Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 13 - Evidence, May 10, 2000

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-19, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence, met this day at 3:45 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, I call the meeting to order.

Before going to the first witness, I wish to make an opening statement.

Bill S-19 is a complex and important piece of legislation. We, both senators and staff, have spent a considerable amount of time familiarizing ourselves with this bill. We also want to familiarize ourselves with the views of our witnesses and allow them a reasonable and meaningful appearance before this committee. It is impossible to do that unless the members of the committee have had an opportunity to review the submissions of witnesses prior to their appearance. Our committee clerk, Mr. Levy, advised all witnesses in writing that they should file their written submissions prior to their appearance; however, receiving briefs or submissions the day before a hearing, which is when we receive most briefs, does not allow for thoughtful consideration.

I understand that some witnesses have indicated that they did not have enough time to review the bill and prepare their submissions. Given that most, if not all, witnesses we have heard from, and will be hearing from, have been involved in the consultation process for years, I find that somewhat surprising.

In any event, we will try to make the best of the situation. We will need to see where we are at the end of today's and tomorrow's hearings and decide whether it is necessary to hear more from these or any other witnesses.

Witnesses, as you have been informed in writing, we are asking you to divide your time between your statement and your responses to questions. There are four groups of witnesses, each of whom will have a half-hour. We would prefer you to make an opening statement of 10 minutes and have 20 minutes for questions. If you wish to use up question time, you can take more time for your opening statement, but you have half an hour either way. I am sorry to be dictatorial, but we are hearing dozens of witnesses and we must get through them. Your briefs and amendments suggested therein will be studied and that process has already begun.

I will call the first witness.

Susan Wolburgh-Jenah, General Counsel, Ontario Securities Commission: On behalf of the commission, I wish to say that we are very happy to have been invited to speak to the Senate Banking Committee about this very important piece of legislation.

We have not been involved for years in the process, unlike perhaps many people that you have heard from to date and will be hearing from in future, but we do take a keen interest in many of the issues addressed in the legislative amendments before you.

Given the breadth and scope of the proposed amendments to the legislation, we thought that what was important was to limit our remarks to the issues where there is considerable interplay today between corporate and securities law -- in particular, issues relating to insider trading and reporting, takeover bids and going private transactions, shareholder communications and proxy rules, electronic communications, the introduction of proportionate liability, and auditor independence.

On those issues, we in particular are focused on the legislative amendments in the package and are interested to note the direction you are taking in terms of the legislation.

We are very supportive of the bill in terms of the direction that it takes on these issues. We think that the efforts that have been made to eliminate duplication in regulation as between federal law/corporate law and securities law/provincial law, with respect to some of the issues addressed in the bill are very laudable. We believe they will ultimately reduce compliance costs in areas that are already effectively regulated by securities legislation.

This is an issue that we hear about all the time as provincial securities regulators. Many of our market participants and constituents find themselves having to deal with a myriad of provincial securities commissions and, on top of that, having to know what the corporate law says on any one of a number of issues that are already addressed in securities legislation.

Over the past few years, we have become more and more focused on trying to eliminate some of that burden in terms of our initiatives. I will talk more about some of those initiatives in my opening remarks.

We also think the model of reform and the direction that has been taken under the bill is a sensible one, where a lot of the detail gets moved into the regulations to permit future changes and more flexibility. This is an approach we are following as well in terms of provincial securities legislation.

The commission itself received rule-making powers about five years ago. We have found as a result that so much of what we need and want to do in order to respond to a very rapidly changing marketplace requires immediate response, where you cannot take the time to always be making changes to the legislation itself. The model that we are looking at in terms of the Securities Act itself in Ontario is one that has a framework that is flexible and sets an appropriate securities regulatory structure with broad principles of regulation and standards of behaviour and sanctions for non-compliance with requirements in the statute per se, and much of the detail of regulation in rules that can be passed by the Securities Commission.

Coincident with the commission's receiving rule-making power some five years ago was a provision put into our statute that called for a review of the Securities Act, the regulations and rules every five years. This is a ministerial committee set up by the Ontario Minister of Finance. He has struck the first of such committees, and this committee's work is currently underway. The committee began its work in February of this year.

It will be a very interesting process. One of things the committee did was to publish an issues list; that list, which is appended to the written submission before you, goes through a number of areas that the committee will be looking at. The advisory committee will be looking at ways in which the legislation may be changed, or may be harmonized, for example, with requirements in corporate law. To the extent that we can harmonize with legislation in other provinces, we will be attempting to do that. We will be looking at what you have done in the area of shareholder communication and proxy solicitation, where there is considerable interplay between the CBCA and the OSA, for example.

The provision requiring a five-year review in the Ontario Securities Act is a very important one. It is there to ensure that there is an opportunity to review the legislation on an ongoing a basis so that it remains relevant and flexible enough to respond to an ever more rapidly changing marketplace. We are delighted to be starting down that road. I think that having this bill before us will enable us to look at the way that you have dealt with some of these issues, or have proposed to deal with them, and, hopefully, we will achieve as much harmonization in these areas as we can.

In respect of insider trading, we are very supportive of the approach taken in the bill. The insider reporting provisions have been left to the provincial securities regulators. The committee's original report in 1996 correctly noted that virtually all insiders are required to file reports of that nature with the commission. The amendments in this respect will eliminate an unnecessary, in our view, level of duplication that presently exists.

Many of you may know that the Ontario Securities Act was recently amended to require insiders to report their trades within 10 days of the date of the trade. It was formerly 10 days of the end of the month in which the trade occurred and in some cases that accounted for a significant lag time. We made that amendment consistent with the legislation that exists in some of the other provinces. We are all moving to uniformity in terms of the standard across the provinces and we have also put into our rule-making powers the ability to vary those time periods by rule to the extent we want to do so in future. If, for example, at some point we find that 10 days from the day of the trade is too long, we can move to five days on a uniform basis across the country. In this respect, these developments will be facilitated by a project currently underway. It is being worked on by the Canadian Securities Administrators, which is a group of representatives from the various regulatory authorities across the country. The group is working on developing a national electronic insider trade reporting system. When it is developed, insiders will be able to simply press a button and file a report instantaneously across the country, thereby satisfying whatever their obligations are in any jurisdiction. Furthermore, the information on the reports will be available through the Internet to any members of the public who want to access the information.

We are very excited about this development. We think it will be something that the markets will want and that the public will very much want to have access to. Once that electronic system is in place and functioning effectively, the commission, with its CSA counterparts, may consider decreasing the time period for reporting and thereby enhance both the transparency of the information in the marketplace and the period of time within which it is available.

As we were looking through the bill, we noted some interesting differences; for instance, Bill S-19 continues to have insider trading provisions per se in respect of what insiders can and cannot do in terms of their trading activities vis-à-vis shares of the corporation, or call and put options and derivative securities of whatever description. There is a difference that we find very interesting, namely, that, under the bill, the CBCA currently prohibits and continues to prohibit certain buying and selling of call and put options in respect of a distributing corporation of which they are an insider. It also prohibits short selling by insiders in terms of shares of a corporations of which they are an insider. On the other hand, the Ontario Securities Act captures those securities in the definition of "securities of a reporting issuer" for the purposes of insider reporting but does not prohibit the insider from trading in such securities.

We can speculate as to the reason why the CBCA has the prohibition, whereas the OSA does not get into the issue of prohibiting those trades, but rather requires them to be reported when they occur. This is an area that we will want to look at as we look at insider trading provisions generally to see whether there is not some sense in ensuring that the provisions themselves, in terms of prohibitions, are the same. To the extent that there are differences, they do represent a trap for people who are unaware -- that is, people who are unaware that the prohibitions that exist under the corporate law are different. They are broader and more encompassing than the prohibitions that exist under the Securities Act. That is where we might try to achieve harmonization as we go forward.

Another issue that arose as we looked at the provisions is that under the Securities Act, certainly, our market participants have taken the view that they are permitted to accumulate what is known as a toe-hold accumulation position in a company with respect to which they are planning to make a takeover bid. Until they get to the 10 per cent point, or threshold, they do not need to tip their hand to the public or file a report as an insider, or an early warning report, as we call it. Many have used this provision to facilitate the takeover bid process. There is the public policy interest here in terms of facilitating takeover bids and wanting to encourage offerors to come forward and make bids. They are able to do this on a somewhat anonymous basis until they have the 10 per cent mark, at which point they must tip their hand.

