Regulators and provincial governments have a clear responsibility to deal with the question of confidence in capital markets David Brown, chair of the Ontario Securities Commission said at a hearing before the federal Standing Senate Committee on Banking, Trade and Commerce today. Brown tabled a report updating the committee on various initiatives designed to bolster investor confidence.

“The problem is that parts of our regulatory system are flawed – providing incentives that individuals find hard to ignore. We need to analyze these flaws in the system and correct them. We need to do that with surgical precision,” said Brown.

Canadian regulators must learn from the Sarbanes-Oxley Act – legislation brought in by the U.S. congress to cope with securities irregularities – but not adopt it wholesale. “We need to determine the exact regulatory remedies that are
right for Canadian markets.”

Public confidence in financial reporting and corporate governance, said Brown, cannot depend on individual commitment and judgment. “It must be backed up by regulation.”

Brown enumerated six principal areas where significant progress is being made: Audit Committee Roles and Composition; CEO certification; Public Oversight of Auditors; Auditor Independence; Broadened Sanctions for Wrongdoing, and Civil Liability for Continuous Disclosure.

The Ontario government introduced legislation today to amend the Securities Act to provide for civil liability for secondary market disclosure. It also proposes to strengthen the OSC’s enforcement capabilities with new powers to impose a maximum fine of $1 million for violations of the Securities Act and increase the maximum jail term for insider trading from two years to five years.

The OSC’s attention is now focused on the remaining two issues – certification and audit committees, said Brown, adding that certification will likely be legislated too. As for audit committees, Brown noted that the legislative package introduced today proposes to give the OSC the authority to make rules governing the functions and responsibilities of audit committees.