With Ontario Securities Commission powers set to increase, concerns about impartiality are growing

By James Langton | December 2002

Does the current regulatory model, which has securities commissions functioning as lawmaker, prosecutor, judge and executioner, work?

That’s a question that increasing numbers of industry players are asking as they find themselves summoned to a securities commission hearing to account for their actions. Is the process they face impartial?
For example, defendants at an Ontario Securities Commissionhearing must argue they didn’t break OSC rules against an OSC prosecutor in front of a panel of OSC commissioners. The process hardly seems fair.

While actual allegations of bias by OSC hearing panels are rare, the perception is troubling enough. It keeps people from speaking out about the system and may lead defendants to settle cases they would otherwise choose to fight. And, with the OSC set to get the power to levy greater penalties (such as fines up to $1 million), the concern over impartiality grows more acute.

The OSC formally maintains independence by requiring that the commissioner who signs an investigative order does not also sit on the hearing panel of the same case. Apart from that formality, it relies on “Chinese walls” to ensure its hearings are fair. While the walls have proven porous in the world of investment banking, the OSC insists the separation of its commissioners from staff is solid.

Susan Wolburgh Jenah, general counsel to the OSC, says the commission is certainly aware of complaints about its structure, but she remains adamant the system works and that commissioners sitting on hearing panels are independent of OSC staff.

Nevertheless, concerns remain on Bay Street. In its latest comment to the five-year review committee, Torys LLP indicated its concerns about the perceived lack of independence, particularly in the face of the commission receiving basket rule-making authority and bigger penalty powers. Torys points to the U.S. Securities and Exchange Commission’s use of administrative law judges as a possible model, although it concedes there are troubles with the U.S. model.

The final report from the review committee is still pending but, given that Ontario’s Ministry of Finance has already taken it upon itself to beef up the OSC’s powers through new legislation, it would seem that it doesn’t share the Street’s concerns. Robert Karp, the Torys partner who drafted the firm’s submission to the committee, has yet to hear a response.

Joe Groia, a former OSC staffer and renowned defence lawyer, is also worried. In a paper to the Queen’s University annual business law symposium, Groia says the OSC’s powers should be curbed rather than beefed up.

“Perhaps we need less rather than more government intervention,” his paper argues. “Our humble solution is this: let’s get back to basics. The OSC sets policy, regulates transactions and market participants, and when there is a need for remedial or enforcement measures to be taken, let that job fall to the courts and to the judges, as it has for hundreds of years. After all, what can the OSC and the Canadian capital markets lose except cases that should not be won anyway.”

Groia says the system would work better either by leaving discipline to the courts or by adopting an administrative law judge system similar to the SEC model.

“I believe that the current structure still could work, but only in policy cases and takeover bids,” says Groia. “The broker discipline should be by self-regulatory organizations; the discipline work for all others by judges.”

An administrative law judge system could work, “as long as the appeal went to court and not the OSC.” In the U.S. system, not only are the judges paid by the SEC but the SEC is also the forum for appeal of the judges’ decisions.

Other models

There are other models as well. In September, the Fraser Institute issued a report suggesting the OSC may be falling behind its international counterparts in its own governance. Among other things, the study recommends looking at Britain’s Financial Services Authority model.
“Consideration should be given to restructuring the OSC more along the lines of Britain’s FSA, so that the non-executive members of its board are no longer responsible for exercising the OSC’s administrative powers,” the report says.
Under such a structure, it notes, OSC panels could be better composed to hear its cases.

The Vancouver think tank says that model should definitely be considered if the OSC’s proposed merger with the Financial Services Commission of Ontario goes ahead. FSCO and the OSC currently have very different hearing models, with FSCO staff bringing their cases before the independent Financial Services Tribunal. The status of the OSC/FSCO merger is up in the air at this point. While it is still officially on the government’s agenda, it has received little attention amid other priorities and may have to survive yet another provincial election before its fate is known. In the meantime, there is no clear answer on how a merged regulator’s disciplinary hearings would be conducted.