Proposed securities act favours dealers and issuers, not investors
BY DAVID BAINES, VANCOUVER SUN MAY 27, 2010
On Wednesday, federal Finance Minister Jim Flaherty rolled out his proposed national securities act under the motherhood heading, "Government of Canada Moves to Protect Canadian Investors."
I think this is a misrepresentation of what this initiative is really about. It's not for the benefit of consumers, but rather for the benefit of issuing companies and investment dealers.
Issuing companies will benefit from having to file disclosure documents, such as prospectuses, with only one national commission, instead of 13 provincial and territorial commissions. Similarly, investment dealers will benefit from having to register their firms and brokers with only one national body.
This would be a long-overdue consolidation. There are obvious economies to be realized.
Flaherty should have left it at that, but he has a problem: He can't unilaterally impose a national regulatory system. Securities regulation is a provincial jurisdiction, and right now, there are two significant holdouts: Alberta and Quebec.
To mute opposition, he is referring the proposed legislation to the Supreme Court of Canada for a ruling on whether it is constitutional. Even if it is ruled constitutional, he has deemed provincial participation to be voluntary.
To generate support, he has to win hearts and minds, and he can't do that by extolling the benefits to large national corporations and brokerage firms. So he has wrapped the entire initiative in the flag of consumer protection.
"Those who commit securities fraud will face a tougher, more comprehensive regime," he said Wednesday. "No more falling through the cracks."
That sort of comment is as dreamy as former president George W. Bush's "no-child-left-behind" educational program. The reality is, there can be no material improvement in securities fraud prosecution until there is a fundamental change in the way we address it.
As it now stands, securities fraud can be addressed in two ways. The first, which is the most common, is for the provincial regulator to cite alleged offenders for breaching the provincial securities act, then take them to a hearing. If found guilty, the offender can be fined and/or banned from the market.
These sorts of administrative prosecutions are supposed to be more informal and expedient than court cases, but over time they have become terribly legalistic, cumbersome and unpredictable, which has limited the number of cases that can be processed. The new act will not change any of that.
Also, many offenders don't care whether they are fined or suspended. They simply don't pay the fine, or ignore the suspension. The proposed act will not change that, either.
The other way to address securities fraud is to take offenders to court. As it now stands, commission enforcement staff can ask Crown counsel to prosecute offenders under the Securities Act, which provides for fines up to $3 million and three years in jail. The proposed act would increase those penalties to $5 million and five years.
But so what? Such prosecutions are rare, and those who are brought to court for Securities Act violations never get anywhere near the current maximums. The new act will not change any of that.
Police can also get Crown counsel to charge offenders under the Criminal Code. The proposed Canada Securities Act supposedly makes it easier for police to gather information, but the real impediments are: police inefficiencies (they don't have the resources or systems in place to investigate cases in a timely manner); the reluctance of Crown to take on any but slam-dunk cases (which plays into the hands of promoters who cast their crooked deals as honest business failures); high evidentiary standards required by judges (most notably in finding criminal intent); and the relatively light jail sentences imposed on offenders (exacerbated by ridiculously liberal parole provisions). The net result is that there is limited criminal deterrence. The new act will not change any of that.
Flaher ty's content ion that a national securities regulator would be a tougher regulator also requires a leap of faith. The world's toughest national regulator is the U.S. Securities and Exchange Commission, but U.S. investors have still suffered horrendous frauds such as Enron, World-Com, mortgage-back securities, and Bernie Madoff.
Flaherty somehow thinks that, by shuffling a few deck chairs, he can prevent these sorts of scandals. He even had the temerity to say that under the new legislation, he would be better able to fight fraud artists like Montreal's Earl Jones. This is ridiculous. Jones ran his Ponzi scheme entirely outside the securities system. Whether the Quebec Securities Act or the proposed Canada Securities Act was in effect wouldn't have made the slightest difference.
There is something else that makes me think Flaherty's "enhanced consumer protection" pitch is baloney. A year or so ago, Doug Hyndman, then chairman of the B.C. Securities Commission, said he doubted federal regulation would provide better consumer protection. Then Flaherty seduced him and the B.C. government by offering to put Hyndman in charge of the entire initiative. They both accepted, and suddenly the idea is a panacea for securities fraud. This about-face is far too wrenching for me to accept.
In another token nod to consumers, Flaherty says the new regulatory system will include an investment advisory panel to ensure consumers are properly represented. This is shameless window dressing. Advisory panels, whenever and wherever they are deployed, are cosmetic appendages. Real power always lies with those who are paying the bills, and in the case of the national securities commission (as with existing provincial commissions) it will be the dealers and issuers who pay the bills. They will always call the tune.
Consumer protection becomes an issue only when it becomes a financial imperative for the dealers and issuers (that is to say, when loss of consumer confidence threatens their profits).
Flaherty also tried to make an economic argument that goes beyond the obvious efficiencies for dealers and issuers. He cited a study, prepared by Columbia University law professor John Coffee, concluding that Canada loses $10 billion a year in economic output and 65,000 jobs due to the current fragmented system of regulation.
I have no idea where Coffee got his figures. I think they are based on what is commonly referred to as the "Canada discount" -- the extent to which foreigners discount the value of our securities due to lack of regulation.
If this is the basis for his reasoning, I think it's nonsense. The United States is the world's biggest spawning ground for stock fraud, not Canada. If there is a discount, attributing it to our lack of regulation is an entirely arbitrary and notional exercise. It should also be noted that Flaherty paid for the study. I don't need to remind you that whoever pays the piper calls the tune (see above).
The bottom line is that national regulation is a good idea for issuers and dealers, but whether it's good for investors depends on who's running the show, what kinds of resources they have, their investigative and prosecutorial zeal, and the pragmatism of our judiciary -- none of which has anything to do with the proposed legislation.
The danger is, if we listen to Flaherty's political patter and accept his proposed legislation as a prescription for stock fraud, true reform will be placed in indefinite abeyance. That would be bad for all consumers.
dbaines@vancouversun.com
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