This article appears in the Mid-November 2020 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
When the Ontario government’s Capital Markets Modernization Taskforce makes its final recommendations next month, it will propose sweeping changes to the Ontario Securities Commission (OSC).
Walied Soliman, chair of the task force and also chair of Norton Rose Fulbright Canada LLP, spelled out the task force’s plans at the OSC’s annual policy conference in early November. He confirmed that the task force’s final report will recommend fundamental changes to the OSC.
The task force will propose separating the OSC’s adjudicative function, rejigging the regulator’s governance and revising its mandate to include the goals of promoting innovation and competition alongside traditional objectives of ensuring investor protection and fair and efficient markets.
During the consultation phase of the task force’s work, the proposal to change the OSC’s mandate to include fostering capital formation and competitive markets was met with criticism. There were concerns that such a mandate would create new conflicts within the OSC at the expense of investor protection, which could undermine the ultimate goal of championing economic growth.
Maureen Jensen, the OSC’s most recent ex-chair and ex-CEO, attended the policy meeting. She questioned the wisdom of revising the regulator’s mandate: “My concern is that it’s very difficult to be a regulator on one hand and to be a partner in fostering new kinds of ideas and companies at the same time.”
Jensen noted that under the OSC’s existing mandate, the regulator already is expected to consider the possible effects of its rule-making on competition and to encourage innovation as part of fostering fair and efficient markets. She said she worries that amending securities legislation to require the regulator to become a partner in industry innovation would go too far.
In particular, Jensen suggested that playing the role of market booster and enforcer at the same time could be tricky.
“What happens when you begin fostering certain kinds of startups or funds, for example, and then something happens, and you have to be the regulator of those funds? You’re really, truly not independent,” Jensen said.
The risk of tilting the balance between investor protection and market efficiency too sharply in favour of promoting growth was raised by the Canadian Coalition for Good Governance (CCGG) during the consultation on the task force’s initial recommendations.
The CCGG’s letter warned that relaxing requirements to make raising capital easier for issuers in the short term could backfire if those same companies fail, taking investors’ money with them and ultimately denting economic growth. The CCGG’s letter pointed to the 2008-09 global financial crisis as an example of this sort of folly and warned against pushing the OSC too heavily toward promoting issuers’ interests.
Not all former chairs of the OSC were against expanding the regulator’s mandate. Howard Wetston (chair and CEO from 2010 to 2015), for example, is less bothered by the idea. Given that the OSC already plays a role in fostering competition, he argued during the conference that there’s nothing wrong with being more transparent.
Wetston said a legislative amendment to ensure that the OSC considers competition when making policy would be “a very significant thing to do because I think it will be a way of advancing our markets, growing our markets [and] growing our economy.”
Soliman told the conference that regulators in the U.K. and Australia, for example, already have pro-growth mandates. He said these mandates allow them to “reduce systemic barriers to growth, including fees and anti-competitive behaviour.”
Alongside a revised OSC mandate, Soliman said, the task force’s final report also will propose separating the OSC’s tribunal from its regulatory function, while also separating the OSC’s chair and CEO roles.
“We envisage, in short order, a capital markets authority with an oversight and governance board, an independent chair, and a CEO with executive and regulatory responsibility for the OSC. We envisage a separate adjudicative body of administrative experts,” Soliman said.
The same thing was proposed in 2004, following a review by Justice Coulter Osborne. In fact, the same model is proposed for the Cooperative Capital Markets Regulatory System (CCMR) — if and when that effort gets off the ground.
While there’s not much optimism about the CCMR coming to fruition — at least, in the short term — Soliman said that the task force’s final recommendations won’t impede the creation of the CCMR.
“In fact, we are excited at the prospect of additional recommendations that we feel will set the stage much better for a future national regulator,” Soliman said.
In the meantime, David Brown, who was chair and CEO from 1998 to 2005, said he’s concerned about how such a separation could affect the OSC’s standing with the courts and, ultimately, the OSC’s ability to regulate.
Currently, securities regulators are accorded a lot of deference from the courts because the former are seen as experts, Brown said, adding that he worries that separating adjudication could erode this expert status — and thus judicial deference. That erosion could leave the OSC open to more second-guessing of its decisions in court, inviting more litigation and ultimately complicating enforcement, Brown said.
“I think keeping the tribunal as part of the [OSC] is very much a part of the structure. I think it’s working, and I think it would be a mistake to separate it out,” Brown said.
Veteran securities lawyer Phil Anisman has long advocated against separating the OSC’s tribunal from other components of the regulator’s mandate. In his submission to the task force, Anisman argued that there’s a significant benefit to housing policy-making and adjudication within the same agency.
When the OSC’s commissioners are involved in developing regulatory policy, they have a better understanding of the purpose of the rules, Anisman noted. This policy knowledge can help inform the OSC’s efforts to protect the public interest in their rulings, he suggested. At the same time, Anisman’s letter suggests, the OSC’s experience hearing cases can also help shape policy-making: “The benefits of this cross-fertilization have long been recognized.”
Back in 2004, the Osborne committee heard many of the same arguments and ultimately recommended that the OSC’s adjudicative function be separated. In making that recommendation, the committee cited concerns about the perception of bias that comes from an integrated tribunal. The government at the time accepted the recommendation, but never acted on it.
Time will tell if today’s government is prepared to follow through on the task force’s recommendations.