Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence of October 31, 2002
OTTAWA, Thursday, October 31, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:05 a.m. to examine and
report upon the present state of the domestic and international financial system (Canadian perspective to the Enron
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: We are pleased to have as our only witness this morning Mr. Douglas Hyndman, Chair of the British
Columbia Securities Commission.
Good morning, Mr. Hyndman, and welcome to the committee.
Mr. Douglas M. Hyndman, Chair, British Columbia Securities Commission: Good morning. I have provided a
The Chairman: We have it here. Is there any part you want to read?
Mr. Hyndman: I thought I would leave the written submission with you and provide commentary for 15 or 20
minutes on matters that are in my written submission and related to it. Then we can get into questions on whatever I
say, anything that is in my submission or anything that is on your mind.
The Chairman: The committee just received your submission; it would be helpful if you could summarize it for us.
Mr. Hyndman: I will do that. Then I will turn to some other comments. I will summarize the written submission
generally and then get into more detail, if that is helpful for you.
First, let me thank the committee for giving me the opportunity to meet with you by video conference. I have flown
back and forth across the country four times in the last three weeks, and it is helpful for me to appear before you by
video conference. Given the size of Canada, it is useful to have this technology available to us to be able to share views
on mattes as important as this.
We are in a period now where, as a result of the matters that are before your committee, securities regulation in
Canada is under close scrutiny. We see articles in the press on an almost daily basis about what we should be doing and
how we should structure ourselves, or whether we should follow the rules in the U.S. and so forth.
I would say there is a very healthy debate going on about Canadian securities regulation, which I think will help us
get to a place where we can have a more effective system in Canada.
I am sure the committee is aware that there are different views held by people in the community and securities
regulators regarding the issues before you. As my colleague from the Ontario Securities Commission may have said to
you yesterday, it is important not to overstate or misinterpret these differences.
All of the securities regulators have the same objectives. We are all in favour of and striving toward effective
regulation that protects investors from abusive conduct and fraud. We are also trying to have a system that does not
overburden the industry and allows Canada's markets to be competitive.
We are all striving to have better disclosure by our publicly traded companies. We are all in favour of better
governance of Canada's companies. We are all looking for our brokers and advisers in the securities industry to
provide honest advice that is untainted by self-interest. These are the fundamental objectives we are all striving toward.
We have a very close dialogue and are working closely together on a variety of things, and moving forward on
harmonized rules in important areas. As an example, we are working to develop a harmonized set of rules governing
continuous disclosure by publicly traded companies.
We have developed and are further developing information technology systems to simplify the process for market
participants in dealing with securities regulators.
You may have heard of what we call our SEDAR system, which is the electronic filing system for all public company
information. We are developing systems for insider reporting and for registration of salespersons.
One very important initiative that we are working on right now is the Canadian Public Accountability Board. I
think my colleague from Ontario told you that we were very close to being in a position to announce the chair of the
Canadian Public Accountability Board. This new agency is being created to oversee the auditors of publicly traded
As a member of council of the governors of the CPAB, and on behalf of the council, it is my pleasure to announce
that Mr. Gordon Thiessen, former Governor of the Bank of Canada, is the first chair of the Canadian Public
Accountability Board. He will be taking up his duties, I think, effective tomorrow.
This is a very strong signal that we are serious about having a board that is effective, and that will do the job of
overseeing auditors of publicly traded companies in Canada.
We should not overstate the difference in views among securities regulators. It is also important not to understate
the differences in regulatory philosophy among securities regulators. British Columbia's Securities Commission takes
the view that we should not be imposing rules on securities market participants unless there is a clearly demonstrated
need for the rule, clear problems to be addressed, a strong reason to believe that the rule will fix the problem, and that
the benefits of imposing the rule will exceed the costs.
Some of our colleagues in certain circumstances would put the onus the other way around, that is, if a rule has been
adopted by another jurisdiction or if someone has an idea for a new rule, the onus is put on those who would oppose
the adoption of the rule rather than those who support the adoption.
