Sarbanes-Oxley reforms could be modified: Pension CIO

(December 2, 2002) The chief investment officer of a major Canadian pension fund says new securities reforms in the United States could be “softened.”

Tom Gunn of the Ontario Municipal Employees Retirement System (OMERS) in Toronto says the shifting political climate in the U.S. could very well shape the reform-minded Sarbanes-Oxley Act.

Sarbanes-Oxley was borne out of scandal. The legislation passed by Congress this summer was a response to governance and accounting scandals at U.S. corporations such as Enron and WorldCom. The act requires company chief executives and chief financial officers to certify that financial statements paint a fair picture of their firm’s financial condition. The law also seeks to improve the quality and transparency of accounting services and independent audits for public companies. In addition, new criminal penalties were established for securities fraud.

“I’m not so sure Sarbanes-Oxley is going to survive,” said Gunn on November 29 during a panel discussion in Toronto, organized by the group Women in Capital Markets.

Gunn said prior to last month’s mid-term elections in the U.S., the Republican Party was seen as a friend of Enron, much to the chagrin of investors and workers. Amid the scandals, Gunn said the Republicans felt they had to be seen acting on behalf of Americans on the issue of securities reform.

However, Gunn said Republican gains in the mid-term elections may encourage those interests in Washington who want to “modify” Sarbanes-Oxley.

“Now there is a Republican Senate, a Republican House [of Representatives] and a very right-wing Republican administration; it wouldn’t be at all unusual to see a softening of this approach,” he told the audience.

OMERS is a member of the “Canadian Coalition For Good Governance,” a group of pension funds, mutual funds and money managers who came together this year to press for improved corporate governance. The coalition represents investors with $500 billion in assets under management. OMERS managed $34 billion in assets at the end of 2001.

Another panel member, corporate director and retired KPMG Canada CEO Spencer Lanthier, said independent boards of directors are the greatest source of strong governance for corporations and confidence for investors.

“I don’t think you can regulate independence. You can’t regulate honesty and integrity,” he said.

David Brown, chair of the Ontario Securities Commission, told the panel that the U.S. crisis of investor confidence spilled over into Canada. Brown has maintained that certain measures in Sarbanes-Oxley deserve consideration here in Canada, such as the requirement that executives certify financial statements.

“I don’t think we can hope that markets will solve the problem [of corrupt governance],” Brown told the gathering.

In October, Ontario Finance Minister Janet Ecker announced plans to add muscle to the OSC’s enforcement arm. Ecker unveiled proposals to raise the maximum court fine for securities violations from $1 million to $5 million, extend the maximum prison term from two years to five years less a day and allow the OSC to order offenders to disgorge ill-gotten profits. Ontario also wants to give the OSC the ability to make rules that require executives to certify that their company’s financial statements are valid.

Filed by Jim MacDonald, Advisor.ca, jmacdonald@advisor.ca.

(12/02/02)