The keepers of the gate

JOHN DeMONT June 13 1988

The keepers of the gate

JOHN DeMONT June 13 1988

The keepers of the gate


It was a trying time for Stanley Beck, the chairman of the Ontario Securities Commission (OSC). In mid-May, a massive insider-trading investigation launched by the OSC was thrown into question by a legal challenge, which penetrates to the very core of the commission’s authority. Earlier, the commission was rocked by the resignation of Harry Malcolmson, a popular senior official at the OSC who left under the cloud of conflict-of-interest accusations. Beck, who appeared on May 25 before an Ontario legislative committee over the Malcolmson affair, said that the commission is working on tougher conflict-of-interest regulations for its staff members. But that did not satisfy committee chairman Allan McLean, who said that even more stringent restrictions are needed for commission members. As one OSC official later said privately, “The commission appears to be under siege.”

In that, the OSC is not alone. Canada’s provincial securities agencies— which oversee the conduct of stockbro-

kers and public companies selling securities in their provinces—are under fire from suspicious governments, irate investors and the very brokers they police. The regulatory commissions have responded with what they say are long-overdue internal reorganizations and by increasing budgets and staff to improve their policing abilities. Even so, some regulatory officials say that they are still concerned about losing some of their judicial and investigative independence.

The Quebec government, for one, is now trying to exert more influence over Quebec Securities Commission (QSC) decisions and policymaking. And, last week, the B.C. New Democratic Party called for a sweeping investigation into securities regulation in that province. Although each province is responsible for policing its own securities industry, there is also growing pressure for Ottawa to play a larger role in the regulation of Canada’s stock markets. Said Paul Guy, president of the QSC: “Securities commissions must act independently. But just

as importantly, they must be perceived to be acting independently.”

During the past few years, regulators have had to grapple with dramatic development of global markets and the deregulation of Canada’s own financial industry. And their jobs were made even more difficult by increased trading volumes and the rash of corporate takeovers that occurred during the fiveyear-long stock market rally. Overall, most of the criticism has been levelled at the OSC, which regulates the world’s fourth-largest equity market and which sets the pace for all securities regulation in Canada. But the commission has also suffered from a series of high-profile resignations as commission lawyers and accountants jumped to investment firms that were willing to pay far more than the Ontario government for securities expertise. At the same time, the OSC has made some enemies with its tough treatment of the brokerage industry. In fact, last month the OSC sent a clear message to the brokerage community when it forced Toronto-based brokerage house Richardson Greenshields of Cana-

da Ltd. to pay $242,000 in trading commissions in response to allegations thiat it failed to fulfil its self-regulatory responsibilities. The penalty was the stiffest ever levied in Canada in a nontakeover case.

Even more controversial has been the OSC’s insider-trading investigation. But, so far, the OSC has not even been able to convince key witness Michael Biscotti, a former stock trader with Dominion Securities Inc., to answer its officials’ questions.

Biscotti’s lawyers recently argued before the Ontario courts that Section 11 of the Ontario Securities Act, which empowers the OSC to investigate and question securities traders under oath, violates the Canadian Charter of Rights and Freedoms.

A ruling in favor of Biscotti would be a major blow to the OSC investigation. And many securities industry officials say that the OSC’s reputation as a credible securities regulator will suffer if the investigation proves unsuccessful.

Said Henry Knowles, president of United Funds Management Ltd. and a former OSC chairman: “I think that if they are not able to demonstrate results, many people will think that the

commission is a hollow agency.”

But Beck, a former law professor, says that he is not concerned by the criticism. He has hired new staff, and the OSC is also in the midst of an internal reorganization following a report from a management consulting firm hired to review the structure and operations of its enforcement branch. And Beck says that “even though there’s no clear verdict on what the result will be,” the insider-trading investigation is a sound use of commission resources. And he added that criticism of OSC’s g enforcement activities = from within the brokerage industry is a clear indication that the commission’s presence is be-

0 ing felt. Added Beck: “We finally have some real bite, and not everyone is happy with it.”

At the same time, the 33-year-old QSC also faces pressing problems. In April, it suffered a setback when Peter Blaikie, a prominent Montreal lawyer and former president of the federal Progressive Conservative party, was acquitted on insider-trading charges brought by the QSC. At the same time, Pierre Fortier, Quebec’s junior minister for privatization and finance, tabled proposals that would empower the government to encroach on the commission’s independence. Fortier has since abandoned a proposal to give his department the power to amend or change commission decisions. But he still insists that the government should have the right to intrude into the QSC jurisdiction. Declared president Paul 8 Guy: “The commission’s reputation as an indez pendent regulator would

1 be irreparably damaged if the government goes ahead with its plan.”

Meanwhile, in a lengthy court case that ended earlier this year, the Alberta Securities Commission came under severe criticism during an RCMP investigation and a subsequent court case. The case involved alleged stock manipulation by officials and brokers

representing Edmonton-based First Commonwealth Securities Ltd. Since then, the provincial government has increased the commission’s annual budget to $4.1 million and its staff to 70 from $2.8 million and 55 employees in 1987. And the commission’s judicial and investigative powers have also been separated to prevent potential conflicts of interest.

The B.C. Securities Commission continues to encounter obstacles in its efforts to police the flamboyant behavior of some members of the Vancouver Stock Exchange. Since its inception last February, the commission has suffered several embarrassments. First, Michael Ross, the province’s superintendent of brokers and main regulatory watchdog, resigned in February, 1987, after he travelled to the Super Bowl football game in Los Angeles with Vancouver entrepreneur Nelson Skalbania. Then, two months later, securities commission chairman Jill Bodkin quit after only nine months on the job for reasons that were never specified.

Since then, Douglas Hyndman, the new securities chairman, has had to weather one of the worst trading scandals in the VSE’s checkered history. The latest affair involves a pair of Vancouver stock promoters—Edward Carter and David Ward—who were involved in the manipulation of stocks listed on the VSE. Recently, the B.C. Supreme Court ordered Carter, Ward and four others to pay damages, which could exceed $16 million, to a Texas mutual fund hurt in the manipulation. Last week, B.C. New Democratic Party Leader Michael Harcourt called for an inquiry into the role of regulators in the Carter-Ward affair.

The controversy has increased pressure for Ottawa to play a bigger part in the regulation of Canada’s financial institutions. But the federal government would encounter strong resistance from provincial regulators who do not want Ottawa infringing on their turf. Former OSC chairman James Baillie, now a Toronto lawyer, says that a federal role is most likely to evolve through the office of the superintendent of financial institutions.

But federal Minister of State for Finance Thomas Hockin says that a federal presence in securities regulation has been placed on the back burner for now, “although things could be different in 20 years.” Instead, he says that Ottawa will play a larger role in promoting a greater harmonization of securities legislation throughout the country. But more than that will probably be needed to take the pressure off the country’s beleaguered securities regulators.