OSC chair talks tough on enforcement

Canada’s regulatory environment is among the best in the world, fostering trust among both domestic and foreign investors, according to the new head of the Ontario Securities Commission (OSC). But there are still several areas which require closer attention, including getting tougher on those who undermine confidence in the markets.

“We are attempting to close the historic gap between securities regulation and criminal enforcement,” says David Wilson. “We’re building bridges with enforcement authorities in the RCMP and the Ministry of the Attorney General.

“We work closely with the Canadian Securities Administrators and are strengthening ties with the U.S. Securities & Exchange Commission. In an era when fraudulent activities can span provincial and international boundaries, regulators must be able to work together seamlessly.”

Speaking at the Canadian Institute’s annual Securities Superconference in Toronto on Thursday, Wilson acknowledged the short-comings of both rules-based and principles-based regulation, pointing out that the two need not be mutually exclusive.

“Rules offer the advantage of a clear road map; but it could just as easily constitute a map to exits and shortcuts,” he said. “Principles can be difficult to enforce. Often, interpretation is needed to compensate for a lack of specificity.

“The reality is that both are needed to achieve the most effective regulation possible.”

Wilson also alluded to a new regulatory drive on pooled investments — from hedge funds to straight mutual funds.

“Hedge funds clearly need to be reviewed, given their sudden growth and evolution,” Wilson said. “We’ve also seen high-profile problems in this industry, such as Portus.”

Wilson says he does not foresee a new regulatory regime for hedge funds per se, but that existing rules should be applied “appropriately and effectively.” Of particular concern, he said, were referral arrangements and the prospectus exemption granted to principal protected notes (PPNs).

“We need to take a hard look at whether this exemption is suitable for highly complex structured products targeted at the mass market of retail investors,” he said. “Hedge funds have extended their reach toward mainstream investors, many of whom do not have the time or the expertise to apply the same due diligence [as accredited investors].”

Hedge funds are not the only pooled investments he says need closer scrutiny. The OSC is currently working with the CSA on a rule which would effectively require mutual funds to adopt Independent Review Committees.

“Mutual fund investors are the ultimate passive investors,” he said. “Who is to look after their interests when they inevitably come into conflict with the interests of the fund managers?

“When entrusted with other people’s money, it is essential that someone truly independent of the manager is in the room.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com