Most of bay street’s law-abiding citizens probably would accept rougher treatment of industry miscreants in exchange for less intrusion into their day-to-day routines. David Wilson, new chairman of the Ontario Securities Commission, may grant such a wish.

Wilson has been in the job of leading Canada’s biggest securities regulator for only a few months, and hard evidence of major change at the OSC is scant. But there are signs.

In his public comments so far and in an interview with Investment Executive, Wilson stresses the importance of enforcement, noting that it is the one area of securities regulation about which everyone has an opinion. He recalls that, upon learning of his appointment to the OSC, colleagues in his former life in investment banking — he was vice chairman of Bank of Nova Scotia and chairman and CEO of Scotia Capital Inc. — suggested he concentrate on enforcement when he took over the commission.

“I was encouraged to focus on that aspect of what securities regulators do, to move that up a notch from what the perception has been,” Wilson says. “There’s been a lot of progress in the enforcement area in this organization in the past five or six years, but there’s still a perception that we can go further.”

In particular, Wilson has keyed on the idea that enforcement sanctions should be strict enough to serve as a deterrent for potential violators. The clearest evidence is the OSC’s prosecution of former investment banker Andrew Rankin for illegal insider trading and tipping.

The OSC initiated the case, and won a partial conviction (guilty of the tipping counts, but not of insider trading), before Wilson’s tenure. But in late November, the OSC decided to press for a bigger penalty than the court handed down. It is appealing Rankin’s six-month jail sentence. Rankin, meanwhile, is appealing his conviction.

“Aside from seeking a fair penalty for illegal behaviour,” Wilson says, “the deterrent impact of that decision is important in the overall context of the business community in which that kind of behaviour can’t happen.”

Since the Rankin verdict, the OSC has also brought a second enforcement action that alleges insider trading and tipping. The case has yet to be heard, but it indicates the commission is willing to tackle prosecutions in an area in which it can be very hard to win convictions.

Illegal insider trading isn’t the only focus for OSC enforcement. Wilson’s message is that there will be tougher enforcement across the board. He indicates no one can anticipate just what offences will turn up, but that there will always be a tiny minority of people in the industry who look to cut corners.

Ensuring that such people have some fear of being caught and facing significant sanctions is a multi-faceted task. Actual case law is probably the best way to send the message, Wilson says, but there’s also a communications challenge. He points to the biannual enforcement report published by the Canadian Securities Administrators, which enumerates all the enforcement activities that have occurred in the previous six months, as the kind of thing that’s important for changing perceptions about the quality and quantity of enforcement in Canada.

As for actually doing the job of enforcement, Wilson is prepared to give the area the resources it needs. He declines to say whether the department will be increasing its head count, as it is still in the middle of its annual planning process. But, he adds, “My attitude is that we’ll find room in the budget to increase it, if it’s merited.”

Enforcement may grab all the headlines, but it is the rulemaking side of regulation that intrudes on the daily lives of the entire securities industry, including the vast majority who are honest, hard-working people, Wilson says. This is where there are signs of a shift.

If he is intent on playing “bad cop” on the enforcement side, Wilson may be more of a “good cop” when it comes to rulemaking. The Wilson-led OSC has yet to demonstrate where it is likely to find its equilibrium between investor protection and freewheeling markets. The OSC has published only one rule for comment (an amendment to an existing registration rule) during Wilson’s short tenure, but he indicates he may tilt more in the direction of allowing markets to function.

@page_break@He stresses the importance of “fair, efficient, balanced” regulation, but, more tellingly, interprets such qualities in a way that suggests he favours less onerous regulation.

“It sounds like motherhood, [until] you think about what those words mean. ‘Balanced’ means not too much, not suffocating. But certainly regulation has to be part of the mix. ‘Fair’ means not overzealous, or overburdensome, but fair and reasonable in the context of the activity. And ‘efficient’ means not more costly than it has to be, because regulation is a burden,” Wilson says. Everything the commission does should be tested against those ideals, he adds.

For example, on the issue of internal-control reporting requirements, Wilson hopes to come up with a version of the U.S. rule [Sarbanes-Oxley 404] that is more efficient for domestic firms. “We have to decide if there’s a Canadian version of SOX 404, with the same objective, that is more efficient and less burdensome, because this market is different and there’s a perception that the U.S. didn’t do it perfectly the first time.”

Wilson says the CSA chairs have dedicated a day of their January meeting to decide on a Canadian model of internal control reporting, suggesting it isn’t committed to a U.S.-style rule. “Whether we’ll require auditor certification or management certification, or something in between — we have to be creative,” he says.

The CSA is still mulling over whether the U.S. model, characterized by auditor attestation of highly detailed internal-control reporting, will ensure the integrity of financial reporting by Canadian firms at a reasonable price. After all, “the cost for all of this comes right out of the shareholders’ pockets,” Wilson says.

The SOX 404 model isn’t the only way to ensure adequate internal controls, he notes. In Britain, the Turnbull Committee established principles that make this type of reporting a board responsibility. In October 2005, that guidance was reviewed, and it was decided the principles-based approach has been very successful in improving internal controls. Britain decided to maintain this approach rather than shift to the more prescriptive U.S. model.

Indeed, British regulators are generally moving further toward a principles-based approach to regulation. In December, Britain’s Financial Services Authority published an action plan detailing how it intends to rely even more heavily on principles rather than rules. “We believe this can produce better outcomes for both consumers and the financial services industry by encouraging a focus on how best to act in a particular situation, rather than simply following a mechanistic process,” FSA chairman John Tiner said.

Canada already has its own advocate of principles-based regulation. Doug Hyndman, chairman of the B.C. Securities Commission, says British Columbia is driving ahead with the implementation of its more principles-based approach, although its proposed new Securities Act is more than a year past its deadline.

Hyndman echoes Wilson when he describes the BCSC’s aspirations. “We want to be less [interventionist], in the sense that we don’t think we should be dictating to securities firms how to manage their businesses, whether through rules, guidance or compliance examinations,” he says. “We want to set the framework and spell out the investor protection outcomes and leave it to the directors and management of the firms to figure out the best way for them to get there.”

The heads of the BCSC and the OSC sound more in sync than they have in some time, certainly since 2003, when the commissions engaged in a public war of words over corporate governance rules.

Wilson says Ontario will be willing to go it alone on issues about which it feels strongly. But he indicates he sees uniformity as a worthy goal — primarily because it makes life easier for issuers and registrants. Of course, if he is as concerned about the growing regulatory burden as he professes to be, the OSC may find itself less often at odds with regulators in B.C. and elsewhere.

On that front, former OSC commissioner Glorianne Stromberg, now an independent industry commentator, says: “I have great hopes for him. I hope he’s a good enough manager of people and issues that he can make a difference in how securities regulation is done in this province and in this country.”

As for the commission itself, Wilson’s biggest challenge may be making the place more efficient. Although he is accustomed to the big bureaucracy of a bank, he came up through the securities side in which a ruthless meritocracy generally rules. He is also familiar with complaints about the commission’s productivity. Wilson was part of the five-year review committee, which made recommendations aimed at improving securities regulation in Ontario. It called for the commission to take on fewer projects, speed up the rulemaking process and improve the oversight and accountability of the commission.

The Ontario legislature has just passed a bill that includes a provision to enhance the legislative oversight of the commission. It will be up to Wilson to see to issues such as faster rulemaking and more focus. Couple that with fair, efficient, balanced policies and tougher enforcement, and the OSC just might be heading in the right direction. IE