The issue that arises in the CBCA is that there may be some issue as to how that provision or the toehold accumulation provisions and early warning provisions interface with the insider liability provisions in terms of liability for insider trading in a situation where one has access to confidential information. To the extent, for the purposes of those provisions, that insiders include someone proposing to make a takeover bid, one might construe that to mean that, if you were to acquire shares of a company in a situation where you were proposing to make a takeover bid, you were in possession of information about the company that others did not know, which, potentially, exposes you to insider trading liability. On the other hand, the early warning provisions make it clear that you can accumulate stock up to 10 per cent without tipping your hand. This is a nuance, but it is an important point that probably could bear some clarification in both pieces of the proposed legislation.

In terms of takeover bids and going-private transactions, we are very supportive of the approach taken here. The bill essentially says, "There is a well-developed regulatory structure in place at the provincial level. To that extent, we will get out of the field and we will incorporate some of the concepts, such as going-private transactions and the fairness and regulatory principles that follow from regulating going-private transactions, and leave that for the commissions to do across the country." That is an approach that makes a whole lot of sense. To the extent you have duplication or you even reiterate the provisions in this piece of legislation, there is an ongoing responsibility for continuing to monitor it and keep this consistent with what the provincial law says. To the extent that we now have the ability to regulate in this area through rules, which is what we have done with respect to insider bids, issuer bids, going-private transactions and related party transactions, there may be a number of situations where ongoing changes and amendments to these rules are necessary. We have the ability to make those changes without going back to the legislature for amendment, and we fully anticipate that there will be the need to change the rules as we go forward.

Recently, the Ontario Securities Commission put amendments forward to our government, as did the other provincial securities regulators on a uniform basis, as a result of the Zimmerman committee report. That report was assembled and issued years ago by a group that studied takeover bid provisions in the various securities acts across the country. They recommended uniformity in the approach; further changes to the time period within which takeover bids remain open; that bids be permitted to be commenced by way of advertisements in newspapers, and a number of other changes that the securities commissions then studied and resolved to adopt in whole. We have made recommendations to our governments across the country. Many of the provinces have enacted legislation to pick up the Zimmerman committee recommendations; however, the legislation has not yet been proclaimed. We are waiting for every province to be in position; once they have all enacted the legislation, then it will be proclaimed. We are expecting that to be in the fall of this year. That is good news from our perspective.

In terms of takeover bid regulation, this committee may be interested to know that, at the commission, we have formed a special group devoted to nothing but takeover bid regulation. A significant amount of mergers and acquisitions, or M and A, activity occurs, and we felt it was important to have a group of dedicated and expert staff to focus on this area, for purposes of policy development; for monitoring these bids as they take place in the marketplace; for dealing with contested hearings before the commission, when they come before the commission for a hearing, which is quite frequently; and for dealing with applications for discretionary relief, and so on. This group has been busy. It was just created a year and half ago and it is comprised of four people who are devoted, full time, to this area. This is something we are pleased about.

With regard to shareholder communications and proxy rules, the work that has been done here is a very good guidepost for us. Securities law has lagged behind in this area. We are looking at the U.S. changes that were made some years ago and we will be looking at the CBCA changes in more detail, hopefully through the advisory committee process mentioned earlier.

Shareholder communication is an area in which the advisory committee is very interested. We very much support permitting shareholders to communicate freely with one another. We agree that the original rationale for the restrictions in this area probably related to issues that are not as relevant today. There are other ways to deal with those kinds of abuses, without making it difficult for people to communicate with one another. These are very good developments from our perspective. We will try to harmonize our efforts in this direction, too, as we go forward.

The bill also deals with the issue of electronic communications by taking a broad-ranging approach, because so much has happened in the past few years with the explosion of the Internet and electronic information delivery. We, too, have been grappling with this. Fortunately, our statute speaks to delivery; but it does not specify the mode, except in two instances that cite prepaid mail as a delivery method. We have been able, without legislative amendment, to adopt a policy and to issue policy guidance on a national basis. That is the policy that I have attached to the submission, National Policy 11-201.

Where provincial law refers, for Securities Act purposes, to required delivery of documents, we interpret that as "effective delivery." Delivery need not be by mail, but it must be effective. In other words, there must be good delivery notice; access by the recipient to the document; evidence of delivery; and non-corruption or alteration of the document in the delivery process. Our policy addresses all those areas. This approach works well and permits us to deal with new developments in the marketplace without requiring legislative amendments.

Modified proportionate liability is an interesting aspect of the bill. We are working on a limited statutory civil liability regime for continuous disclosure. Right now, securities law provides for statutory rights of action where there is a misrepresentation in a prospectus. It does not provide the same sort of statutory right of action for misrepresentations in continuous disclosure.

Most of the information issued by companies these days falls into the category of continuous disclosure -- the press releases; the takeover bids; the proxy circulars; the financial statements. Most trading takes place on the basis of continuous disclosure. This is a project that the CSA has been working on to introduce a modified form of statutory civil liability, and it is not premised on the rule 10b-5 approach taken in the U.S. As part of our process, we adopt a deterrent model, not a compensatory model. The purpose behind these provisions is to ensure appropriate due diligence with respect to preparation of materials. The purpose is not necessarily to give everyone the right to full compensation when they are aggrieved.

We also have looked at the issue of proportionate liability in that context. We say there ought to be proportionate liability with respect to this regime for reasons articulated in the submission.

We found the approach taken in the bill rather interesting, and we will look at some of those provisions to see if we might adopt something similar in our code. There are many similarities in our work, but we have not, for example, provided for a reallocation when money cannot be collected from a defendant. We have not provided for reallocation amongst those who are left. We will look at that.

Our chief accountant is very busy looking at the issue of auditor independence. Our chairman is also very interested, because there has been a major change in the way that accounting firms do business and in the types of business they do. We are seeing a significant expansion in the range of services provided by these firms, as well as in the nature of their business relationships.

There have been minor amendments to the independence provisions of the CBCA. We will consider the many issues that arise in this area. We are looking for the flexibility that will result from including that concept in the regulations and will allow for future changes, should they be necessary.

The Chairman: You had submissions on six different issues: insider trading; takeover bids and going-private transactions; shareholder communications and proxy rules; electronic communications; modified proportionate liability; and auditor independence. We will need to deal with all of those when we study the myriad of suggested amendments. It was refreshing, though, to hear someone champion the bill, rather than ripping it apart.

Senator Kelleher: We have had tremendous correspondence and representation from all kinds of social groups -- that may be the wrong expression to use -- on the proposed amendment to section 137, which sets out what shareholders can put on an agenda. We have heard a lot about that.

What is your perspective? Does the amendment go too far? Some say it does not go far enough.

Ms Wolburgh-Jenah: I read an article by someone who espoused the view that the amendment did not go far enough. These amendments are billed as relaxing the restrictions on agenda input by shareholders, but the difficulty is with the subjective language. Agenda items must relate to the affairs of the corporation. What if someone wants to introduce an environmental code for a bank, for example?

Senator Kelleher: They resent the onus being put on the shareholder, and not on the company, to justify the item.

Ms Wolburgh-Jenah: Yes. This is a difficult area. I am sure the committee has grappled with it. There is no easy answer. The competing interests here are the legitimate interests of shareholders who are becoming more activist. In the past decade, more shareholders, institutional and retail, are showing an interest in the way corporations are run and in corporate governance. They want to put issues on the agenda. Initially, corporations may resist that.

Perhaps I am naive, but I do not foresee horrific outcomes from opening up the agenda and allowing more input. Shareholders vote with their reason. I do not believe that abuse will prevail if we allow items not yet proven to relate to the affairs of the corporation. I do not know that there is much evidence of that. Maybe you have heard similar testimony from others. Maybe you have heard testimony from the corporations.

On the other side, corporations have a legitimate interest in running their meetings efficiently without being distracted from the real business of the company by social agendas or vendettas. Although it is difficult, an appropriate balance must be struck.

I do understand the reasons for the provision. I equally understand the reasons for your question.

Senator Fitzpatrick: I found your comments very interesting. My questions have more to do with some of the things you have said than what is in the bill.

You talked about a national electronic filing for insider reports, which would be a step in the right direction even if one had to do it in less than 10 days. Could you tell me if the other jurisdictions you deal with are in agreement with that?

Ms Wolburgh-Jenah: Absolutely. The CSA have all committed to this project. When I say the CSA, I mean all 13 jurisdictions.

In practice, what happens when we have CSA projects of this kind is that we tend to have representation from the jurisdictions that have more staff to devote to the project, being more active. You have Alberta, British Columbia, Ontario, Quebec, and sometimes you have some of the other jurisdictions involved to a lesser degree, but this project is being overseen at the highest level by each of the chairs of the different commissions.

The chairs have monthly conference calls. They meet quarterly. Projects like this are monitored and status reports are fed back to the chairs on an ongoing basis. The CSA decides on a means of funding these projects before we get involved, because, obviously, the bigger jurisdictions, which can more afford to pay for the development of this kind of system, will be funding the costs up front. That is understandable because we get more of the proportionate benefits from it, or at least our market constituents do. Everyone is onside with this. We believe this will be tremendous. Many retail people and market participants want easy access to this information. We remember how difficult it was not even five or six years ago to get access to the corporate information that we required issuers to file with us. You had to go to a place called Micromedia and you had to request that they bring you the document for your review.

We now have an electronic data and retrieval system. It took a long time, but it is an amazing development given where we were not long ago. Everyone can have access through the Internet and can read the company reports.

Senator Fitzpatrick: Do you have any idea how long it will be before this can be instituted?

Ms Wolburgh-Jenah: I can tell you what I am told. The optimistic target date is the end of this year, 2000. We are working with the same group, the Canadian Depository for Securities, that took over the management and operation of the SEDAR, once it was developed. The CDS is very involved with us in the development of the electronic insider trade reporting system.

Senator Fitzpatrick: Just to make sure I have understood, you have a bit of a dilemma with respect to the insider reporting, or the accumulation of a share position on the way to being an insider and, in fact, with the intention of being an insider. You also know the intention that you have would be a takeover or an offer to be made. Is that what you are saying?

Ms Wolburgh-Jenah: Yes.

Senator Fitzpatrick: My other question is with respect to communication and the difficulty that corporations have with the depository system. Corporations can work hard to provide accurate and timely communication, but how is that then distributed to actual shareholders, because they are buried somewhere behind the depository system, particularly offshore accounts. Most corporations do not really know who their shareholders are.

Ms Wolburgh-Jenah: That is an issue. I have referred in the submission to a national policy that the CSA have called National Policy Statement 41. That policy was adopted probably about a decade ago to address this very issue. You had registered shareholders who were not the beneficial owners and yet the statute called for delivery of materials to the registered shareholders. Once almost everyone started to hold in nominee name it became, from a regulatory point of view, a bit of a farce that the legislation called for that. Therefore, this policy was developed to ensure some method of ensuring that those materials found their way into the hands of the beneficial shareholders.

We have had difficulty with this policy. It has been one of the least popular instruments that the CSA has ever adopted. We have been trying to fix it for probably the last four or five years. It has been an ongoing process of trying to balance completely competing and divergent interests in this area. We are close to finalizing it. I understand that it is coming before our commission in a few weeks' time and hopefully will address some of these issues, but certainly people have been working very hard at trying to strike a better balance than the original policy struck.

Senator Tkachuk: You mentioned that under the Securities Act of Ontario there is a mandatory five-year review period because of the changes. I could be corrected, but I do not think there is a requirement under this particular act for a mandatory review.

Ms Wolburgh-Jenah: I do not think so.

Senator Tkachuk: I particularly liked your explanation of why that was necessary. You then brought up the subject of regulation. Under the Securities Act presently and in the future, when you make your changes, will the regulations need to be tabled in the legislature for a period of time before they are implemented?

Ms Wolburgh-Jenah: I cannot speak for every other province, because not everyone has rule-making authority as we do in Ontario. We have the legislation, the statute, the regulations and then the rules. Rather than having a myriad of different places to go for answers, we were trying to streamline the process to move the content from the regulations into the rules. To the extent that we were dealing with a subject matter that is already dealt with in the act, in the regulations and now in the rules, we were trying to make it more streamlined and user-friendly.

Our process for rule-making is that rules do not go to the legislature, they are made by the commission, but they are subject to approval by the Ontario Minister of Finance. The minister has to review the rule and decide whether to accept it, reject it, or send it back for further consideration by the commission, but the commission has the ability on its own to make the rule, and the rule has the binding force of law.

Senator Tkachuk: What about the regulations?

Ms Wolburgh-Jenah: The regulations are not made by us. Essentially, we have rule-making power over everything that there used to be regulation-making power for. Anything the commission can make a rule with respect to, the Lieutenant-Governor in Council, likewise, has power to make regulations with respect to that same subject matter.

Senator Tkachuk: That is tabled in the legislature?

Ms Wolburgh-Jenah: Yes.

The Chairman: One of the things we will be studying here is the question of regulations. The way the act looks, there is less act and more regulation. The regulations, as far as I can make out, are really subject only to the whims of the bureaucracy. There is a committee that looks at regulations, but when they look at a regulation they don't have the background of the act to which it applies.

One thing we are contemplating is that regulations will need to come back to this committee once a year for review, not necessarily for hearings, as some or perhaps all of them are just technical, but so that things do not get out of hand.

Thank you for your appearance, Ms Jenah. Your presentation has been helpful.

Our next witnesses are from the Certified General Accountants Association of Canada.

Gentlemen, please proceed.

Mr. Bruce A. Hryciuk, First Vice-Chair, Board of Directors, Certified General Accountants Association of Canada: Honourable senators, it is a pleasure to be with you today from Cranbrook, B.C.

Our organization, CGA Canada, is responsible for the education, certification and professional development of more than 60,000 certified general accountants and students across Canada. Our members provide accounting, taxation and related services to individuals and businesses of all sizes, especially small and medium-sized businesses. Others occupy financial administrative and policy positions in governments, financial institutions and not-for-profit organizations.

We are a self-regulating body charged with ensuring that our members adhere to the highest standards of professional conduct.

As you know, we regularly appear before parliamentary committees, including this committee, to address public policy issues of concern to our membership and to provide our expertise to policy-makers whenever it is appropriate.

I commend this committee for its work in 1994 as part of the consultation process undertaken by the government in preparation for the tabling of amendments to the Canada Business Corporations Act. The cross-Canada hearings you undertook at the time and the subsequent report have had an important impact on the bill now before Parliament.

Our brief touches on four issues. Three of them are of particular interest to members of the accounting profession. The remaining matter, namely the shift of many of the substantive provisions of the act from the body of the statute to the regulations, is a matter of broader interest.

For brevity, I will speak to only two of three accounting issues in my remarks, but we would be pleased to answer your questions on any of the issues addressed in our written submission.

I begin with the definition of "auditor" found in clause 1 of the bill. The act's current definition begs the question: Should there be a minimum standard for auditors in the Canada Business Corporations Act? We believe the answer to that question is yes.

That raises a second question. What should that standard be? We believe that question has already been answered by Parliament in its passage of the Bank Act and the Canada Elections Act.

Permit me to elaborate. The absence of the federal Parliament from defining in the CBCA who may be an auditor or accountant under the act means that anyone can audit a federally incorporated company in some jurisdictions. In British Columbia, for example, anyone can perform an audit of a CBCA company, qualified or not. That should not be permissible. It places the public interest at risk. Investors and third parties ought to be assured that auditors meet a minimum standard across Canada and that the financial information audited or prepared by them is reasonably reliable.

In order to remove any doubt about who can prepare audits or perform other accounting services under the CBCA, we are proposing the enactment of legislative amendments that more precisely define the term "auditor."

We have proposed draft language for these amendments at page 3 of our brief. Essentially, our proposed amendments would accomplish several purposes. First, business operators who carry on business under the provisions of the CBCA would be obligated to select a qualified accountant who belongs to any of the three professional organizations in Canada.

Second, the act would conform with other important pieces of federal legislation that define "auditor" in a manner consistent with our proposed amendments. I refer specifically to the Canada Elections Act, the Bank Act, the North American Free Trade Agreement Act, and the Trust and Loan Companies Act, to name a few.

These amendments would serve to overcome what is now a barrier to the mobility provisions contained in the Agreement on Internal Trade, which was signed by all provincial and territorial governments in 1994. We know the federal government supports the AIT in letter and in spirit. The Minister of Industry, who played an integral role in the negotiation of the agreement, would want to ensure that provincial legislation does not prevent a public accountant, qualified anywhere in Canada, from serving as an auditor for a federally incorporated company.

