David Brown has given Canada’s top securities watchdog a lot more bite
The Market Czar
David Brown has given Canada’s top securities watchdog a lot more bite
He doesn’t put his feet up on thé table. But with the sole of one shoe firmly on the flat edge of its salmoncoloured travertine surface, David Brown pushes off and gently tilts his chair back on two legs. The head of the Ontario Securities Commission—the country’s most influential market regu-
lator—is sitting at the table in his office where he often eats lunch. Today, an unfinished glass of milk remains. Brown, 60, is talking about the tarnished reputation of Canada’s capital markets and his mandate to restore confidence in them. “It’s no secret that there have been some heavy blows to our credibility in the past several years,” he says. “Much of what we have been trying to do is rehabilitation.”
Brown, a former Bay Street lawyer and a licensed pilot, is
disarmingly comfortable in his role as Canada’s top securities watchdog. Now halfway through a five-year term as chairman, he arrived at the commission at a critical point in its history. The spectacular flame-outs of a string of companies, including Bre-X Minerals Ltd., YBM Magnex International Inc., and
Livent Inc., raised fears that the Canadian markets were rife with corruption—as well as questions about the effectiveness of the market regulators. That, combined with a U.S.-led push towards global capital markets, has threatened to submerge Canadian exchanges at the same time as more Canadians than ever are investing through the stock market in publicly traded companies. Brown’s job, as he sees it, is to figure out how the different pieces—investor protection, reputation repair and
the challenge of international markets—fit together, while keeping an eye on technology and how it affects investing. He wants to create a regulatory framework that is relevant to the times but doesn’t get in the way, that “fosters fairness but doesn’t stifle innovation and creativity.” One of his real strengths, he says, one that was honed as a lawyer specializing in intricate mergers and takeover deals, is an ability to solve problems. “The more complex the problem the better,” he says.
The silver-haired, slight and soft-spoken Brown has unquestionably made a difference. Where the commission was once regarded as an institution bogged down by a lack of funding, a shortage of staff and an inability to command respect from the investment community, it now has money, people and the full attention of The Street and its troops of brokers, lawyers and investment bankers. Jean Fraser, who is managing partner at Osler, Hoskin & Harcourt and one of Brown’s former Bay Street peers, says the chairman enjoys an “extremely high regard” from the securities bar and the investment community. The Street is paying attention because the commission, under Brown, has not held back from tackling some mighty big players in Canadian business circles: the Royal Bank of Canadas pension management arm, RT Capi-
tal Management Inc., fined $3 million for manipulating stock prices; Michael Cowpland, the flamboyant former chief executive of Corel Corp., charged with insider trading; Air Canada, under investigation for giving information to a limited list of transportation analysts; Yorkton Securities Inc., a boutique firm that has been pushing the envelope by investing in companies it underwrites and promotes, also under investigation; and in mid-December, four Web sites accused of providing “potentially fraudulent” investment services.
The commission has also made strides on the less sexy front of developing new rules and regulations. For discount brokers, it has lifted the so-called know-your-client requirement, where brokers must review trades against their clients’ level of risk tolerance. It is adopting new rules to allow alternative trading systems—independent electronic markets that have flourished south of the border. It is set to expand its horizons with a merger with the Financial Services Commission of Ontario, regulator of pensions, trusts, credit unions and insurance companies. And with Brown a driving force, the commission has worked with other provincial regulators towards creating a quasi-national system—a true feat in the face of antagonistic provincial politics.
In his rehabilitation effort, Brown is keen to show that standards in Canada are up to snuff internationally, especially compared with the United States. The reality, Brown says, is that the U.S. capital markets are the world’s biggest. He knows that as stock markets form global alliances, regulators will increasingly have to work together. Already, there is a “great deal” of co-operation between Canada and the United States, he says. “For us to adopt an approach that radically departs from what goes on in the U.S. is to jeopardize the ability of our companies to participate in those markets,” he says.
