News & Events
Keynote remarks by David Wilson
Chair, Ontario Securities Commission
"Momentum for Change: Providing the Regulation Canada Needs"
Dialogue with the OSC
Toronto
November 10, 2006
Good morning! I'm David Wilson, Chair of the Ontario Securities Commission. Welcome to Dialogue with the OSC.
This is our annual opportunity to connect with our many stakeholders - face-to-face and live via a webcast of the speeches and plenary sessions today.
I get to do the easy part: Say a few words, touch on some of the things the OSC has been doing over the past year, and give a rundown on the challenges we face over the next year.
First, let me thank the people who have done the hard work.
The conference organizers did a great job. They assembled an excellent program. Thanks to all of you who helped make this possible.
Today, I'll speak about four primary areas of focus for the OSC:
#1. We must reform Canada's regulatory approach and regulatory structure;
#2. We need to tighten up aspects of the regulatory regime to deal with hedge funds. And we need to address certain regulatory issues related to income trusts.
#3. We need to give retail investors a fair deal; and
#4. We must absolutely provide an effective enforcement approach to fight economic crime.
Regulatory Approach and Structure
First, the need for the right regulatory structure - a structure that will allow regulators to respond to emerging issues with speed and efficiency. These capabilities are especially important given the competition for the attraction of risk capital.
Competition between markets is intense. It's vital to ensure that Canada has a structure and approach for securities regulation that will make our market a prime location for raising and investing capital.
Modernizing the structure of Canada's securities regulatory system is very much in the hands of the politicians. Everyone in the room knows there have been numerous studies making the case for Canada to adopt a common securities regulator.
That point has been made clear.
It's now up to politicians to make their decisions about regulatory structure.
And I wish them well.
But I do want to say a few words about regulatory approach.
Is the appropriate regulatory model one that emphasizes prescriptive rules, or one that focuses on regulatory principles? In my opinion, it's not a black-or-white question.
Detailed regulatory rules and regulations have their advantages and disadvantages.
Clear rules are relatively easy to interpret.
They build confidence in a public that can understand rules in clear, black-and-white language. But the sheer volume and complexity of rules could render them an unintelligible maze.
Rules offer the advantage of a clear road map. But the map could just as easily be riddled with shortcuts that undermine the actual spirit of the regulation.
Principles, on the other hand, can be difficult to enforce. Often, interpretation is necessary to compensate for the absence of prescriptive rules.
But principles allow the flexibility to adapt to the evolving conditions of the market. They become evolving standards that can adjust to changing needs.
Where does Canada stand in the spectrum of principles versus rules?
My assessment is that we currently have a hybrid approach, with each jurisdiction differing on the degree to which it emphasizes one or the other.
Two recent studies in Canada have made the point that it's time to shift to a regulatory approach based more on clear, broad principles.
Take the Crawford Report, written by highly-respected men and women from business and academia, headed up by Purdy Crawford, whom we're pleased to have with us this morning. The Panel recommended a new model for a common securities regulator - a model founded on as much principles-based regulation as is feasible.
Then just last month, the Task Force to Modernize Securities Legislation in Canada published a comprehensive report, known as the Allen Report. It also supports the need for a more principles-based approach to regulation, asking:
"How will Canada distinguish itself in this 'beauty contest' for capital? Certainly not by inadequate or lax legislation - that is never the answer to attract capital."
The Allen Report's clear recommendation was for principles-based regulation - focusing regulation at every available opportunity on clearly enunciated regulatory principles which do not need a detailed set of prescriptive, interventionist rules for sound implementation.
One thing is for sure: Canada needs, now more than ever, a competitive, responsive, efficient and globally respected regulatory regime for our capital markets.
But would a principles-based approach to regulation provide that kind of regulatory regime?
The U.K. overhauled its structure and approach for financial regulation nine years ago. The Financial Services Authority, the FSA, uses a principles-based, "lighter touch" approach to securities regulation.
Many observers cite this as one of the key ingredients in the improved competitiveness of Britain's financial markets.
For example, in 2005, the London Stock Exchange and AIM had 354 Initial Public Offerings. NASDAQ and NYSE had 193 IPOs combined.
It would be a little too soon to give all the credit for these good numbers to principles-based regulation. But it has definitely got to be one of the contributing factors.
In my opinion, the arguments in favor of principles-based regulation are very compelling.
However, there's a very important caveat to take into account.
Principles can be difficult to enforce.
Market participants don't want to operate in a regulatory gray zone. They want and need some guidance and some clarifying rules. That's why a principles-based regulatory approach must be complemented by a robust enforcement and compliance regime.
We have to ask ourselves: How would a more principles-based approach work in practice in a country with 13 securities regulators?
Through consensus, the CSA might well be able to come up with a set of common principles for each regulatory issue. But that would still mean 13 different ways of interpreting and administering them. It would be analogous to adopting a single constitution - and leaving its interpretation to 13 separate Supreme Courts.
That's why it's not enough to get the structure right or to get the approach right.
The two are inextricably linked.
It's time that Canada's capital markets had the right regulatory structure and the right regulatory approach.
I'm hopeful these very important issues - Canada's regulatory structure and approach - will be worked out sooner rather than later.
In the meantime, our job as regulators is to roll up our sleeves and deal with the challenges that are coming at us.
Hedge Funds and Income Trusts
I want to talk now about two such challenges: Income trusts and the regulation of hedge funds.
As all of you in this room know, last week's announcement of a change in the federal government's tax policy regarding income trusts sent a shock-wave through Canada's capital markets.
The OSC is preparing for the possible implications arising from this very important tax change.
We're preparing for the possibility of an increase in the number of mergers and acquisitions in the trust sector.
