NEW STOCK COPS

NEW STOCK COPS

Canada needs a securities watchdog with teeth, KATHERINE MACKLEM writes

February 16 2004
NEW STOCK COPS

NEW STOCK COPS

Canada needs a securities watchdog with teeth, KATHERINE MACKLEM writes

February 16 2004

NEW STOCK COPS

Business

Canada needs a securities watchdog with teeth, KATHERINE MACKLEM writes

THE CALL FOR a national securities regulator is growing louder and, having jumped the fence into the political realm, is gaining momentum. Op-ed pieces debate not only the merits of a single watchdog overseeing all of Canada’s capital markets, but also the minutiae of one model over another. Experts from around the world are flown in to speak at conferences about reforms at home. Just last week, Ontario Premier Dalton McGuinty appealed to Albertans at the Calgary Chamber of Commerce to help him cut the “needless red tape” of having a separate market overseer—13 in all-in each province and territory. Even federal Finance Minister Ralph Goodale has entered the fray, indicating a preference for a politically sticky single regulator over the “passport model,” a plan favoured by some provinces that keeps the existing 13 regulatory agencies, but calls for greater cooperation among them.

For a topic that’s about as sexy as lumber tariffs, it’s getting a heck of a lot of buzz. But as tales of business corruption and scandal contribute to that sinking feeling the rot might be endless, attention naturally turns to the watchdogs. It’s telling that charges laid last week against a former Canadian Imperial Bank of Commerce executive came from New York Attorney General Eliot Spitzer. And that the U.S. Securities and Exchange Commission (SEC) is aggressively investigating Conrad Black’s corporate manoeuvres. For Canadian investors, it’s unsettling: it appears very little is being done in Canada. Part of the problem is the 13 regulators, a cumbersome system widely regarded as ineffective. And because perception is reality in the capital markets, Canada’s credibility is damaged, worldwide.

Unlike the U.S. and its powerful SEC, there is no national regulator in Canada. It’s an international anomaly that dates to the British North America Act of1867, which divvied up government responsibilities and decreed property a provincial matter. Until the late 1990s, the stock market followed a similar pattern: there were five separate exchanges in Canada. They’ve consolidated somewhat, but the regulators who oversee the markets haven’t managed to move in tandem. Instead, they’ve been bogged down by an ages-old Canadian political game, that tug of war for power between Ottawa and the provinces.

The results have been awkward. The Ontario Securities Commission (OSC), by far the most influential watchdog in the country, has led the charge for a national regulator, only to be accused of making a power grab. Quebec, unlikely ever to relinquish its existing powers, argues a decentralized setup is the best way to protect investors. Alberta and B.C. are also reluctant to give up control—and Ottawa has been equally reluctant to push. Meanwhile, an umbrella group called the Canadian Securities Administrators struggles to find consensus among the 13 regulatory bodies. And publicly traded companies, especially large ones, lament the overlapping fees they must pay to each regulator—not to mention the endless forms that must be filed—but they do so quietly, as if fearful of angering their regulatory masters. So at best, any progress is jerky. At worst, it’s glacial.

AFTER the U.S. adopted Sarbanes-Oxley In 2002, regulators here began work on a similar set of rules. They’re still working.

Finally, last December, the federally appointed (and named) Wise Persons’ Committee, chaired by Vancouver-based energy executive Michael Phelps, strongly recommended a major overhaul to the current system. As it is, we’re out of step with the rest of the world, the committee said. Only Bosnia and Herzegovina has as encumbered a system. A single body enforcing a single code for Canada’s capital markets would bring Canada into the 21st century, it added.

There are numerous examples of the sluggish pace of the Canadian watchdogs. Last month, the OSC said it too is investigating Black’s corporate dealings, an inquiry it says has been “underway for some time now.” That’s interesting because four years ago, well before U.S. investors became antsy over suspicious payments made to Black and other Hollinger executives, an insider urged the Ontario regulator to look into similar payments between companies controlled by Black.

It’s possible—we may never know—that the OSC has been looking for years into the affairs of Black and Hollinger. But which is worse: that the OSC ignored the earlier tip? Or, with years of lead time, that the OSC still trails the U.S. regulators? Mind you, that wouldn’t be new. In April 2001, the OSC began investigating a Royal Bank of Canada senior executive named Andrew Rankin, who’d been fired amid allegations he passed on confidential information to a friend. After an initial flurry of coverage about the scandal, the story went cold. Then, just last week, the commission charged Rankin with 10 counts of insider trading, and said a hearing—the first of many, no doubt—will be held in early March. By comparison, the SEC launched an investigation in early 2002 into Sam Waksal, the former ImClone CEO also accused of insider trading. Today, Waksal is already in jail, serving a seven-year sentence.

In the U.S., we’ve seen wrongdoing at companies such as Enron, Adelphia, WorldCom, and Tyco hit the headlines. We’ve watched men and women in expensive suits frogmarched in handcuffs to court. We’ve seen others sent to jail. In response to those scandals, Washington debated, wrote and adopted Sarbanes-Oxley, a wide-ranging federal securities law which, among other things, requires CEOs and chief financial officers to personally sign off on their corporations’ financial reports. Meanwhile, Spitzer has emerged as a force who’s feared and revered. He’s successfully gone after brokerages whose analysts pumped stocks they didn’t believe in. Lately, he’s targeted corrupt trading practices in the mutual fund business—and likely will force the whole industry to lower fees charged to investors. That’s all stateside.

After Sarbanes-Oxley was adopted in the summer of 2002, regulators here began work on similar rules. It took a year, and last June those new rules were proposed by the CSA. Then they were discussed. And negotiated. There was more consultation. Last month, the CSA announced with great fanfare that the proposals had been adopted. Not by everyone, mind you—B.C.’s not in. And today, even in the regions that adopted them, the regulations aren’t entirely in place: provincial and territorial legislatures still have to give their nod of approval.

Alexander Leman is a governance expert who consults to leading blue-chip companies. None of his corporate clients support a fragmented provincial-based system, he says. While he cautions that regulation isn’t the full answer to good corporate governance, he says it’s an important part of the mix. In the eyes of his customers, a national regulator would give Canada the chance to become credible in the global marketplace. Corporate malfeasance in North America has served an important purpose, he adds. “The scandals have been a really powerful force in engaging the politicians.”

And for many, that is cause for optimism. “The horse is out of the bam,” Phelps, leader of the Wise Persons’ Committee, told Maclean’s. If market players put pressure on the three recalcitrant provinces, Ottawa will pick up the campaign for a national regulator, he predicted. Once the federal election is out of the way, he said, politicians will push for a single regulator because voters, most of whom hold shares in their insurance policies, pension funds or RRSPs, will insist on a cleaner, more credible marketplace. “The end of the current system is nigh,” Phelps says. “I shouldn’t have to make a bet on this at all. A national regulator’s got too much logic behind it.” True, but when the cold logic of business clashes with the passion of politics in Canada, the outcome is never a sure bet. Hfl

katherine.macklem@macleans.rogers.com