The second issue I wish to raise deals more with regulations pursuant to the CBCA. I recognize that the regulations are not formally under scrutiny here, but many of the substantive policies are found there.

Given the broader policy implications of this particular concern, I trust that you will indulge us in this intervention. I am referring specifically to the fact that the current act and the bill before us provide, through regulation, that financial statements prepared under the provisions of the CBCA must conform to the standards set out in the handbook of the Canadian Institute of Chartered Accountants.

We are not flagging this matter to criticize the handbook or its contents. CGA Canada has no quarrel whatsoever with those standards. However, we do wish to use this opportunity to promote a policy discussion relating to the adoption in Canada of international accounting and auditing standards that are more in keeping with existing trends in the new global economy.

What does that mean? To respond briefly, adopting a set of accounting and auditing standards that cross national boundaries will allow Canadian companies to avoid the compliance costs associated with restating financial information for foreign jurisdictions in order to conform to a different set of standards. For investors, it would mean transparency and comparability of financial information in what is, irrefutably, a global marketplace.

The International Accounting Standards Committee, in cooperation with the International Organization of Securities Commissions, has been labouring to create and gain support for a core set of IASC standards. The major components of these were completed in 1998.

Convergent standards are gaining support around the world. Recent supportive statements are noted in our brief from David Brown, Chairman of the Ontario Securities Commission, and Arthur Levitt, Chairman of the United States Security and Exchange Commission, among others.

CGA Canada commissioned a report, which was published last September, entitled, "The Case for International Accounting Standards." That report detailed the many benefits of adopting IASC standards. There are many other indications that momentum is building in favour of harmonized standards.

We are not suggesting that Canada abandon its own generally accepted accounting principles. We recognize that there will always be national idiosyncrasies, such as tax matters, that require specific national treatment.

We believe that Canada has an important decision to make in this area. We have asked the Minister of Industry to refer this matter to this committee for in-depth study. We hope you will agree that you are well placed to provide a useful forum for such a policy debate and that you will join us in urging him to place the matter before you.

Thank you for your attention. I am at your disposal for any question that you may have.

Senator Tkachuk: You said earlier that anyone can perform an audit in British Columbia. Are you talking about audits of public companies or private companies?

Mr. Hryciuk: I refer to companies under the CSBA.

Senator Tkachuk: So it could be both?

Mr. Hryciuk: Yes, it could be both.

Senator Tkachuk: That means a public accountant can also do an audit of a private company, for example, and claim it is an audit; is that right?

Mr. Hryciuk: I am not sure what you mean by "public accountant." Do you mean any public accountant?

Senator Tkachuk: Yes.

Mr. Hryciuk: Yes.

Senator Tkachuk: However, not necessarily a chartered accountant; is that right?

Mr. Hryciuk: That is right; nor a certified general accountant.

Senator Tkachuk: Just who in your opinion should perform an audit?

Mr. Hryciuk: We believe that the right to audit should be restricted to members of the three professional accounting bodies, those who are members of the Canadian Institute of Chartered Accountants, the Certified General Accountants Association and certified management accountants.

Senator Tkachuk: Are there any public companies of which you are aware that do not use any one of those three?

Mr. Hryciuk: There are none that I know of.

Senator Tkachuk: What is the difference, then?

Mr. Hryciuk: Our concern is that the public interest be protected; and, rather than wait for that eventuality to occur, we are at a stage within the context of the discussion of this bill that the precise definition could ensure that it would never occur.

Senator Tkachuk: So far as I know, it has never occurred. My point is that, if it is a public company, the accountant has to reveal if he or she is a member of one of these three bodies. They do that to keep public confidence, otherwise it might hurt the company or themselves. They will not do that. What do you care if my private company decides to do an audit using my mother, for example? What is the difference? I do not have to pay her as much and it will get done. It does not matter to me; it is my own company and it is private.

Mr. Hryciuk: Senator, I assume from your question that your mother is not a member of one of the three accounting bodies.

Senator Tkachuk: That is right.

Mr. Hryciuk: The issue is that financial statements are produced for more than just your own personal use. They are used by third parties. They need to have some assurance that those financial statements have been prepared by a properly qualified individual on a proper basis. That is the main thrust of an audit engagement.

Senator Fitzpatrick: Do you have a breakdown of audits performed in British Columbia by chartered accountants, certified general accountants, and general management accountants?

Mr. Hryciuk: No, I do not have that breakdown. In British Columbia, in terms of everyday businesses, certified general accountants and chartered accountants probably do 90 per cent to 95 per cent. For public companies it would be different.

Senator Kroft: I am not wishing to invite a lot of detail in answer to the question I am about to ask, but could you highlight the most significant differences between the education and training of those in the three categories?

Mr. Hryciuk: Are you referring to the educational models of the three professional accounting bodies?

Senator Kroft: I do not wish to burden you with a long explanation. However, could you touch on what the public might see as the essential differences?

Mr. Hryciuk: Depending on which jurisdiction you are in, I am not sure that the public generally recognizes the difference. From an educational standpoint, the Certified General Accountants Association of Canada offers an at-distance educational program consisting of various levels. The program is approximately five and one-half years to six years in duration, if there are no transfer-in type of credits. In addition to that, there is a requirement that to obtain the designation each student must have a university degree upon completion. That is subject to the successful completion of what we call the pace examinations, which are a series of examinations to assure professional competency.

I know that representatives of the CICA are here. I hope that they will forgive me if I misstate their process. My understanding is that, generally speaking, to enter into their school of accountancy requires a bachelor's degree. To go through the school of accountancy takes approximately two years. They write uniform final examinations, as well as attaining certain experience, as do the certified general accountants.

I must be honest, senator, with regard to the certified management accountant stream, I am not sure it has changed a great deal over the last several years. I am not entirely sure where they have landed. It does entail entry into a professional level. Suffice it to say that I do not know enough about it to give you much detail.

Senator Kroft: In any case, it is not fair to press you on someone else's business.

With respect to the performance of the audit function, are you aware of any major difference in course work or training work that is not part of the package or curriculum of your training?

Mr. Hryciuk: No. As I said, our organization provides various levels of training. Included in those is a focus on the auditing component. We believe very strongly that our method of training equal to anyone else's in terms of preparing our members for audit engagement.

Senator Furey: Thank you, gentlemen, for coming this evening to share your views.

In your presentation, you endorsed the movement of substantive provisions from the act to the regulations to deal with rapid changes. However, you then went on to say that you would like to see new regulations thrown back at Parliament for overseeing. How would that speed up the process?

Mr. Hryciuk: As the brief sets out, we believe it is important in the rapidly changing economy and environment for it to be able to react quickly. We realize, as an interim step at least, that those regulations going back through Parliament would ensure appropriate debate and consideration. Therefore, while that may not be the most effective and efficient way of doing it, we believe it is a prudent way to proceed at this time.

Senator Furey: Even at the expense of the original purpose of transferring substantive provisions from the act to the regulations in order to speed up the process?

Mr. Hryciuk: Yes, at this point in time.

Senator Hervieux-Payette: With regard to harmonization standards, every year I attend an international conference with accountants and lawyers who come from around the world. I must tell you that we are very far from harmonizing. If we were to start to harmonize, we should start the process with lawyers who belong to different bars and who are not able to practice in every province. When it comes to the international aspect, even though I subscribe to that view, I have to ask myself this question: If I were a bank or I wanted to acquire a company, would I perform the auditing with my own people or would I use others, especially if I were to acquire a company outside the country?

Regardless of the training -- CA, CGA or CMA, would you feel comfortable in not bringing your own team in to examine the books of the company yourself? Would you just trust others and lend them, say, $100 million on the signature of a CA or a CGA?

Mr. Hryciuk: Senator, I don't have $100 million to give to anyone, but I understand your question.

The answer is that harmonization of the standards is being driven by market forces, more than anything else. Even with harmonized standards throughout, the requirements of lenders and other interested parties would be for just as much vigilance as is the case today, but those requirements would be presented in a slightly different format that would be consistent across economies around the world.

Senator Hervieux-Payette: We deal with professions who come under provincial jurisdiction. How far have the provinces come with this integration? Is it only British Columbia that now recognizes CGA and CA to be on an equal footing?

Mr. Hryciuk: Other provinces do so, namely, Alberta, Newfoundland, Saskatchewan and New Brunswick. I am sure the committee is aware that there are certain turf wars. Those will no doubt continue to the glee of Mr. Fraser and other lawyers.

Senator Hervieux-Payette: I just wanted to underline that we, alone, certainly do not have the power to resolve that issue. It is beyond the federal government's authority. I do wish the provinces would come up with more liberalization in terms of professions, whether for CAs or lawyers or others. There are big barriers between provinces in respect of many professions. Only the engineers have come to an agreement, even on a worldwide basis, so it is much easier for them practise their profession in various countries and still be recognized by the local legislation.

Mr. Ian Fraser, Legal Counsel, Certified General Accountants Association of Canada: Having had my name taken in vain, I suppose I should interject. The proposed definition of "auditor" does not intrude on any area of provincial jurisdiction. It simply does what has been done in the Bank Act and the Canada Elections Act. It is the same language and proposals. No solution to the problem of interprovincial mobility can be found in this legislation. It was not the intention of our proposal to try to solve that problem.

Senator Fitzpatrick: On the definition of "auditor," I take it you are suggesting a standard or test to allow a CA, a CGA or an MA to be tested and then to advertise that qualification as an auditor. I asked you earlier about the proportion of CAs and CGAs who carry out audits. Most people seem to believe that CAs carry out audits, but if that is incorrect, I would be interested in knowing that.

I would also be interested in knowing whether you want a standard or a test that allows the qualification of auditor for three of the accounting organizations.

Mr. Hryciuk: Yes, senator, to answer your question, there are CGAs doing audits. We are saying that a minimum standard is needed. That minimum standard is found in the wording we have proposed, that is, membership in one of the three professional accounting bodies. That is consistent with the legislation of the Bank Act, the Canada Elections Act, and the North American Free Trade Agreement Act. There is no additional requirement, but membership in those bodies should be the minimum.

The Chairman: I now call on the witnesses from the Canadian Bar Association. Please proceed.

Ms Joan Bercovitch, Senior Director, Legal and Governmental Affairs, Canadian Bar Association: Honourable senators, as you are aware, the Canadian Bar Association has played a role through consultation in the redesign of the CBCA. That role is consistent with the overall mandate to participate in the improvement of the law and in the administration of justice. Our submissions today are also consistent, we hope, with that objective.

Our brief will be presented by Mr. John McIninch, a senior corporate practitioner in Toronto who chairs the corporate law subcommittee of our National Business Law Section; and by Dr. Philip Anisman who is the former director of corporate research in the Department of Consumer and Corporate Affairs which was the precursor to the current Industry Canada. He was involved in the implementation of the original CBCA, and is a former law professor on corporate and securities law. Dr. Anisman currently practises in the area of corporate law and litigation in Toronto.

Mr. John McIninch, Barrister and Solicitor, Torys, Canadian Bar Association: Honourable senators, a comment was made earlier that many submissions on this bill have been fairly negative. That is true, but I think it is true because most of us are attempting to improve specific areas of the bill. As we tried to indicate perhaps unsuccessfully in our submission, we did not comment on the vast majority of provisions with which we agree.

The Chairman: I said to the earlier witness that her submission was a nice, refreshing surprise. That had nothing to do with your submission. Generally, the idea of coming here is to tell us what is wrong with a bill because, if it is good, there is no point in appearing before our committee.

Mr. McIninch: Along those lines, I would comment on the provision on financial assistance which reflects a remarkable improvement. It is the abolition of a regime which is a cumbersome and extremely expensive regime from a corporate point of view in terms of legal and accounting fees. That regime, to the best of my knowledge, having practised in the area for over 25 years, effectively protected no one.

To go back to Bill S-19, our subcommittee has been working for at least a decade on the CBCA and has, from time to time, made recommendations. Over the last two or three years, we have spent an inordinate amount of time addressing the 10 policy papers put out by Industry Canada.

Most of this work, as indicated in the brief, was done by the Canadian Bar Association in Ontario. The subcommittee is made up, as you could probably guess, of very busy legal practitioners. To compound the problem, those members are volunteers whom we call upon to donate their time.

Given those facts, we did spend two or three years and literally thousands of hours responding to the policy papers. We had great difficulty with the time period afforded to us to comment on Bill S-19. I need not repeat it for the benefit of those in this room, but this is a very important bill. We would like another couple of weeks to make a more complete and a less hurried response. That would allow us to improve the quality of our technical comments and to more fully digest and comment on the policy decisions which are implicit in Bill S-19.

Senator Furey: How long have you been involved in the process and were you not apprised of everything as you went along during the number of years you said you were involved?

Mr. McIninch: We were apprised as the papers went through. We were given about three weeks to make comments on Bill S-19. Our comments incorporated many of the recommendations contained in the policy papers, but many of those policy papers simply set out for our consideration one of 10 possible policy approaches.

The first time we were able to come to terms with and to see which policy alternative had been chosen and, equally important, how it had been implemented in terms of drafting, was when we received Bill S-19.

Senator Furey: Is it fair to say that, throughout the whole process, you were involved in that you had input and access to any proposed changes that were being discussed?

Mr. McIninch: We were not privy, of course, to the legislative plans or to the policy decisions behind them.

Senator Furey: The policy decisions?

Mr. McIninch: Yes.

The Chairman: We do have a problem with your submission, and I am pleased to have this opportunity to discuss with you how we can rectify the situation.

It is your right to submit 46 pages. We were given this yesterday. Your submission has 52 recommendations. I do not have a clue how we can handle your submission today because not one person here has read it. My executive assistant started reading it this morning, but there was simply no time to even begin to get into it. How do you suggest we proceed?

Dr. Philip Anisman, Barrister & Solicitor, Canadian Bar Association: The departmental officials have indicated a willingness to speak to us about the contents of our submission. Depending on your schedule, we would like, if possible, an extension of time before you go to clause-by-clause so that we may address the technical issues more fully with the department.

I echo Mr. McIninch's remark that, while we were involved in the department's request for policy analysis, we never had an opportunity, prior to the publication of the bill, to address the method of implementing the policy actually selected by the department. There are drafting issues which affect policy implementation and effectiveness, and they are difficult to deal with. They require thought.

We propose today to have Mr. McIninch give you an overview. I would propose to supplement the brief, recognizing you have not been able to fully address it. In preparing for this session, we have come across more issues which we think are significant in terms of implementation, not necessarily basic policy. We request perhaps two to three weeks to give us and the department an opportunity to address the technical issues more fully.

The Chairman: You understand that the department, once it gives us this bill, wants it out "yesterday."

Perhaps we can accommodate you.

Senator Kroft: I want to make it clear that it is a problem for us, as the chairman has clearly stated, but we want to be fair to you and to the process. We have a parliamentary schedule. There are very few days before our summer recess, and we are conscious of our time constraints.

When did you receive the bill?

Mr. Anisman: Within the last month. We had to scramble to get it. Some of us got it off the Internet. I phoned the department the day after the announcement hit the press and they sent me a copy of the bill.

All members of our committee are involved in practice and we have heavy schedules. We received the bill less than a month ago, I would say.

Senator Tkachuk: I wish to make it clear that there is no great pressure. A suggested time frame may come from the minister or the department, but as far as our side is concerned, a thorough examination is needed. The fact that it took the Canadian Bar Association this amount of time to not complete but to get a good start on its response -- and I might add this was done by volunteers -- demonstrates how complexity of this bill.

From our point of view, we have lots of time. Parliament will go on in the spring and in the fall. We should be able to deal with this by fall and then send it to the House of Commons and they will deal with it then.

I believe, Mr. Chairman, you and I both agree that clause-by-clause on Thursday is not necessary, that we can deal with it in June. We do have some time to deal with the matter.

Senator Kroft: This committee has been preoccupied with doing it right. My question was designed to make sure that the process was fair to everyone.

The Chairman: I am not trying to be adversarial, but we do have an enormous amount of legislation coming our way that we must handle. I cannot give you a deadline. I would suggest, however, that you ought to be prepared to return within three weeks and, in the interim, if I hear you right, if you can meet with the departmental officials and cut down on your 52 recommendations, many of which, on a highly cursory look, seem very technical, such as replacing an "I" with an "O" or a period with a semicolon, that would be most helpful.

Our job is to deal with policy issues. We do not deal with technical amendments. You should be able to clear those with the department, and you have indicated that you think you can do that.

Senator Kelleher: Since our witnesses will return, I have what I consider to be helpful suggestions.

One, when you have had your discussions with the departmental officials, you will still, I presume, have many recommendations for us. It would be most helpful to this committee if you could prioritize some of them. At present, we do not know which recommendations are most important to you.

