Move slowly on regulatory reform, policy paper suggests

(January 16, 2003) There’s no need for Canadian regulators to rush into adopting U.S. style reforms, according to a policy paper commissioned by the Capital Markets Institute at the University of Toronto.

In fact, wholesale acceptance of reforms like the Sarbanes-Oxley Act could impose “undue costs” on Canadian market participants, says the paper’s author, Christopher Nicholls, the Purdy Crawford Chair in Business Law at Dalhousie University in Halifax.

“Regulators have the luxury of time,” Nicholls maintains. “Current proposals should not be rationalized on the basis that they were the best that could be cobbled together given the urgency.

“There are sound reasons favouring regulatory patience and an informed debate on proposed reform measures.”

Sarbanes-Oxley, introduced last July in response to Enron and other scandals, includes tough new corporate governance and disclosure rules for publicly traded American companies. Provincial regulators are trying to decide how many of the new rules should be introduced in Canada.

Ontario Securities Commission chair David Brown has argued for a “made in Canada” solution that balances the need for investor protection against increased regulatory burden.

More appropriate, Nicholls says, is a “made for Canada” solution that recognizes Canada’s a small number of large inter-listed companies, large number of small public companies and higher proportion of companies with controlling shareholders.

But Nicholls admits there are no easy solutions. “Simply reciting distinguishing market characteristics does not advance the reform debate. Each proposed reform must be specifically analyzed from the Canadian perspective.”

In his paper, Nicholls suggests the push to restore investor confidence is something of a red herring. If lack of trust was primarily to blame for the recent fall in equity prices, then the declines would have happened mostly in the U.S. and improved corporate earnings would have had little positive effect on share prices, he argues. The fall in equity prices spread outside American borders and recent positive earnings announcements have triggered short-term stock rallies, Nicholls says.

It’s no surprise that investors insist on blaming stock losses on corporate scandals rather than earlier market miscalculation, he says. “It now seems apparent in hindsight that investors may have been rashly overconfident during the bubble years,” Nicholls says. “Regulators might well have been advised during that period to take steps to dampen overzealous investor confidence. However, it is doubtful they would have been applauded for doing so.

“The role of the regulator is to foster fair and efficient markets that investors can trust, not to rekindle investors’ smoldering desire to purchase stocks in order to restore battered share prices,” he says.

Nicholls believes the scandals have opened a window of opportunity for regulators. “Rarely has there been such political will to undertake significant corporate and securities law reform. Wise and long-frustrated regulators have a unique opportunity to address lingering problems.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca