More than principle: David Brown explains why Ontario regulator needs to adopt rules

(May 23, 2003) In a post-Enron world, securities regulators must address corporate governance in a robust manner and propose reform, says Ontario Securities Commission (OSC) chair, David Brown.

In a speech today given at the Toronto Board of Trade in downtown Toronto, Brown expressed that governing principles — a Canadian tradition — are no longer sufficient. “It is very difficult for market participants to apply principles,” he said. “It’s difficult for the courts to interpret them and it’s difficult to enforce them.”

Instead, “our principles must give birth to rules,” Brown explained. The push for new reforms stem from OSC consultations with Ontario market participants after the Sarbanes-Oxley Act in the U.S. was signed in July 2002. The act, which addresses corporate governance, has been referred to as the “new gold standard” in the world’s capital market. “The North American markets are too integrated for Canadians to think that the U.S. could adopt a new set of market standards that we could simply ignore, as though our markets have no relationship with each other,” Brown added.

Last month, amendments to Ontario’s Securities Act and Commodity Futures Act were introduced, giving the OSC rulemaking authority to promote management accountability, auditor independence and stronger audit committees. As a result, three proposed rules will be introduce on June 27 to address CEO and CFO certification of annual and interim disclosures; the role and composition of audit committees; and, to support the work of the Canadian Public Accountability Board (CPAB), as it oversees auditors of public companies.

Under the first new rule, CEOs and CFOs of all Canadian public companies will be required to file annual and interim certificates stating that they personally certify the company’s filings do not contain any misrepresentation and that the company’s financial statements fairly present its financial condition.

“Fair presentation,” said Brown, includes selecting and properly applying the appropriate accounting policies, disclosing financial information that reflects underlying transactions and disclosing any additional information necessary to provide investors with a complete picture of the financial condition. “We will not have a two-tiered approach for CEO and CFO certification,” Brown added. “If the CEO and CFO cannot stand behind the company’s financial information, the company should not be publicly traded.”

The second proposed rule requires every audit committee to have a minimum of three members and each member must be “independent and financially literate.” A committee member is independent if he or she has no direct or indirect relationship with the company. An individual’s financial literacy will be determined according to the committee he or she serves. Members will be expected to be able to read and understand financial statements at the “breadth and complexity” expected of the company’s financial statements.

The third rule will “put some teeth into the CPAB,” said Brown, adding that it will require financial statements to be audited by a firm that is in good standing with the CPAB.

Brown added that these rules mirror much of what the American act introduced, but are a “Canadian solution tailored specifically to our markets and their unique needs,” he said. “Our system and structure for securities regulation has to reflect market realities. It has to reflect the fact that we live in an interconnected world.”

A number of provinces and territories will join with Ontario in this new rule initiative, Brown noted. His goal is have the rules implemented by January 1, 2004, though Brown admitted Ontario does have a long rulemaking process.

After the release of the proposed rules at the end of the June, there will be a 90-day comment period. Should any amendments be made as a result of comments, the OSC will republish the rules and offer a second 60-day comment period. After that, they will be passed to the minister, who will have another 60 days to review them.

Filed by Jennifer McLaughlin, Advisor’s Edge, jmclaughlin@rmpublishing.com.

(05/23/03)