Political leadership missing from reform debate, says IDA president

(February 20, 2003) “Calls for regulatory reform to boost investor confidence in the U.S. are echoing throughout Canada and around the world,” says Investment Dealers Association president Joe Oliver. But if Canada is going to reform its fragmented system of securities regulation, political leaders must step up to the plate to champion the cause, Oliver said in a speech earlier this week. And that hasn’t happened yet.

“What’s missing is the political leadership,” said Oliver at the Canadian institute’s annual securities superconference on Tuesday. “Ministers responsible for securities regulation must urge participation, encourage compromise and champion legislative follow-up. The provinces have the opportunity to reform the structure and deal with the content.” Action is required now, otherwise things could get a lot worse, warned Oliver. “In spite of our problems, it is not beyond our capabilities to make the system worse.”

Without political leadership, he said, it will be difficult to find a solution that deals with both regional and federal interests. “The problem is quintessentially Canadian,” Oliver pointed out. “The provinces are occupying the field, while the feds believe national interest is on their side. The solution awaits a crisis.”

“What cannot be accepted,” added Oliver, “is opposition to a national commission from decision-makers who are unwilling to support substantive improvements in the present system. The status quo is simply not an option.”

Last year, federal Finance Minister John Manley appointed Saskatchewan lawyer Harold MacKay to look into ways to improve Canada’s system of securities regulation. MacKay recommended the creation of a “wise persons” committee for further study, but the idea appears to have stalled amid reports of opposition from some of the provinces. However, in his budget speech on Tuesday, Manley said Ottawa is still committed to the concept.

In his speech, Oliver also warned against the wholesale adoption of U.S.-style regulatory reforms, such as the Sarbanes-Oxley Act, to restore investor confidence. While he agrees with many of its proposed initiatives, they don’t all serve the unique requirements of Canadian capital markets. Canada-U.S. harmonization is important, he said, especially when it comes to the 177 interlisted Canadian companies. But the proposals pose major challenges for small- and medium-sized businesses in Canada. In particular, aspects of the stringent criteria for audit committees are problematic, even “over the top” when it comes to guidelines for financial expertise. “Apparently even Warren Buffett would not qualify,” he said.

Oliver also asserted that many existing Canadian corporate governance and securities rules are superior to U.S. rule changes. For example, when it comes to research analysts, the IDA’s proposed Policy 11 is more comprehensive, he argued. While U.S. rules require disclosure only, Policy 11 prohibits research reports prepared by an analyst who is an officer or director of the company. Moreover, the IDA covers the fixed income market — U.S. rules do not. He also pointed out that the IDA’s proficiency standard for analysts — the Chartered Financial Analyst designation — is far ahead of the National Association of Securities Dealers, which ignores this mark altogether.

In a letter to Federal Solicitor General Wayne Easter, Oliver recommended the creation of a specialized, integrated capital markets investigation unit. It “would combine legal, investigative, forensic accounting and regulatory expertise to investigate and prosecute white-collar crime. This would signal Ottawa’s seriousness about the problem and make a real difference in enforcement.” Similarly, Oliver said the IDA is requesting that the provinces “establish special courts that can effectively deal with lengthy and complex securities and corporate malfeasance.”

[Editor’s note: As part of Tuesday’s federal budget, Finance Minister John Manley announced provisions of up to $30 million a year for a new national enforcement effort aimed at strengthening the investigation and prosecution of corporate and market-related fraud. For full details and Oliver’s post-budget reaction to this news, please click here.]

Is Oliver on the right track? Do you agree with his suggestions for securities regulation reform? Share your opinions and ideas in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

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Caroline Cakebread is a Toronto-based investment writer