My second suggestion relates to the question I put to the representatives from the Ontario Securities Commission. We have received a great deal of correspondence and many people have appeared before us to speak to the revised wording of the particular subsection of section 137. They say it is not enough. The companies have told us that we do not need to expand it. In the past we have always looked to the CBA for assistance regarding legal drafting. It would be helpful if you could comment on this issue. I do not believe you have touched on it in your 52 recommendations.

Mr. Anisman: That is one of the provisions we did not address.

Senator Kelleher: I wish to give you a second chance to do that.

The Chairman: Give us your presentation. We will not take any questions. When you are ready to come back with a slimmed-down version of your brief, we will hear you. However, that will be within three weeks.

Mr. McIninch: From a structural point of view, we will separate what are, in our opinion, purely technical drafting corrections from matters of policy.

I would now ask Dr. Anisman to address one or two areas which have come up and which we did not have time to address previously, so you will have some forewarning of our concerns.

Mr. Anisman: There are four or five issues that we have noted in our subsequent review that are worth addressing. One is an issue that has been before you previously in a submission from the Canadian Bar Association. That is the question of proportionate liability.

Bill S-19 incorporates a number of recommendations made by the Canadian Bar Association, and the Canadian bar obviously supports it. There is one provision, however, that diverges from the Canadian Bar Association's recommendations and from the recommendations of this committee, and that is the provision defining sophisticated investors and distinguishing them from unsophisticated investors. This committee, the bar and the CICA recommended a net-worth test, and there were different views as to what the appropriate net-worth test should be. The bill adopts a wholly different test. It is based on the amount of investment of a particular investor in the corporation in question, and the draft regulations would set the amount at $20,000.

We have some difficulty seeing a principle in that divergence. It does not address the question of sophistication or net worth in any way at all. What it does is impose an arbitrary level based on an investment in a specific corporation, which the regulations would peg at $20,000. On the one hand, an investor who has that investment may have a net worth that is significantly above the $500,000 recommended by the bar association, and yet that investor would be entitled to full compensation, and there would be no apportionment of liability. On the other hand, an investor who has a $25,000 investment in the corporation would not be fully compensated, even though that may be the full net worth of the investor.

Our difficulty with the provision, apart from the divergence from prior recommendations of this committee and the entities that appeared before it, is that, so far as we can see, there is no rational policy basis impelling it that relates in any way to what you were looking for, which was to distinguish people who really need the protection of full compensation from those who can participate in the more sophisticated balance that you drew with respect to proportionate liability.

The second issue that I would identify relates to insider trading. I would echo what Ms Wolburgh-Jenah said earlier. It has been very clear in the history of our insider trading legislation and takeover bid regulation that offerors are entitled to buy shares in a company they intend to make a bid for, so long as they are buying on the basis of their own plans, because those are developed by them, they are not abusing anyone, they are not using anyone else's confidential information. If there is any ambiguity in the bill with respect to that -- and there is -- that should be clarified; and we will attempt to address this issue with the department soon.

The other issue that we have identified in our submission with respect to insider trading is the question of the scope of liability. There has long been a debate about whether an insider who trades in shares of a public company in an active market should be liable only to the person who, by chance, happens to be the direct purchaser of the shares sold by the insider, let us say, if that can be proved, or whether there should be a general form of market liability. There has been a debate about whether the current CBCA imposes one or the another. Most people think the current CBCA requires privity. In an article I wrote when I was director of corporate research in the department, I suggested that the CBCA is susceptible to an interpretation that permits market liability and that it should be interpreted that way. The current draft in Bill S-19 does not address that issue with respect to liability for direct trading by an insider. In other words, it leaves the CBCA as it was with the same open question, and it is an important question.

The Chairman: Are there not precise rules as to how an insider can buy or sell?

Mr. Anisman: No, quite frankly, there are not. There are general prohibitions as to when an insider can and cannot buy and sell. Some companies have precise rules.

The Chairman: Are we not saying the same thing?

Mr. Anisman: I am not sure we are, senator.

The Chairman: I have been an insider seven or eight times, and there were openings and there were not openings. After a quarterly report comes out, there are 10 days, or whatever it is. Are those rules not precise?

Mr. Anisman: Those are not law. What I think you are talking about are the corporate policies adopted by public companies.

The Chairman: Are you saying there is no law on it?

Mr. Anisman: There is law. There is a prohibition against trading by an insider when the insider has material, undisclosed information, and there is the determination of when it is and when it is not. Corporations frequently adopt policies to guide their officers and other insiders, but that is about all there is.

The Chairman: Many companies have compliance officers, and would send a memo to directors that were considering buying X, informing them that they cannot buy or sell before a certain time.

Mr. Anisman: Yes.

The Chairman: Is that a purely internal mechanism?

Mr. Anisman: It is an internal mechanism designed to ensure that the law is followed when the corporation is planning to buy another corporation.

The Chairman: It does not have to be restricted to buying. It could involve a new development. It could be that you are about to go bankrupt. It could be any one of a number of things.

Mr. Anisman: It is designed to ensure that none of the insiders of the corporation trades when he should not. It is an attempt by the corporations to ensure compliance with the law. The law is a general prohibition, at least in the securities laws. The CBCA does not prohibit insider trading, but it prescribes liability in circumstances where insiders inappropriately trade. My point is that the determination of that liability is a difficult issue, and the CBCA treats it in two ways. One is when an insider directly trades, and it leaves open the issue as to the scope of liability. However, when an insider tips, that insider is liable for the tippee's trades only to the person who trades with the tippee. There is thus an incoherence in the section with respect to a very important issue that again we will attempt to address with the department, but it may raise a policy issue that we will come back to you on.

The Chairman: I am getting confused. Where does the CBCA begin and end, and where do securities laws begin and end? Are there overlaps and conflicts?

Mr. Anisman: There are all kinds of overlaps. I do not think there are any conflicts with respect to insider trading.

The Chairman: I do not mean only with respect to that issue, I mean generally. In other words, do we have too many laws on the one subject?

Mr. Anisman: This bill suggests that some people believe we do, for example, with respect to takeover bid legislation, from which the bill would remove the federal government. I cannot give a generic answer. The question must be dealt with in terms of specific issues and specific conflicts. There are not many conflicts, but there may be much overlap.

I would like to raise two other issues. One relates to shareholder proposals. It is not an issue that has been raised before in this committee, but one equally important as those you have touch on and, I would suggest, very basic. I am not sure of this because what I am saying is based on a reading of the bill, but I believe that the bill is intended to override the Supreme Court of Canada's decision in Verdun v. Toronto-Dominion Bank. I must confess I acted as counsel for Mr. Verdun in the Supreme Court, and lost. The bill attempts to correct that decision, I believe, by allowing beneficial owners of shares to submit proposals to corporations whose shares they actually own. I am not sure it accomplishes that. There is a technical issue, in terms of the drafting and the retention of the words "a person entitled to vote" which provided the basis on which the Supreme Court held that Mr. Verdun lacked status to submit a proposal. That is another issue which is quite important and it is not clear that the bill addresses it. I think the drafters intended to do that, but I am not sure. That is an example of the difficulty of seeing the implementation of policy for the first time. It is another issue which we will attempt to address with the department, one on which we may be back before the committee.

The final issue I wish to raise with you today is one that relates to regulations and the making of regulations. Everyone who has appeared before you ahead of us has referred to the fact that this bill will relegate to regulations a number of detailed issues that may need to be dealt with more expeditiously than can be done through Parliament in terms of the time needed to address them. The current provisions of the CBCA contemplate a notice and comment procedure for regulations. They contemplate that, before regulations can be adopted, drafts will be published and a time will be permitted for interested people to comment on them. This is mandatory under the CBCA now. I should add that it is also mandatory under the Ontario Securities Act for rules made by the commission.

The Chairman: To whom are comments made?

Mr. Anisman: In the case of draft regulations, at the moment they are published and comments are made to Industry Canada.

The Chairman: Personally, I find that unacceptable, but I do not know what my fellow members think.

Mr. Anisman: Let me explain why it is there. It is not the only mechanism for accountability, but it is one mechanism that requires that proposed regulations go out to people who will be affected by them. Those people then have an opportunity to address them, just as we do this legislation, before they come into force. Any unintended matters or policy issues which may require consideration and consultation have an opportunity to be addressed by the people affected. It is a mechanism of accountability. It is not the only one, and it is not the exclusive one.

