was produced by Mr. Bray as Chairman with Mr. Beatty and Professor Willis as his associates there is no doubt this will be most valuable and may well be reflected in Company and Securities Laws in the near future.

Last summer a study of the unlisted market in Toronto indicated a volume of $7 million a week. Since that time, the Investment Dealers' Association after two years' work have set up a Trading Data Centre which, while dealing only with unlisted industrials at the present, is proving highly successful and will, we hope, expand in due course to care for mines and oils as well.

New by-laws produced by the Toronto Stock Exchange were sent to us for approval in December last and are now being considered by the Exchange membership. As with the Investment Dealers' Association and the BrokerDealers' Association, our policy is to work closely with these self-regulatory bodies and to encourage them to care for their affairs with a minimum of interference from us. We hope the Canadian Mutual Fund Association will soon qualify officially for such a role.

Price, Waterhouse, management consultants, set up in 1966 the organization now in effect at the Commission. I felt it desirable to have them look at this again since four years had elapsed since the original study and with the concurrence of the minister this is being done--I should have the report later this month.

I could mention a large number of other studies under way, but important among these is the development of a microfilm service for our files and the development with a number of other people of a cent! al depository to cope with the tremendous flow of certificates that has caused so much trouble in the industry in recent years. Dr. James Gillies of York University is heading a study group on the Mutual Funds Report and will have some comments for us late this summer including the impact of institutional buying. The Moore Committee Report sponsored by the Investment Dealers' Association and the Toronto Stock Exchange on foreign ownership and provision of capital for brokerage firms is expected later this year.

I should like to thank the President and his executive for this opportunity to say something about the Commission and its work. Our role is to protect the investors while at the same time making it possible to raise capital in Ontario for worthwhile ventures with a minimum of fuss. We hope to have an increasingly efficient organization serving the public, but I have found that, when administering an act of this nature in accordance with the principles of natural justice dealt with so adequately by Mr. Justice McRuer, it is not too easy to achieve that degree of dispatch that one expects in private industry. I can say to you that your Commission is regarded as the most sophisticated in Canada, operating under an excellent and improving Act and staffed by dedicated people. If at any time you have cause for complaint regarding our actions or failure to act, then we should like to know (our friends the Press usually tell us) and you may be sure that the matter will have our best attention.

It is after all your Commission; its ability to serve and protect you depends upon men of high standing in the community coming forward to serve on the Commission itself when called upon, it depends on our obtaining personnel, particularly lawyers and accountants, of a superior calibre and finally and above all, it depends on the support of the community and its elected representatives. If we have these then I promise you we shall have a first-class Commission administering your Securities Act with justice, efficiency and understanding as it meets the challenges of the future.

Lt. Col. Royce was thanked on behalf of The Empire Club by Mr. John W. Griffin.