One of the first things Brown did after arriving at the OSC in 1998 was to boost staff numbers and their pay. In the allimportant enforcement division, the employee total has climbed in the past 18 months to 80 from 40. Aiding Brown was a change in the commission’s legal status, from a branch of the Ontario ministry of finance to a self-funding Crown corporation, which gives the OSC control over its own financing. Where the Ontario government once kept the lion’s share of the OSC’s revenues (66 per cent in 1997, mainly from fees for prospectus filings and registrations), the commission now hands over much less—28 per cent in fiscal 2000. And even though it has cut its fees, annual revenue jumped in the past four years to $82 million from $58 million due to the business boom.
The increased funding levels have been key to the com-
mission’s newfound vigour. So has Brown’s leadership, according to Peter Dey, chairman of Morgan Stanley Canada Ltd. and a longtime friend. Dey recalls teenage years when despite his short stature, Brown— “Brownie” then—was a star basketball player at Fisher Park high school in Ottawa because he had a good sense of the game around him. “He was creative and very focused,” Dey says. The OSC chairman now has the opportunity to shape public policy as it affects the capital markets—and at a time of tremendous flux, it is crucial to have someone who can look at the big picture, says Dey, himself a former OSC chairman and a member of the search committee that hired Brown. “Brownie leads with a vision,” Dey says. “He didn’t go in simply to regulate brokers and dealers.”
Not all observers are so positive about Brown. Some criticize the way the commission handled the RT Capital affair, and accuse Brown and the OSC of making an example of the Royal Bank, the country’s
Brown is keen to show that standards in Canada are up to snuff internationally
biggest, to drive home the point that the commission, like Big Brother, is watching. Others focus on the Yorkton case, criticizing the backdoor manner in which the commission revealed that an investigation was under way. Normally, the OSC makes a probe public when it is ready to take action. With Yorkton, it forced a company called Engineeringcom Inc. to write in a prospectus that Yorkton, which was both its underwriter and an investor, was under investigation for similar dual roles with other companies. The OSC stressed that neither firm was being investigated for the current deal.
Philip Anisman, an independent senior securities lawyer, notes the commission has very broad powers—it makes securities rules, it enforces them and it judges them. Anisman says there are some checks and balances, but not enough. In Yorkton’s case, the commission should have explained why it wanted the information added to Engineering.corn’s prospectus. “When a
The OSC’s hit list
Recent investigations of individuals and companies
Michael Cowpland The former Corel Corp. CEO faces insider trading charges over his 1997 sale of company stock.
commission makes significant decisions, they have an obligation to issue reasons for them,” Anisman says. Brown declined to comment on Yorkton. Says OSC spokesman Frank Switzer: “The results of the investigation will speak for themselves.” A major concern for Brown is the protection of investors—especially when 49 per cent of adult Canadians own shares either direcdy or through mutual funds (dramatically up from 37 per cent in 1996 and 23 per cent in 1989). If he had to make a choice, he says, he would “inevitably” choose to protect small investors over other market participants. His concern for the little guy may come from his own upbringing in Ontario. Browns family lived in Peterborough and Kingston before settling in Ottawa. His father worked as a salesman for John M. Garland, a vendor of dry goods. In the summertime, his father brought young David on the road with him. “I was in every general store in every small town in eastern Ontario,” he says.
When Brown was approached to take on the job of leading the OSC, he flatly turned down the offer. “I had no intention of being a regulator,” he says. He was content in his job as senior partner with Davies, Ward & Beck, where he’d practised law for almost 30 years. He was making more than his current salary of $518,000—others say probably double—and he thought he’d be there forever. But his friends Dey and Jim Baillie, a plugged-in securities lawyer at the Toronto firm Torys, “just kept chipping away” at his resolve, Brown recalls. Finally, he went away for a week to ski at Vail, Colo., with his family. “The first day, I was just buckling up my boots when the phone rang,” Brown says. It was Dey who told his friend Brownie there would be plenty of time for thought as he rode the ski lifts or waited in line. “I want you just to think about it,” Dey said. “At the end of the week,” recounts Brown, “I’d talked myself into it.” Brown, who took up flying at the age of 50, recently sold his Cessna 310 twinengine plane. He found the chairman’s job has too demanding a schedule to keep up flying. “I actually loved it, but something had to give,” he says. He’s held on to his licence, but says he wouldn’t get in a cockpit before taking lessons again. Like leaning back in his chair, like overseeing markets, balance and caution for Brown are key. EH1
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