The ontario government appears to be backing away from its pledge to start the separation of the Ontario Securities Commission’s judicial role from its enforcement role by the end of October. Instead, the government’s pursuit of a single regulator continues to dominate its attention.

The commitment to separate the OSC’s adjudicative function came hot on the heels of two reports last year that recommended the split. In the spring of 2004, Ontario’s integrity commissioner, Coulter Osborne, delivered a report to the OSC that found no actual bias in the commission performing the roles of investigator, prosecutor and judge all at once, but it did find a perception of bias among those it canvassed on the Street. So
Osborne’s report called for the hiving-off of the adjudicative role.

That report was not publicly released when it was delivered to the commission. Instead, the OSC released it several months later, at the start of two days of legislative hearings into the state of securities industry regulation. Officially, the hearings were called to review the recommendations of the five-year review committee headed by Purdy Crawford. However, a large part of the time was taken up with the complaints of aggrieved investors and their advocates, who seized one of the few formal opportunities available to make their complaints about the securities regulatory system to the legislators who are ultimately accountable (the standing committee on finance and economic affairs).

The SCFEA delivered its report in mid-October 2004, recommending a variety of substantive reforms, again including the bifurcation of the OSC’s adjudicative function.
The minister then responsible for the OSC, Gerry Phillips (now minister of government services but at the time chairman of the management board secretariat), formally accepted the SCFEA’s recommendations, both in the legislature and in a public address at the OSC’s annual conference held on Nov. 1 last year.

At the time, Phillips said that unless he was presented with a new, compelling argument against it, the government would proceed with splitting the OSC’s roles. The only caveat was, as the SCFEA report recommended, to defer the move for 12 months to see if any progress could be made toward creating a single securities regulator — the idea being that if bifurcation makes sense, rather than just doing it at the OSC, the structure should be the model for any new national regulator.

Since that time, there has been little to no evidence of progress on the single-regulator issue. However, the Ontario government continues to make a national commission — the one thing it has no real control over — the linchpin of OSC reform. Last February,
Phillips appointed Ron Daniels, then a professor at the University of Toronto, to head yet another panel to design a single-regulator model. But before that panel did any work,
Daniels was lured away to the University of Pennsylvania.

In his place, the government again turned to Crawford, appointing him to lead this effort.
A discussion paper is expected from this new Crawford committee by the end of October. It will include a recommendation on whether a single regulator should include an
integrated tribunal or not. And, in the meantime, the Ministry of Finance says it doesn’t wish to render that recommendation redundant by moving ahead with the bifurcation of the OSC.

“The government does not want to pre-empt the panel on any issue that it has been asked to consider,” the ministry said in a statement to Investment Executive. “We look forward to what the panel has to say on the single-regulator model and the separate adjudicative function. Once the panel has presented its work, the government will assess the situation and consider its next step.”

One former regulator suggests the delay in shifting to a bifurcated model might make sense if there was real progress toward a new single regulator, adding, “The chances of a single, national commission are slim to nil.”

Indeed, the Ontario government’s stance appears to ignore the fact that a single regulator remains little more than a pipe dream. It assumes that what makes sense for a new national regulator also makes sense for the OSC as a stand-alone agency. It also seemingly overlooks the fact that the reason the Osborne report called for bifurcation in the first place is the fact that the existing institution has created the perception of bias.

@page_break@Still, the ex-regulator believes bifurcation has a better than even chance of going ahead for a number of reasons, including the series of reports recommending the split; the support for the idea from three former OSC chairmen; and hints that incoming OSC chairman David Wilson was recruited from his post atop Scotia Capital Inc. with the promise of fundamental change.

In the meantime, market players are continuing to joust with regulators in the course of their hearings over allegations of bias. In May, a pair of executives facing an enforcement action in Alberta sought to have their case dismissed on the grounds of institutional bias, lack of procedural fairness and claims that they were deprived of certain constitutional rights. The Alberta Securities Commission panel found no evidence to support the executives’ claims and it denied their application. But in mid-September, the B.C.
Securities Commission did accept the possibility of bias in a regulatory hearing. It overturned a disciplinary decision by an Investment Dealers Association of Canada panel, finding that the composition of the panel raised a reasonable apprehension of bias.

Back in Ontario, while the government allows the perception of bias at its existing regulator to fester in anticipation of a new model for a highly hypothetical national regulator, the groundwork for bifurcation is being left undone. Rossana Di Lieto, acting general counsel at the OSC, says the question of whether the OSC will ultimately be split is purely a government decision. The OSC is simply waiting to hear from the government on the issue — and that decision appears to be tied up with the government’s desire for a single national regulator. She confirms the OSC isn’t doing any work on its possible bifurcation, such as a cost/ benefit analysis or legal research into how the system might work.

If the government is committed to bifurcation, as it indicated almost a year ago, the OSC should surely be doing some of the legal spadework to determine how the reformed model would operate. For example, should a separate tribunal only hear the commission’s enforcement cases, or should it hear cases from the self-regulatory organizations, too?
Could it also serve as a forum for investor redress?

Indeed, making decisions about the form and function of a special tribunal could serve as a way for the government to deal with several other outstanding SCFEA recommendations. A tribunal that offers a way for aggrieved investors to get a shot at getting their money back could answer the SCFEA’s call for an improved system of investor redress.

And a tribunal that deals with cases brought by the SROs would go some way to alleviating fears about self-regulation that led the SCFEA to conclude that the testimony it heard last summer “revealed a deep-seated skepticism on the part of the investing public. It simply is not confident that complaints will always be handled in an objective manner under a system of self-regulation.” The SCFEA has called for a task force to review whether SROs should have any powers at all.

The government claims it hasn’t forgotten the rest of the SCFEA’s recommendations. Indeed, in August, legislation introducing civil liability for secondary market disclosure was finally proclaimed. The Crawford panel was set up in an effort to advance the long march to a single regulator (as the SCFEA report recommended). The next securities law review has also been moved up, as the report suggested. And, while it’s not a SCFEA recommendation, a committee has been established to review the Commodity Futures Act.

Other recommendations, such as the introduction of fund governance requirements, will be dealt with by the regulators themselves. Yet this still leaves some of the biggest issues unattended — investor redress, the function of self-regulation and, perhaps most important, introducing greater legislative accountability for securities regulation.

Ontario insists it’s committed to addressing all the SCFEA recommendations: “Some will be dealt with in the short term; others will be address[ed] in the long term, as some of these recommendations may require legislative changes. The government will make public announcements on the implementation of each of these recommendations at the appropriate time.” IE