We're trying to anticipate any transition issues that may arise from this big change in tax policy.
We're proceeding on course to publish a proposed policy on distributable cash early in the New Year.
We're also working on issues related to the regulation of hedge funds.
The CSA has studied hedge fund activity in Canada, and has focused on tightening up certain aspects of our regulatory regime.
Last week, I appeared before the Senate Banking Committee as part of its review of hedge funds. I told the Senators that Canada's securities regulators have been actively involved in reviewing the existing regulatory framework to deal with this large, important new pooled investment vehicle.
I explained to them that all of the people and firms who manage hedge fund portfolios must be registered as portfolio managers. That's very different from the U.S.
Furthermore, the people who distribute hedge fund securities must also be registered.
I also informed the Committee that early in 2007, the CSA will propose a requirement for all hedge fund administrators - often called fund managers - to register with regulators, in addition to the registration of the portfolio managers. Hedge fund administrators manage the day-to-day operations of the funds, including valuations and marketing plans.
I believe that this proposed registration requirement makes a great deal of sense.
We're also concerned about Principal Protected Notes, including PPNs linked to hedge funds.
The CSA consulted with stakeholders and issued a Notice and an Investor Watch, in July, to communicate these very concerns.
Moreover, the CSA's analysis of the hedge fund industry will result in a notice in the next couple of months commenting on hedge fund issues.
I can assure you that the CSA has stayed on top and will continue to stay on top of this new rapidly-growing asset class.
Retail Investors
And that relates to the next issue I want to address: The evolution of our relationship with the retail investor.
Three demographic and economic developments are magnifying the importance of providing protection to retail investors.
First, baby boomers are starting to retire.
Second, we're seeing a massive inter-generational transfer of wealth through inheritance.
Third, we're seeing a shift in the workplace.
Defined benefit pension plans are giving way to defined contribution plans.
More Canadians than ever are responsible for investing for their retirement security.
One of the OSC's organizational priorities is to take actions to better understand and address the needs of retail investors. This past year, we took an important step by establishing the Investor Advisory Committee. The committee members - some of whom are with us today - have been giving us good advice on some of the key initiatives we have in progress. They will issue a report on their work early in the New Year.
We're also working closely with the Investment Dealers Association, the Mutual Fund Dealers Association, and the Ombudsman for Banking Services and Investments.
We are collectively addressing the following significant issues:
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Improving the complaints-handling process for retail investors;
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Enhancing communications with retail investors;
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Making access to information easier for investors; and
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Providing clarity on existing redress mechanisms.
This work flowed out of last year's Investor Town Hall meeting.
Today, I'm pleased to announce that we'll be holding our second Investor Town Hall in 2007. The planning for the Town Hall is just getting underway. The target is to hold it next September.
Helping retail investors get a fair deal is an absolute priority for the OSC.
We're off to a solid start, but we have work to do.
Enforcement
My last topic this morning is enforcement, always a major priority for the Commission.
During the past year, I've come to believe that you can have the best policies and the best regulations in the world, but if you don't enforce them effectively, they don't mean a damn thing.
No question about it - effective enforcement is our biggest challenge.
All of you have seen the coverage of the Rankin decision in the morning papers.
We need to study the judge's reasons and then consult with staff about weighing our options. I will say I'm very disappointed that we may have lost the "deterrence message" that the previous Rankin conviction conveyed to industry players. I will also say that - regardless of what happens with the Rankin case - we will not hesitate to pursue those who misuse confidential information.
As I just said - effective enforcement is our biggest challenge.
That's why it's the topic of our first plenary session today.
You and I know that as we're sitting here, somebody, somewhere is hatching a scam - or mis-using privileged information - to rip off innocent investors and rob them of their savings.
Compared to violent crime, economic crime is easy to downplay.
Many ask: Who really gets hurt?
Too many people get hurt.
Some market scams have taken in thousands of people - many of whom lose their savings and lose hope of recovering a nickel.
Who gets hurt?
We all do.
Economic crime steals something else - respect for our capital markets.
It makes it more expensive to raise capital and maintain a robust economy.
The costs of economic crime may seem invisible - but they are felt by every single one of us.
People ask me: Why should we treat a company that mis-states its results with the same harsh penalties as break and enter or theft?
Because that's virtually what company mis-statements do.
Just ask yourself: How would you feel if your mother bought shares in a company based on mis-stated, puffed up earnings - and then lost a big chunk of her retirement savings?
You would feel that someone had stolen her money.
That's why we've got to look at economic crime as crimes against individuals - crimes that harm people, causing problems that affect their lives.
How well are we combating economic crime?
In the complex, multi-faceted mosaic that comprises the white-collar crime enforcement system in Canada, we must - and can - do better. One of the most important things we must do within that mosaic is cooperate, cooperate, cooperate.
Here, too, we have begun the journey.
Meeting in Newfoundland last month, the federal and provincial Justice Ministers recognized the importance of doing their part in policing fraud in Canada's capital markets - and applying appropriate sanctions. They agreed to establish a working group - including police, securities regulators, and prosecutors - to review ways to improve enforcement.
I tell you today, there's an appetite for change - and fresh momentum to make enforcement the priority it deserves to be.
It's a major priority for the OSC to be a catalyst for change for the better.
So enforcement continues to be a critical goal over the next year.
Conclusion
The right regulatory approach and the right regulatory structure.
A fair deal for retail investors.
Vigorous enforcement.
These are our top priorities for 2007. Commissioners and staff at the OSC will pursue them tenaciously.
In each of these areas we already see progress. Now we have to take advantage of the momentum. We have to build on it.
For the day ahead, we want to hear from you.
This is your meeting.
Dialogue is what this is called.
And dialogue is what we want.
Thank you.
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