The Ontario Securities Commission disclosed detailed information on Tuesday about its emerging market issuers review at a time when investors are increasingly questioning the ability of Canadian regulators to scrutinize companies that mostly operate abroad.
Speaking at an OSC conference in downtown Toronto, chairman Howard Wetston told delegates the regulator is reviewing 24 reporting issuers from different industries operating in various emerging markets.
"We are close to completing the first stage of our review. A lot of effort has gone into it," Mr. Wetston said. "We are trying to determine whether these emerging market issuers, as well as those involved in bringing the issuers to market and auditing their financial statements, provided the required disclosure and conducted the required due diligence."
The review's preliminary findings have already unearthed several "governance challenges" when a company's management and the bulk of its operations are located in foreign countries, he said.
The OSC is also zeroing in on audit procedures that may be affected by foreign business practices.
Additionally, it is focusing on the "inability of Canadian regulators to access audit working papers" in instances when auditors live abroad, while also examining how local business practices influence "internal controls and risks."
Those first glimpses into the OSC's preliminary findings come at a time when the regulator is investigating Sino-Forest Corp. TRE-T and investors are asking pointed questions about whether the regulation of emerging market issuers is too lax. For his part, Mr. Wetston did not directly cite Sino-Forest in his remarks.
"First, it is critical that advisers have adequate knowledge of the emerging market issuer, its business practices and the risks of operating in foreign markets," he said. "That includes understanding the cultural norms and relationships that are needed for the emering market issuer to operate in that environment, and that's essential."
Mr. Wetston also stressed that North American due diligence processes can prove ineffective in foreign markets since they may prove incompatible with local business and cultural practices.
"I think there is a need for securities regulators to continue to review this matter," he said.
Mr. Wetston told reporters he believes the OSC may need to bring together representatives from various groups involved in helping foreign companies list in Canada – including lawyers, stock exchange officials and auditors – to develop policy ideas to reform rules. He said he has not decided yet what form such consultations should take, saying he has considered the idea of a task force but isn't sure yet whether it is the right mechanism.
Still, he told delegates that regulators are also cognizant that Canadian capital markets have a need to remain desirable to foreign listings.
"Fostering markets ... that are fair and efficient will attract both domestic and foreign issuers, but in order to ensure investor protection it may be necessary for gatekeepers and boards to step up and carry out their duties with a greater degree of vigilance and oversight."