Our commission is more inclined than some others to rely on market-based solutions. We think markets are more
powerful in changing behaviour than rules. We think that rules are not the answer to every problem in the market.
Rules impose costs, and investors ultimately pay for costs. Rules often have perverse effects on market activity. I would
like to briefly describe a few examples of what I mean by that.
There is a lot of discussion going on now about conflicts of interest affecting securities analysts, sell-side analysts,
and suggestions that their advice is skewed by the conflicts of interest they face in being in firms that are involved in
The U.S. stock exchanges and SROs have adopted very complex and voluminous sets of rules to address these
conflicts. There are further discussions about restructuring reporting relationships in firms in order to try to separate
the functions. We are having similar discussions in Canada. The IDA has adopted and proposed to the commissions
that we accept a rule that will impose similar restrictions in Canada. All of this is intended to force the analysts of the
sell-side firms to provide advice that is not influenced by the fact that the firm is often seeking corporate finance
business from the public companies that are the subjects of the analysts' reports.
In my view, these rules miss the point and are likely to do more harm than good. The fact of the matter is that
whatever walls you put up, whatever reporting relationships you establish, whatever rules you impose, an analyst who
is employed by a sell-side firm has an interest in ensuring that the firm he works for does well. The firm will do well if it
gets underwriting business, and it will be at risk of losing underwriting business if the analysts that the firm employs
write negative reports about the company that the firm is seeking business from.
The way this works can often be subtle, but effective. Analysts get frozen out of getting their questions answered
when they deal with firms if they write negative reports about them, and I do not say that happens with all public
companies, but it happens enough that it is a problem. Analysts will be aware that, if they write a negative report, the
public company might be inclined to take its business elsewhere. There is strong pressure on analysts to avoid writing
reports that will offend the subjects of the reports. That is why the reports that come out now are written in code. There
are always complaints about the fact you do not get enough sell recommendations. The fact is that the analysts are
writing the report in a way that is designed not to offend the subject of the report, but to put enough code in so that the
investor reading between the lines can interpret the report, draw his own conclusions and make an appropriate
If we impose rules separating analysts within firms and creating Chinese walls on all these things, that might send
signals to investors, inappropriately, that we have solved the conflict-of-interest problem. In my view, we would be
doing investors a greater service if we put a skull-and-cross-bones warning on an analyst's report from an analyst of a
sell-side firm and tell investors they should take into account the significant conflicts of interest when they are reading
and interpreting the analysis. This is an example of how I think rules not only are sometimes not effective in addressing
problems in the market, but also can have a perverse effect.
In the area of auditor independence, some rules have been published for comment in Canada recently to try to
ensure that auditors are independent of the companies they audit. For the most part, I think those rules make sense
and are desirable. One aspect of the rules is a ban on auditors carrying out certain non-audit functions. Among those
are the functions of doing bookkeeping and financial statement preparation for their audit clients. I think for the larger
clients, that probably makes sense; but for small public companies, the fact is, they generally do not have the in-house
accounting talent to prepare a good solid set of GAAP financial statements and, if they do not get the auditors to help
them prepare their financial statements and ensure they are done in accordance with GAAP, they either have to find a
way to do it in-house, which means the quality of financial reporting may go down rather than up, or they will be
forced to hire another firm at significant expense to do that work for them. I suspect that that particular rule will make
financial reporting by small public companies worse rather than better.
The audit committee's independence rules that have been adopted under the Sarbanes-Oxley legislation in the U.S,
and that some people are proposing we adopt in Canada, would require that all members of a public company's audit
committee be independent — independent of management and independent of significant shareholders. With many
companies, particularly the junior end of the market, you will get a significant investment from a venture capital firm
or a strategic investor who, in providing the investment, will want to have someone on the board, and generally will
want to have that person on the audit committee to watch out for the health of the investment. I see no benefit in
excluding those people from membership on the audit committee. I think, in many cases, they are the best people to
have on the audit committee. They are looking out for the interests of the strategic shareholder or the venture
capitalist, which are well aligned with the interests of the public shareholders. This is another example of where I think
a well-meaning rule will have a perverse effect.
