Canada’s market regulators get it from both sides: wronged investors accuse them of being soft on corporate crime and the Street complains that they are too tough and too arbitrary. If the punishment records are anything to go on, however, it’s investors who have it right.

Investment Executive examined the enforcement records of the provincial regulators in 2004. IE looked at all the cases, both settlements and decisions, that ended in penalties during the year. Totalling the monetary penalties exacted by the securities commissions in the year, IE found that the regulators handed down slightly less than $6 million in total fines, voluntary payments and costs awards.

The total is just slightly more than each of the major self-regulatory organizations managed in their own realms (IE , March 2005). Not including the massive market-timing settlements, the Investment Dealers Association of Canada levied almost the same amount in direct monetary penalties during the year ($5.9 million).
Market Regulation Services Inc. wasn’t far behind, at $5.5 million.

The SROs also did so with significantly smaller budgets. The IDA and RS combined spent about $44 million on regulation (as of March 31, 2004, for the IDA and Feb. 29, 2004, for RS, the most recent annual financial data available), vs almost $55 million spent by the Ontario Securities Commission alone, as of March 31, 2004.

Looked at another way, monetary penalties levied by the OSC amounted to about 5.4% of its total operating budget, vs 24.4% for the IDA and 27.6% for RS. And of the three major securities commissions — Alberta, British Columbia and Ontario — the OSC is the toughest.

Of course, only a portion of the commissions’ budgets is dedicated to enforcement (about $10.7 million for the OSC for 2004-05). One study estimates that 10%-20% of overall operating budgets goes to enforcement, depending on the jurisdiction. But the same is true of the SROs. Their budgets aren’t dedicated solely to enforcement, either. They expend plenty of time and resources on policymaking and compliance work, among other things.

Still, to be fair, the securities commissions have a lot more to do than policing a segment of the markets. The SROs deal only with discipline of a particular set of industry professionals, whereas the commissions take on everyone — industry players, issuers and insiders to homegrown, one-man securities scams.

It could also be argued that the magnitude of penalties levied against rule-breakers isn’t necessarily a proxy for effective regulation.
And that focusing on monetary penalties ignores all the other sanctions that the commissions use.

Admittedly, the arguments have some validity, but the reality is that investors’ perceptions — and, to some extent, those of prospective rule-breakers — are shaped by the number and size of the penalties handed down. The regulators themselves admitted as much in December, when the Canadian Securities Administrators released its first comprehensive report on CSA enforcement action, which touts the deterrent effect of the penalties levied on rule-breakers.

The report notes that between April and October of 2004, there were 59 cases in which sanctions of one sort or another were handed down. “This sends a strong message of deterrence to people who would consider violating our securities laws,” says then-chairman of the CSA and chairman of the Alberta Securities Commission, Steve Sibold.

However, as IE noted in its study of SRO sanctions in the March issue, the impact of non-monetary penalties is often overlooked when regulators’ records are evaluated. So, as we did with the SROs, IE has put a ballpark value on the securities commissions’ non-monetary sanctions. To do so, we have estimated a value for the registration bans and bans from serving as a director or officer of a public company, which are frequent features of securities commissions’ disciplinary sanctions.

As with the SROs, IE has projected the value of a suspension of registration by estimating the compensation probably lost due to time out of the business (estimated average industry compensation is $14,393 per month, or $172,716 a year, based on IDA data). Obviously, this is just a rough estimate; if anything, it errs on the conservative side.

To value the compensation lost by being banned from serving as a director, IE has adopted an estimate from Mercer Human Resource Consulting. In October 2004, it projected average annual director compensation at $79,660 for 2004. Its estimates were higher for board committee members, and much higher for non-executive chairmen, but IE has taken the lowest estimate in an effort to keep our calculations conservative.