Sweeping recommendations to reform Ontario’s securities laws are facing a barrage of criticism from certain corners of Bay Street.
The Ontario Capital Markets Modernization Taskforce, which began its review of the province’s securities laws in February, published its draft recommendations in July. The task force aims to deliver its final recommendations to the government by the end of the year, despite conducting most of its consultations amid a global pandemic.
The task force’s work has been remarkable for both its speed and its ambition, but critics say the group’s recommendations are ill-conceived, threaten investor protection and could undermine the province’s efforts for more vibrant capital markets.
The task force’s July report proposes a series of reforms largely designed to stoke growth in the capital markets. In addition to the Ontario Securities Commission’s (OSC) traditional priorities of investor protection and ensuring fair and efficient markets, the task force proposes expanding the regulator’s mandate to include an obligation to foster capital formation and competition.
The task force also recommends overhauling Ontario’s existing regulatory structure, easing a variety of constraints on raising capital, remodelling proxy voting and corporate governance, and revisiting enforcement and investor restitution mechanisms.
Many proposals set off alarm bells and, given the speed of the consultation process and the number of bold ideas in the report, perhaps that isn’t surprising.
First of all, revising the OSC’s marching orders to include a mandate to foster market growth is sparking concern. The submission from the OSC’s independent Investor Advisory Panel (IAP) warns that expanding the OSC’s mandate could undermine the regulator’s raison d’être, leaving the OSC “in the awkward and unenviable position of being seen as a cheerleader for Ontario’s capital markets when the OSC should more appropriately be positioned as a fair and objective regulator of those markets.”
Even if the government’s top priority is driving market growth, strong investor protection is a prerequisite for attracting capital, the Canadian Coalition for Good Governance (CCGG) cautions in its submission to the task force: “Reforms that risk eroding investor protection or increasing regulatory burden for investors, risk losing the patient global capital that fuels capital formation over the long term.”
The CCGG, which represents institutional investors that collectively manage $4.5 trillion in assets, states in its submission that a number of the task force’s recommendations — including measures to regulate proxy advisory firms, to give issuers more information on shareholders and to involve the OSC in the handling of shareholder proposals — are “antithetical” to the OSC’s investor protection mandate.
Various submissions propose that several of the task force’s recommendations threaten to diminish investor protection.
Securities lawyer Phil Anisman’s submission points to proposed changes to rules pertaining to accredited investors and the introduction of an offering model based on continuous disclosure (rather than by a prospectus) as measures that would erode long-standing investor protections in favour of providing issuers with new ways to raise capital.
These concerns were echoed in the submission from the Investment Industry Association of Canada (IIAC), which warns that “the many adverse consequences of [the proposed alternative offering model] would significantly degrade the reputation of Canadian capital markets.”
The IIAC also opposes proposals designed to enhance competition by pushing bank-owned investment dealers to open their product shelves to more third-party products. The IIAC’s submission notes that forthcoming changes to conduct standards in the Canadian Securities Administrators’ (CSA) client-focused reforms will address any competition concerns.
Recommendations that would introduce curbs on the OSC’s enforcement capabilities are another source of concern for those worried about investor protection being degraded.
Anisman’s submission points out that several of the task force’s ideas, if adopted, could hamper the OSC’s investigations. These proposals include provisions that would expand the ability of investment firms and individuals to resist investigative orders, limit the OSC’s power to compel compliance and weaken confidentiality requirements. In addition, the task force proposes that admissions made in enforcement settlements can’t be used in private litigation.
A number of the comments criticize these proposals — including the submission from the CSA, which didn’t include input from the OSC. The CSA’s submission warns that the proposed changes to the OSC’s enforcement capability “could ultimately impair CSA enforcement processes and undermine investor protection.”
Kristen Rose, manager of public affairs with the OSC, says the OSC’s role in the task force’s consultation “has been to provide the task force with technical input and suggest areas for potential reform.”
Alongside proposals that some fear could hamper regulatory investigations, the task force makes several recommendations for bolstering the OSC’s enforcement capability and boosting investor access to redress — such as expanding the OSC’s evidence-gathering capabilities, improving its performance at collecting sanctions, raising penalty limits and enhancing its ability to return ill-gotten gains to harmed investors.
The task force also revived the idea that the OSC’s adjudicative function should be hived off from the regulator and given to a separate tribunal. Back in 2004, an independent review reached a similar conclusion, which was accepted by the government at the time but never acted upon.
A number of comments support the idea. For example, the IAP’s states the panel is in favour of an independent regulatory tribunal, but suggests that the tribunal should report to the attorney general rather than to the minister of finance, in order to better guard against political interference.
Similar concerns arose regarding the task force’s recommendations that the chair and CEO roles at the OSC should be separated, with the CEO given performance targets by the government that are linked to compensation.
The CCGG’s submission states that the coalition “has serious governance concerns” with this idea, and notes that the government already has a variety of ways to drive policy direction at the OSC. The comment also states that the proposed structure would fundamentally violate the regulator’s independence.
Given the fundamental changes being contemplated by the task force and the speed of its work so far, some submissions call for further consultation before reforms move ahead.
“In view of the breadth of the initial proposals, the fact that the report discloses only two-thirds of the task force’s proposals, and their lack of concreteness,” Anisman’s comment suggests the task force should solicit another round of comments before making its final recommendations to the government.