Rules, in our view, create a loophole mentality. They get into detailed prescriptive requirements to try to tell market
participants in excruciating detail how to run their businesses. That leads them to search for a way through the rules
and find the loopholes. We have seen that with U.S. GAAP. We have seen that in many areas of securities regulation
where people are trying to find their way through the system and challenging the regulator to tell them where in the
rules it says that they cannot participate in a certain conduct.
Many rules that we have adopted and that are being proposed are directed at conduct that is already illegal and that
was made illegal by our higher-level principles. I say we should enforce the rules we already have before we start
adopting new rules.
Regulation is about more than imposing rules on market participants. The way to regulate effectively is to identify
real problems in the market and fashion solutions to those problems with the right mix of tools, which can be rules
where appropriate, but also enforcing existing requirements, conducting compliance reviews, educating investors and
other market participants, providing publicity about the problem to try to let the market solve it, et cetera.
In British Columbia we would argue for a more principle-based approach to regulation, trying to raise our sights
above the detailed rules and focus on broader principles of fair conduct in the markets.
Often one will find that rules obfuscate the principle rather than elaborate on it. I have a quote in my paper that
elaborates on how that works in accounting. It is a quote from David Tweedie, who is the chair of the International
Accounting Standards Board, regarding how rules create a rule-book mentality, a loophole mentality that obfuscates
principles and leads people to ask, ``Where does it say I can't do that?''
Interestingly, over the last month, we have conducted at our commission a series of focus group meetings with
market participants, issuers both large and small, accountants, lawyers, and institutional investor groups and analysts.
We have found among those people a high degree of skepticism about the utility of many of the Sarbanes-Oxley type of
rules that have been proposed for adoption in Canada. In particular, the group that we talked to that was least
convinced of the utility of the rules were the institutional investors. Many of them said that they thought these
requirements were window-dressing rather than representing real change, and that real change would best come from
That may be different from what our colleagues in Ontario have heard from market participants there. I am not sure
what that reflects, if it is different. Perhaps we have a more market-oriented approach here in British Columbia; I do
That leaves the question of what we should be doing to make regulation more effective. I would say that there are
five key things that regulators should be focusing on. We should devote our attention to the most significant threats to
investors and use the best mix of regulatory tools to fix them. We should limit the volume of the rules we impose and
make them clear and simple. We should foster a culture of compliance among market participants, helping them to
comply with the rules rather than us always having to run around and enforce them. Having said that, when people do
step offside, we must act decisively against misconduct in the market. Finally, we should educate and inform investors,
companies and the investment industry about the risks, rewards and responsibilities for those who participate in our
I talked about enforcement and I just want to focus briefly on what I call the three-legged stool of deterrence in the
securities markets. An effective system of deterrence against misconduct has three legs. One leg is regulatory
enforcement or regulation generally. The second is criminal enforcement. The third is civil liability.
Over the years in Canada, frankly, our three-legged stool has been more like a one-legged stool. Securities regulators
have been given additional and significant enforcement powers over the years. Most recently, you will see that the
Ontario government introduced legislation yesterday to give new powers to the Ontario Securities Commission. Many
of those are powers that we have had in British Columbia for over a decade, although we are also looking to update
ours. Those regulatory enforcement powers will give us additional tools to use our authority to help police the markets.
Frankly, if we want to be effective in deterring this conduct, we cannot let regulators be the only ones in the game.
For whatever reason, criminal enforcement against securities fraud and white-collar crime generally in Canada has not
been effective. It is not because we do not have talented and dedicated people in the system. There is something in the
system — and I do not pretend to have the answer to it; it is something we must work on — that results in our criminal
justice system simply not providing the results in the form of deterrence that we want and need if our markets are to be
The third leg of the stool is civil liability. Similarly, in Canada we have not had a system that really gives investors an
effective remedy to go after people who abuse and defraud them to try to get their money back, to put it bluntly.
