Task force recommends overhaul of Ontario Securities Commission structure

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An Ontario government task force is calling for the province’s securities regulator to be dramatically transformed, proposing an independent tribunal to hear cases and a broadened mandate that includes making economic growth a priority.

The Capital Markets Modernization Task Force, which was launched by the Ministry of Finance in February, has also proposed rules that it hopes will allow smaller, independent investment dealers to better compete against their larger rivals in the banking sector and has urged the government to ban a specific, exploitative type of short-selling.

The proposals are among 47 recommendations touted as the first wide-scope review of Ontario’s capital markets since 2003. The full list of proposals is scheduled to be released Thursday but is not final; the task force, chaired by Walied Soliman, the Canadian chair of law firm Norton Rose Fulbright, is seeking public comment before it puts forward its final list in the fall.

Among the more sweeping proposals are major structural reforms to the Ontario Securities Commission, the country’s largest. Currently, the organization is run by about a dozen commissioners who play three roles: setting policy, functioning as a board of directors and adjudicating cases of alleged wrongdoing.

The task force has called for that system to be dismantled and has proposed creating an entirely new capital markets tribunal – one that would be completely separate from the OSC and report directly to the Minister of Finance. It has also proposed a slightly less drastic option, which would create an adjudicative tribunal within the OSC.

Ontario’s securities law stipulates that the roles of OSC chair and chief executive officer be filled by the same person. The report says those roles need to be split, as is expected of the corporations the OSC oversees.

“It was time for the Ontario Securities Commission to evolve to the governance standards that it holds our issuers to across this province,” Mr. Soliman said in an interview.

Another big-picture proposal is a rejigging of the OSC’s mandate. As it stands, the commission is responsible for enforcing securities laws, but the task force has raised the idea of expanding its mission to include the “fostering of capital formation and competitive capital markets.” Such a move, it said, would “institutionally and culturally” shift the organization to consider economic growth, which would help it reduce “fees and anti-competitive behaviour.”

The task force has also floated a number of changes that it said will “level the playing field” between smaller, independent market dealers and the behemoths in the banking sector. It has singled out the practice known as “tied selling,” in which banks use preferential interest rates or incentives to compel companies to raise capital through their own affiliates. Although this is already banned by federal banking law, the task force said it heard from dealers and issuers that commercial lenders “continue to engage in these practices.”

This raises the possibility of forbidding such “exclusivity arrangements” and requiring a senior banking officer to attest that no such bundling deals have been struck. The task force also asked market participants how they would feel if, by law, a specific percentage of all underwriting arrangements across the province were required to be performed by “non-bank-owned investment dealers.”

Mr. Soliman said many of these proposals are in response to a decline in the number of smaller investment dealers. He said that when bank dealers were asked about tied selling, they denied offering such incentives – in which case, Mr. Soliman said, the proposed changes won’t affect their business.

He said the province needs to sustain independent dealers because small companies and entrepreneurs are not able to get an audience with bank dealers. “We would not have had a cannabis capital market in this province if we didn’t have small dealers,” he said. “None of the larger financial institutions were interested in getting involved in cannabis issuers because of cross-border legal issues.”

His group is also seeking to stamp out a sophisticated financial trick used by some institutional investors, a type of trading that was highlighted in a Globe and Mail report in November on the collapse of the cannabis sector. Hedge funds anticipating a new cannabis deal would short the issuer’s shares before the deal launched, knowing an offering in the works would be available at a discount. They would then cover their positions by purchasing large portions of the financing and, in effect, instantly earn a discount percentage.

This practice “harms the corporation, its shareholders and the uninformed investors trading against the short sellers,” the task force report states. The report proposes that any market participant that has previously shorted securities of the same type as offered under a prospectus should be forbidden from acquiring those securities under the prospectus.

The task force has also urged the government to give the OSC new powers to help it collect unpaid fines from market wrongdoers. Similar to changes enacted in British Columbia, it has called for new laws that would allow the regulator to freeze assets in the early stages of an investigation and force fraudsters to pay their OSC fines before they are allowed to renew their driver’s licence or licence plates.

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