The Ontario Securities Commission 1975, and the Years Ahead

SIR ARTHUR CHETWYND:

Distinguished guests, ladies and gentlemen: Our speaker today is Arthur Sydney Pattillo, Q.C., Chairman of the Ontario Securities Commission. I feel more than a little out of place in introducing a man of Mr. Pattillo's sophistication in a field that is largely a mystery to me. For I have no stocks and bonds, except for a couple of shares in my relatively small company which I have insisted on, over the objections of our two vice-presidents, my wife Marjory and my elder son Robin, in order that I might gain entry to our annual meeting!

I feel a little like the man who was killed by a circular saw. In his obituary it was stated that he was "a good citizen, an upright man, and an ardent patriot, but of limited information regarding circular saws!"

I do feel that our system of what I call "co-operative free enterprise" is still a very good system. By "co-operative free enterprise" I mean that we still are able to practise free enterprise in the business community--at least theoretically--but at certain stops along the way (and they are growing in number) we must cooperate with government or the creatures of government. The Ontario Securities Commission, it seems to me, is such a creature.

I have enough business experience to know that a business enterprise moves through three phases: survival, profit and expansion. Sometimes it oscillates from one to the other. Speaking of my own weird kind of industry, I can tell you that at the present time, in the Canadian motion picture production industry, of which I am a small part, most of its members spend their lives sliding between the first two phases-survival and profit. Personally I count myself an expert in the first phase! This year marks my twenty-fifth year of survival in a vocation where our mottos are "You do not have to be crazy-but it helps," and "This is a non-profit business, but it was not planned that way." As soon as my term as president of the Empire Club is finished in April, I will begin on the second phase and will be pleased to report to you after another twenty-five years -probably posthumously!

Profit is essential to our system of doing business, for it has to be sufficient, first of all, to replace and modernize plant and equipment to keep it efficient and productive; to pay salaries and wags which will compete in the manpower marketplace; and finally to pay a return on investment that will enable it to attract capital in the money marketplace.

The Ontario Securities Commission oversees a great part of that "money marketplace", at least from the standpoint of stocks and bonds, as 70% of all trading in stocks and bonds in Canada takes place in Ontario. I gather that it is Mr. Pattillo's role to see that our system works in a way that will serve the business community and, indeed, the community at large, without denying the real need for risk capital, and without shutting the door to high reward, as long as it is accompanied with exercise of due responsibility.

There is a saying that "riches are no menace, as long as we do not divorce dollars from sense!" That's spelled S-E-N-S-E.

Our speaker's education, training and experience fit him eminently to carry out the responsibilities of his current task. He was born in Nova Scotia-a "bluenoser"--as at one time were the majority of our chartered bank presidents. That part of the country has a tradition for turning out men who have moved to the highest offices in Canada's financial community.

He was educated at King's College, Windsor, Nova Scotia, and at Dalhousie University. He was called to the Bar in Nova Scotia in 1933; in Ontario in 1945; in Alberta in 1960; and in Manitoba in 1965. He has been a director of a galaxy of Canadian corporations. He is a Trustee of Sunnybrook Hospital, and a member of the board of the Fathers of Confederation Memorial Building Trust. He was appointed a K.C. in 1950. We've got so used to "Q.C." that perhaps we have forgotten that back in 1950 it was "King's Council".

Mr. Pattillo has also served as chairman of the board of governors of the Canadian Tax Foundation. He is a Bencher of the Law Society of Upper Canada, and was president of the Canadian Bar Association in 1969 to 1970.

Since 1944, he has been a member of the distinguished law firm of Blake Cassels and Graydon of Toronto.

He was appointed to his present position as Chairman of the Ontario Securities Commission in September, 1974. It is interesting to note, regarding the Ontario Securities Commission, which was founded in 1928, that of its eight previous chairmen, two of them were presidents of The Empire Club of Canada. The first, the late Right Honourable George Drew was president of this club in 193233, and Lieutenant Colonel Ted Royce who is at our head table today, was president of the club in 1965-66.

When we have a guest speaker from such a high and distinguished echelon of our society, it is difficult to refrain from mentioning some of our own who have also been there (I hope you will excuse the commercial, sir), in the very human hope that some of the aura which our guest's presence generates will rub off on us!

It is with very great pleasure that I introduce to you, speaking on "The Ontario Securities Commission 1975, and the Years Ahead", Mr. Arthur Pattillo, Q.C., B.A., LL.B., LL.D.

MR. PATTILLO:

Mr. Chairman, ladies and gentlemen: I am very grateful to you and to my predecessor, Mr. Royce, for making it possible for me to speak to you today. My subject is the Ontario Securities Commission and the problems it has before it in this current year 1975.

Exactly six months have elapsed since I became Chairman of the Commission. I could outline to you the changes that I have made in its personnel and in its physical layout. The main hearing room and the reception area, when completed, will be very substantially altered. As of the middle of January, we obtained a new director who is in charge of the day-today operations. We are completely revamping the old investigation section and converting it into a new enforcement and compliance section under the supervision of a new deputy director. In this new section, we are proposing to have two able young counsel and four outstanding young accountants on a two-year staggered contract basis. We have taken steps to enlarge and improve our filing or prospectus section. Under the deputy director of this section, we propose to develop an improved financial surveillance and insider reporting division.

I do not propose to speak further about these changes because I recently did so before the members of the Ticker Club. The subject of personnel at the commission is not a joke which bears repeating.

What I want to talk about today are some of the problems that have already been identified and that must be dealt with by the Commission and by the securities industry in this year 1975. I wish to briefly indicate how we propose to cope with some of these problems.

I realize that the members of the Commission have no crystal ball and that situations are changing so rapidly that even the Minister of Finance admitted in February that the assumptions made for his November budget were not as accurate as they might have been. Nevertheless, the rapidly changing times can only affect remedies or solutions. They are not going to solve the problems which are before us or are on the horizon. At least I do not think so because I do not believe in miracles. I am afraid I do not share the view of some that future events, unguided and uncontrolled, will solve problems. Though I do not come from Missouri, before I accept such a philosophy, I would need to be shown. What are some of the problems presently facing the securities industry and the Ontario Securities Commission which, I am sure you appreciate, must act as guardian of the investing public? Some are:

1. The introduction and implementation of a new Securities Act;
2. The utilization of the Stock Exchange for take-over bids;
3. The financing of exploration and development of mining prospects;
4. The management of mutual funds by brokers;
5. The asserted difference between dealing in commodities and securities;
6. The regulation of "puts and calls" (the so-called Chicago Board options);
7. The role of the mutual fund particularly as the underlying investment of registered retirement savings plans;
8. The accuracy of financial reporting;
9. The continuation of the fixed percentage fee structure on the exchange.

Time does not permit me to deal with all of these items, even if I was prepared to do so. Also, one of the matters I have mentioned is presently before the courts and is sub judice. Two of the matters, namely, the financing of exploration and development of mining prospects and the management of mutual funds by brokers are to be considered at hearings of all persons interested.

The regulation of "puts and calls" is before the Exchange and the Commission is waiting to hear from it. So is the question of the utilization of the Exchange for take-over bids.

The role of the mutual fund, particularly as the underlying investment of R.R.S.P.s, is a matter of discussion between that branch of the ministry supervising insurance and trust companies and the Commission. Some financial institutions do not consider an R.R.S.P. unit a security. Whether or not it is a security will certainly have to be resolved in the forthcoming months.

I do not propose today to discuss the new Securities Act. You are all aware that Bill 75 was before the last session and that many briefs were received from those interested. Mr. Bray and his committee spent countless hours studying these briefs and making changes in the bill. In fact, the committee has spent more than five years working on the new act. We hope it will come before the Legislature early in the forthcoming session, and that the new act with regulations to implement it will be in effect before the expiration of the year. As you are aware, we anticipate opportunity will be given to appear before a committee to discuss the new act. Consequently, I prefer to wait until that occasion to say anything more regarding it.

This brings me to the first of the two topics I wish to stress today. The accuracy of financial reporting is giving the Commission, its financial advisory group and the Institute of Chartered Accountants a great deal of concern. In this day of uncontrolled inflation, can any person with confidence rely on financial statements which are based on historical cost and do not correctly reflect the rapidly increasing contingent liability for pensions. I laugh when I hear people say that so and so is an expert in reading a balance sheet-and that is apart from the fact that I have always considered an expert a son of a b .... away from home. Anyone who can read can read a balance sheet, but how many people know what is missing and what adjustments should properly be made in what appears.

All over Canada this month auditors are working on the financial records of corporations-verifying, questioning, crosschecking. For a great majority of corporations, this is annual audit time. Later, when the companies issue their 1974 financial statements, each will carry the statutory auditor's report stating that the statements were prepared "in accordance with generally accepted accounting principles".

It is not my intention to dwell on the many problems associated with generally accepted accounting principles. The subject has been debated in countless articles and seminars and I am told progress is being made. Suffice it to say that I am waiting for the day when rules are devised leading demonstrably to figures which companies, clients and outsiders can confidently use in watching over their own interests. I am waiting for the day when the language of accounting will reflect what actually happens to the financial affairs of companies as they go about their business.

I realize that the problems are so pervasive that no one group, no one profession, no one sector can possibly cope with these unilaterally.

However, may I tell you briefly what the Commission is doing in the area of accounting disclosure: