OSC has lots of work to do, chair concedes

Income trusts, hedge funds and enforcement are just a few of the pressing issues in the securities industry regulators need to tackle, says the chair of the Ontario Securities Commission. David Wilson spoke Friday at the annual Dialogue with the OSC in Toronto.

First, the OSC chair talked about Ottawa’s surprise decision to revise the way income trusts are taxed, essentially levelling the playing field between the trust and corporate structures. Although the change is being phased-in over a four year period, “the OSC is preparing for the possible implications arising from this very important tax change,” Wilson said.

Not only is the OSC trying to anticipate any transition issues that might arise as companies adjust to the proposed tax policy, Wilson says the commission is preparing for an increase in merger and acquisition activity in the trust space.

These developments come on the eve of a report the Canadian Securities Administrators is set to release that will call for stricter regulation of trusts, specifically pertaining to the reporting of income. “In January, the CSA will be publishing a notice on income trust matters, including clarifying our expectations of disclosure and the calculation of distributable cash,” Wilson says.

The alternative asset class is another issue that is top of mind for the OSC. Since taking over the top position of Canada’s largest securities commission, Wilson has rolled out new rules that require all individuals and firms who manage hedge fund portfolios to register as portfolio managers.

Next year, Wilson wants to see that requirement extended to hedge fund administrators. He points to the important role that hedge fund administrators have on managing the day-to-day operations of the funds, including valuations and marketing plans. “I believe that this proposed registration requirement makes a good deal of sense.”

Although this focus would seem to coincide with what advisors expect will be an expansion of hedge funds into the retail space, Wilson doesn’t agree. “Among the hedge fund manufactures we have not seen evidence of a lot of interest in creating products for the average retail investor,” he maintained in an interview following the speech.

Wilson also took the opportunity to respond to an Ontario Supreme Court decision on Thursday to throw out the OSC’s insider trading case against Andrew Rankin.

“I’m very disappointed that we may have lost the ‘deterrence message’ that the previous Rankin conviction conveyed to industry players,” he says. “Regardless of what happens in the Rankin case, we will not hesitate to pursue those who misuse confidential information.”

Overall, Wilson believes that Canada can and must do better to tackle white collar crime. Immediately following Wilson’s speech, a panel of experts that included representatives from the CSA, the RCMP and the U.S. Securities and Exchange Commission took the stage and concurred with that sentiment.

Giuliano Zaccardelli, the commissioner of the RCMP, was the most blunt and colourful of the bunch. “We are on the verge of creating process constipation,” he says. “If we don’t take something that starts when we have a reason to investigate it and take it through to a reasonable conclusion, within a reasonable amount time, I think the public will continue to lose confidence in us.”

Several references were made to procedural delays, endless paperwork and the stall tactics afforded to defence attorneys that drag out cases for years without resolution. “We have to be able to move through the system,” Zaccardelli says.

Process is just one of the hindrances cited by the panel as being a detriment to enforcement practices. Michael Watson, OSC’s director of the enforcement branch, says the RCMP’s Integrated Market Enforcement Team lacks the resources to adequately deal with many of the offences brought to its attention.

“Finally, insider trading is going to become a criminal offence rather than just a regulator offence,” he said. “But the tools available to the police to investigate these crimes are terribly limited.” Even when there is activity that looks suspicious, Watson says IMET often lacks the ability to act because of the ways the laws are written. “Many aspect of our laws need to be brought into the twenty-first century.”

OSC enforcement wasn’t the only focus. An audience member asked about ways of increasing the enforcement powers of the IDA and MFDA, specifically giving these SROs the power to collect the fines they levy on the members regardless of whether they are still a registrant in the industry.

In response Watson says there has been tremendous improvement in the SRO enforcement in the past few years. The levying of fines is step one, he says, step two is to make those sanctions meaningful, although he provided no details on how that could be achieved.

Wilson had little more to offer on the issue when he was asked to expand on the topic after the panel discussion. “I’m not aware of any specific ways that we can help the MFDA and IDA,” he says. “We certainly would like them to be as effective as possible in securing sanctions and fines and any way that we can help, we will, but I’m not aware of any specific plans that we have to get involved in their sanction process.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/10/06)