Quebec’s financial watchdog has moved to toughen securities regulation and enforcement in the wake of a series of financial scandals in the province.

The Autorité des marchés financiers has recommended to the provincial government a package of legislative changes aimed at making penalties harsher for securities infractions, strengthening investigative powers and improving wronged investors’ ability to sue public companies.

“Economic crimes are just as serious for society as other types of crimes and they should be treated with the same severity,” AMF president and CEO Jean St-Gelais said in a speech to a day-long conference on market regulation in Montreal. “It’s unacceptable to allow fraud artists to believe that they can get off easy in Quebec.”

The AMF has been under pressure to look and act tough after a wave of financial scandals broke last year. The most high-profile case is the embezzlement of tens of millions of dollars from mutual funds administered by Norbourg Asset Management Inc.

The AMF has come down hard on Norbourg CEO Vincent Lacroix, charging him with 51 criminal charges under the Securities Act. Lacroix is accused of misappropriating $84 million from his firm’s mutual funds, including $18 million for his personal benefit.

Yet the questions have not stopped about whether the agency was negligent in its supervision of Norbourg and other scandal-plagued firms, including hedge-fund operator Norshield Financial Group.

Indeed, the AMF was recently named as a defendant in a $130-million class-action lawsuit brought on behalf of 9,200 Norbourg investors who lost money when their mutual funds were looted. The suit alleges that the AMF was grossly negligent in supervising Norbourg.

It argues the AMF’s performance was so bad that it should be stripped of its immunity from civil litigation in the case. The AMF has says it intends to fight its inclusion in the suit, arguing it fulfilled its obligations in overseeing Norbourg.

In his speech, St-Gelais made passing reference to the Norbourg affair in proposing a series of anti-fraud measures.

“The confidence of investors has been seriously shaken,” he says. “We must ensure that the game is fair for everyone and that cheaters will be punished.”

The measures outlined by St-Gelais include:

> allowing investors to sue public companies under the Securities Act for making false or misleading statements. Currently, investors can only use the act to sue in the case of misleading disclosures before initial public share offerings. But IPOs represent only 10% of market transactions, St-Gelais noted. Similar legislation came into force in Ontario in January;

> increase minimum fines under the Securities Act. St-Gelais says the AMF is satisfied with maximum penalties of a $5-million fine and five years in prison for each conviction, but the $5,000 minimum fine needs to be strengthened;

> require mutual fund managers to register with the AMF in the same way as brokers and other investment professionals do.

FUND MANAGERS REGISTER

“In the wake of the Norbourg affair, we believe that fund managers should be required to register with the authority, as is the case with 50,000 other participants in Quebec,” St-Gelais says. “We will then be able to establish requirements for transparency and proper management, and impose sanctions in the case of failure to comply with these requirements”;

> extend the powers of the AMF to conduct criminal investigations and prosecutions to the area of insurance.

St-Gelais hopes the government will introduce the changes in the legislature this fall and pass them in the spring session.

A broader right to sue over misleading or false statements by public companies was controversial before it came into force in Ontario at the beginning of the year. Some companies and their legal advisors have expressed concerns that it could lead to a rash of shareholder lawsuits similar to what is seen in the U.S.

On the other hand, shareholder-rights activists have complained that the legislation, Bill 198, goes too easy on companies. St-Gelais notes that the new law has yet to be used in Ontario.

Quebec Finance Minister Michel Audet says the government is currently consulting with the financial services industry on the changes proposed by the AMF. He predicts the package will help improve investor confidence in capital markets.

“If the financial services sector is going to develop, the public must have confidence,” Audet said after making a speech at the conference. “We’ve seen with the recent situations just how worrying this is for people. So, we want to deal with it.”

@page_break@The AMF’s package of reforms is just part of a busy legislative agenda on the securities front in Quebec. The legislature is considering a set of bills to harmonize Quebec’s securities regulations with those of other provinces and to implement a so-called “passport system” for securities issuers. Under the system, companies answer only to the securities commission in which their head office is located.

Audet used his speech to strongly defend Quebec’s opposition to a national securities commission in the face of a push for a single regulator from Ontario. He says Quebec needs its own regulator to meet the needs of both the public and the local industry.

“Only a Quebec regulator, present and involved, can appreciate the needs of our citizens for protection,” he says. “At the same time, the industry needs a regulator whose headquarters are in Quebec, and whose primary concern are the needs and priorities of the Quebec industry.

“Can we be certain that a pan-Canadian regulator will be sufficiently sensitive to the needs of the Quebec public and industry? Sincerely, we believe not. And that is why we are working to ensure that Quebec preserves its jurisdiction over not only securities, but the entire financial sector as well.”

Audet argues that the passport system can answer the concerns of those pushing for a national regulator. He adds that the system, which has the participation of all the provinces and territories except Ontario, will be successfully implemented.

“The passport system is without a doubt the best answer to those who are arguing for one securities commission in Canada.” IE