Once the notice and comment process is followed, then regulations, when adopted, follow the normal process for regulations. They could be complemented by the annual review which you suggested earlier, senator.

Our point is that, in view of the broad delegation of law-making power that will follow under the provisions of Bill S-19, a notice and comment procedure should be a mandatory element. The bill deletes the mandatory requirements from the CBCA. Our recommendation is that they be reinstated.

Those are our immediate submissions. If there are any questions of specific importance you wish to address today, we would be pleased to do so.

Senator Kelleher: You commented on the irrational reasons for the change with respect to the provision concerning proportional liability. Please discuss that with the government officials when you see them because, what happened is that we all agreed on how the provisions should read, but the government came back and told us that they did not think they could work with that. They said it would cause problems and asked us to consider an alternative. To keep them happy, we came up with new criteria. This was not something of our doing or our making. In effect, they said to us, "If you want this, you will have to change this." Because we really wanted proportional liability, we went along with it and came up with other criteria.

Senator Hervieux-Payette: Are there many companies who would choose not to be incorporated under the federal legislation because of the 25 per cent rule? Would it be a great improvement if we allowed board meetings to be held outside the country? Have you heard people say, "We will not incorporate because we want to have a larger number of non-resident Canadians on our board"?

Mr. McIninch: Certainly, in my practice, we have a number of clients who choose jurisdictions that have no residency requirements. As we have said in our submission, we do not think the 25 per cent solution addresses the question at all. It will not stop corporations from choosing jurisdictions such as New Brunswick which does not have a resident Canadian requirement.

As for holding meetings outside the country, that is a completely separate question. Right now, I believe the proposal is that, if it is provided for in your articles, you can have meetings just about anywhere in the world. In my view, that is not an unreasonable compromise. I do not think corporations should be given the power to simply declare that their next meeting will be some place in Mexico that no one has heard of. If you want to hold meetings outside Canada, the requirement to specify the place of the meeting in your articles is not an unreasonable one.

Senator Hervieux-Payette: Do you know why companies want to have directors who are not residents of Canada? If you say that the 25 per cent is not acceptable, do you mean that some companies want to have only foreign directors?

Mr. McIninch: Yes.

Senator Hervieux-Payette: What is the reason for that?

Mr. McIninch: When we first considered it, we broke it down into the approach of public companies and the approach of private companies. We found from the experience of practitioners around the table that, by and large, public companies have more than the majority of resident Canadians on their boards. Thus, this provision did not trouble them.

In the case of private companies, many of them would employ unanimous shareholders' agreements which have the effect of taking all powers away from directors and have the shareholders directly run the corporation.

Between those two facts, if you will -- the fact that public companies had more than what is required by the law and that private companies tended to use USAs to get around the law -- we thought the proper recommendation to make to this committee, and the one we did make, was to abolish it. Backing up that abolishment was the practice we have witnessed, which is increasing in frequency, of companies deciding, "We simply want the same directors. We do not want to go through this unanimous shareholder agreement with straw man, Canadian directors and running the company by shareholders' signatures. We just want it simple, clear and above board. Take us to a jurisdiction that does not have a requirement that the majority of the directors be resident Canadians."

The Chairman: Contrary to what you say, there is also the case of small Canadian companies which start here and which grow to the size where Canada is not big enough for them to do what they wish to do. They go elsewhere and find themselves doing, perhaps, 5 per cent or 6 per cent of their worldwide business in Canada and, ergo, need directors who have expertise in other parts of the world where they are active.

Mr. McIninch: Yes, that is a possible scenario.

The Chairman: That is more than "possible." I have been on the board of such a company. There are probably a couple of dozen of them.

Mr. McIninch: Mr. Chairman, I was asked in my experience if a fair number of companies avoid the CBCA for that specific reason.

The Chairman: I think that the marketplace will probably dictate that.

Mr. McIninch: Yes. I think it is already dictating that.

Senator Hervieux-Payette: Are there other circumstances where we would allow companies to have directors from outside of the country but, when it comes to, in the case of Quebec, if you go to the caisse des dépôts, there is a requirement to have money coming from there. It is not in the legislation, but if you are in fact dealing with one of the major lenders and investors in Quebec, it is a requirement. They do that indirectly. Is that something you see in other jurisdictions?

Mr. McIninch: I have certainly not encountered it elsewhere.

Mr. Anisman: The distinction there, if I may, is that there is a difference between economic needs and a corporation's wish to accommodate a major investor and imposing a requirement that corporations can easily avoid when they do not have those kinds of economic demands.

The Chairman: You are very delicate. They accommodate the major investors. They do it or else, it seems to me.

Mr. Anisman: That is an accommodation.

The Chairman: Thank you for your time. Please come back within three weeks. By that time we may have a head start. We only received your brief yesterday. Try to come back with something that is simplified.

Mr. McIninch: Mr. Chairman, we will certainly do that. Again, I apologize. You would have received it earlier if we could have produced it earlier.

The Chairman: We all want to do the best job possible.

Senators, our last group of witnesses is from the Canadian Institute of Chartered Accountants.

Mr. Michael Rayner, President, Canadian Institute of Chartered Accountants: GoWe are pleased to appear before you today to comment on Bill S-19. With me today is Mr. Ross Walker, Chairman of the CICA's Legal Liability Task Force, and Ms Diana Hillier, the CICA's director of assurance standards.

With respect to our presentation today, Mr. Walker will outline our views on the liability provisions of Bill S-19. Before he does that, on behalf of the institute, I would like to thank the Senate Banking Committee for the considerable time spent over the years examining the issue of modified proportionate liability. I would like to express our appreciation for the committee's efforts in bringing forward two landmark reports in 1998 in support of change, reports which formed the basis for the liability amendments contained in Bill S-19.

Following Mr. Walker's remarks, Ms Hillier will provide our comments on certain of the governance-related elements of the bill. I can assure you that we have cut a few paragraphs out and can do this in 10 minutes. I will make closing remarks, following which we will be happy to respond to questions.

Mr. Ross Walker, Chairman, Legal Liability Task Force, Canadian Institute of Chartered Accountants: Mr. Chairman, we are pleased that Bill S-19 responds to the threat posed by joint and several liability by establishing a modified proportionate liability regime under the CBCA and the Canada Cooperatives Act. These reforms are a key recommendation made in the 1998 Senate Banking Committee report to implement a modified proportionate liability regime to claims related to the dissemination of financial information issued under the CBCA and the financial institution legislation.

Bill S-19 contains provisions that will largely make liability proportionate to the degree of fault. We note that joint and several liability will continue to apply for claims made by all plaintiffs that relate to fraudulent or dishonest conduct of a specific co-defendant. Joint and several liability will also continue to apply to claims for which a plaintiff's financial interest is below a prescribed threshold. This is intended to provide protection to small plaintiffs. This financial interest threshold has been set at $20,000 under the regulation, an amount which we believe is appropriate. There is also a mechanism called judicial discretion which would permit the courts to consider special circumstances and allow plaintiffs the protection of joint and several liability even though their financial interest exceeds that threshold.

The modified proportionate liability regime will apply to most defendants in claims above the financial interests threshold because it applies to financial loss arising out of error, omission, or misstatement in financial information concerning a corporation that is required under these acts or the regulations. This means that everyone involved in preparing, reviewing, approving and disseminating defective financial information -- for example, management, directors, auditors and lawyers -- would be subject to modified proportionate liability with respect to the claims based on that financial information. Whether they are actually involved with that information, as just set out, or whether they merely relied on it, as would be the case with a valuator or financial advisor, they would be subject to modified proportionate liability.

In our discussions with Industry Canada, we have identified two areas where we believe that there should be amendments in order to bring greater clarity to the amendments.

The first amendment is to replace the word "defendant" in proposed section 237.2(1) with the words "person or party." This is necessary to ensure that the modified proportionate liability regime would operate the way it was intended. Without it, joint and several liability would actually continue to apply to claims under which there was only one defendant sued by a plaintiff, even though others may also be responsible for the loss.

Proposed section 237.2(2) contains a list of exemptions to the modified proportionate liability regime; however, the section stipulates that a government agency is exempt from modified proportionate liability if a substantial part of its activities does not involve trading or investing. We are concerned that this wording could be confusing and suggest, therefore, that the wording be amended so that it is phrased in a positive fashion, as suggested on pages 3 and 4 of our written submission.

We understand that Industry Canada is in agreement with the need to bring forward amendments to address these two issues.

Thank you on behalf of the profession and my fellow members of the CICA Legal Liability Task Force for the work you have done on this issue.

Ms Diana R. Hillier, Director, Assurance Standards, Canadian Institute of Chartered Accountants: Mr. Chairman, we are pleased to see that many of the proposals contained in Industry Canada's discussion papers have been reflected in Bill S-19. We believe that these amendments will go a long way toward eliminating duplication, harmonizing jurisdictional differences, harmonizing corporate legislation with other legislation, in particular, securities legislation, and simplifying reporting and compliance requirements.

While our presentation today focuses on directors' liability and provisions affecting auditors, our written submission provides input on further issues such as financial assistance and related provisions, shareholder communications and proxy solicitation proposals, going private transactions, insider trading and takeover bids. It is in the best interests of Canadian companies that the best and brightest be recruited to serve as directors. In order to respond to this need, directors need to be given adequate protection against personal liability in circumstances where they have exercised their duties in good faith and with due diligence. In this regard, we were pleased to see the inclusion of a due diligence defence for directors contained in the bill.

We believe, however, that further clarification to directors' responsibilities are warranted. First, further definition of the act, of what constitutes the "best interests of the corporation," is desirable. We are not completely confident that leaving the interpretation of this phrase to the courts will necessarily be more successful in the future than it has been in the past. The CICA believes that a clear legislative delineation of directors' fiduciary duties would be useful.

Second, we believe that the description of "directors' responsibilities" in subclause 102(1) should be clarified. The bill makes reference to directors managing or supervising the management of the business and affairs of the corporation. While we were pleased to see the addition of the word "supervising," we believe that the continued use of the world "managing" in describing the directors' responsibility confuses the governance role of the directors with the management role carried out by others. We suggest specific alternative wording in this regard on page 5 of our submission.

Third, we would also like to see directors' duties clarified to explicitly include a requirement to ensure the corporation has appropriate control and information systems to manage its affairs, and support the directors in discharging their responsibilities.

I would now like to turn to the provisions in Bill S-19 affecting auditors. We are pleased to note the proposed technical amendments to strengthen the auditor's role in the corporate governance process. We believe that requiring management to provide shareholders with an explanation as to the reasons for replacing an auditor, and giving both the successor and former auditor the opportunity to make comments, will help protect shareholders.

There are three other matters affecting auditors, however, that we believe should be considered in the context of Bill S-19. We note that Bill S-19 proposes to amend the definition of "independence" in section 161, which defines the circumstances when an auditor is deemed not to be independent. This section has been amended to refer to not only "the person or the person's partner," but also the person's "employee or shareholder."

We understand that Industry Canada's intent in making these amendments was solely to accommodate incorporated forms of organization for professional services firms. We agree with the addition of "shareholder" to that definition, since it allows for an auditor that is incorporated. We are concerned, however, that including the word "employees" in the list extends the provision beyond what is reasonable. Employees would sweep into the ambit of the independence rules, those professional staff who are not involved in the engagement or even working in the same office as the auditor who performs the engagement, as well as non-professional staff such as clerical or maintenance staff. Such employees would not provide services to the client corporation, or have any ability to influence the judgments and decisions with respect to the audit of that corporation, or have access to information about the corporation in the accounting firm's files. Including such persons would exceed existing Canadian legislative independence requirements and any independence rules of which we are aware elsewhere in the world.

We recommend that the preamble to subclause 161(2) be amended. Deleting the word "employee" would retain the intent of the existing independence provisions in the current act, while accommodating incorporated forms of organization. We have discussed this matter with officials at Industry Canada and understand that the department will be giving it serious consideration.

On another matter, we are concerned that management may become increasingly reluctant to provide complete access to legal correspondence files to auditors, fearing that the information therein could lose its privileged status. Bill S-19 should contain an amendment stating that solicitor-client privilege will not be breached as a result of privileged information being made available to the auditor in the performance of the audit. We suggest specific wording, based on the New Brunswick Evidence Act, on page 7 of our written submission.

Mr. Rayner: We appreciate the opportunity to present our comments to you today. We believe that the liability regime that is in the bill is one that, as much as it can, reflects the standing committee's report. Generally speaking, we are favourably impressed by the corporate governance provisions that have been introduced in this bill.

Senator Kelleher: I believe you heard the earlier submission by the CGA, with respect to the need for an expanded definition of auditors and the need for international accounting standards. Without wishing to embarrass anyone here, I feel the need to ask you for your comments on those suggestions and recommendations. Do you agree with them?

Mr. Rayner: With respect to the expanded definition of auditor, I think what the Certified General Accountants have recommended is paralleling in this legislation wording that exists already in other federal legislation. I do not believe we can oppose that. Whether that will mean that there will be any certified general accountants actually auditing CBCA corporations is then a function of provincial regulation of the accounting profession in some provinces in this country, certainly the two largest ones. There are public accounting licensing provisions that provide a test for who can in fact audit public corporations, or corporations generally. I believe that is where the issue will be resolved.

With respect to the international harmonization of accounting standards, we are very much in favour of the international harmonization of accounting standards and have been actively working with the international accounting standards committee to help it get itself into a position where its standards are acceptable on a global basis. They are not there yet. Some important changes are being introduced. We believe that, over time, international accounting standards will be at a standard where they will be acceptable in Canada. Presently they would not be as good a set of standards as Canadian generally accepted accounting principles, and we would not want to see a retrograde step and a lowering of the standards in this country.

The CICA appointed a relatively independent task force on standard setting a few years ago. That task force held public hearings, sought input from the public, and reported our recommendations which did suggest that, in due course, we should evolve towards adoption in Canada of international accounting standards once they have reached that acceptable level. You would maintain a Canadian standard setting operation simply to ensure that, where there were minor variations needed to suit the unique requirements of the Canadian economy, that would be possible and that would be done.

We also need a body in Canada to ensure that there is an appropriate due process in Canada to ensure that Canadian corporations and other interested parties have an opportunity to influence the international standard setting process.

Senator Hervieux-Payette: I want to understand your proposal with regard to the use of the word "employee." If you are conducting an audit, and you work for an incorporated accounting firm, according to general principles, if you are doing that work you would be an employee. How do you reconcile the position of an associate with that of an employee who is working for an incorporated accounting firm? I realize you referred to other employees of the firm. However, there seems to be a new trend. By that I mean, for instance, KPMG is reported as being in the process of going through a big IPO to create a worldwide firm. What will be the status of accountants in firms like that? Will they become employees, or will they retain a special status within the new corporation?

Mr. Walker: The KPMG IPO was only related to the consulting group. It did not involve the audit practice or the assurance practice. However, your point is relevant.

Ms Hillier: Our understanding, in talking to the Industry Canada, is that their intention in amending this section was solely to relate to incorporated forms of organization for the audit practice. In doing so, with the addition of the word "shareholder," we would believe you would get the act to the same position that it had been previously, where it referred to the person or his or her partner. In an incorporated form of organization, the shareholders would in fact be the partners and, therefore, you would retain the same playing field.

Our concern with the addition of the word "employee" is it would then sweep in many more people than had been contemplated previously, including, as we mentioned, perhaps clerical staff or maintenance staff, who would not be in a position to influence the decision on an audit or create an independence issue. Therefore, our concern is that by inadvertently adding the word "employee" we have created problems beyond what would be reasonable in discussing the independence of the auditor.

Senator Hervieux-Payette: I suppose the Industry Canada people agreed to that?

Ms Hillier: We did speak with them and they did agree that they would give serious attention to that proposal.

Senator Fitzpatrick: I was interested in your comments with respect to clause 119. Today, with globalization and mergers, a director at any given time can have a liability for as much as hundreds of millions of dollars in unpaid wages or unpaid income taxes. Employees or officers are stakeholders in the management of the company and may in fact be more aware of the circumstances that would lead to a situation where directors were liable for those unpaid wages or taxes.

Could you expand on that and give us the reasons for your concerns? I want to know if they are in line with the kind of thought process that I have on this.

Ms Hillier: When we were discussing that issue we were looking at the overall policy challenge of finding the brightest and best people to act as directors of a corporation. In considering a director's responsibility for employee wages, if there is a need to give priority to certain stakeholders in those circumstances, we felt that the issue was best addressed in the Bankruptcy and Insolvency Act rather than in the CBCA.

The Chairman: Thank you for your time, and your interesting and comprehensive brief.

The committee adjourned.