Some changes have been proposed by securities regulators to deal with liability for misrepresentations made by
public companies. Again, the Ontario government yesterday finally introduced legislation to implement those
proposals, which I applaud. However, I think we can go further. Our commission has some proposals that we
published for comment that would introduce broader civil remedies for investors and to go after anyone who engages
in securities fraud, misrepresentation or unfair practices in the securities markets. We are test-marketing that proposal
now and will be developing it further over the coming months.
Let me turn, finally, before I conclude this opening statement, to a brief description of a program that we have been
pursuing at the British Columbia Securities Commission for several years now. It is a project to streamline and simplify
our rules. We started in the summer of 2000 with a streamlining program and reviewed all of our local requirements.
We eliminated 140 instruments of various types, and streamlined and put into plain language with a consistent
numbering system most of what remained. That dealt with the back end of our rule book, the blanket orders and
policies that we have locally in British Columbia.
As of October 2001, we stepped up that effort and established what we call our deregulation team, which is a bit of a
misnomer because it is not deregulation in the sense that is implied in some other fields of regulation. It is really a more
aggressive streamlining and simplification program. It has been going through two phases. We first did a high-level
review, out of which we came up with major proposals to simplify some significant and important areas of securities
regulation. Those proposals have been out for comment several times. The most recent comment period ended a few
weeks ago. We are now reviewing the comments and developing those proposals further.
We have now moved into the second phase of the project that we call our detailed review. The detailed review is
more of a zero-based examination of every section of the act, our rules and policies, and asking some basic questions
about whether the individual requirements still serve a useful purpose and, if so, whether they could be drafted in a way
that would address the problem they are directed at more effectively.
At the end of this, we are seeking to develop a system of regulations that is more effective and less burdensome,
which is a win-win-win situation for investors, for industry and for Canada's economy. It would be best if we could
adopt a national system in Canada, if all securities regulators would buy into it but that, at the moment, seems to be a
long shot, given the philosophical differences between different parts of the country.
I would encourage your committee, if you agree that that approach has merit, to add your voice to those who are
calling for a new approach to securities regulation, a simpler and less burdensome system of regulation for Canada's
Mr. Chairman, I have essentially covered what is in my paper. I should be happy to elaborate further or to answer
any questions that the committee members may have.
Senator Fitzpatrick: Mr. Hyndman, it is refreshing to hear you say that you are prepared to battle the complexities
and limit the volume of rules. In reading the results of your high-level review, I am most interested in the subject of
continuing market access, which is desirable. I question how that can work on a timely and cost-efficient basis, and
disseminate information fairly to all or potential investors. The problem that we have is that the professional houses,
and they may vary in size, may have different abilities to access the information.
Are you able to outline to the committee some of the ways you think that this would happen, so that there would be
full disclosure, that it would be understandable and that it would be disseminated on a fair basis so that all investors
would be able to access it?
Mr. Hyndman: I would be happy to do that. This is not a new idea that our commission came up with. It has been
kicked around for some time. There was a study done in the United States in the mid 1990s which resulted in the
Wallman Report, after SEC Commissioner Steven Wallman. He recommended a similar system for the U.S. market,
although his was more limited in the sense that he was focussing on the largest companies only. We think his proposals
could work for all publicly traded companies. The continuous market access system in our proposals is a variant of a
general concept we call the integrated disclosure system.
Traditionally, securities regulation has focused attention on disclosure in prospectuses, disclosure done by
companies at the time they are doing public offerings. We have devoted less attention to the ongoing disclosure
provided to the market. However, the fact is that offerings by companies account for somewhere less than 5 per cent of
the trading in the market. Most investment decisions by investors are made in the secondary market, buys or sells. In
doing those, they are relying on the continuous disclosure information provided by the companies.
Companies may not do a prospectus every year. In fact, our studies indicate that many go many years between filing
prospectuses. We do not think it is appropriate that a full and comprehensive disclosure by the company should wait
that long. It should only happen when a company happens to be doing a public offering. This is not controversial. This
is a direction that big Canadians securities administrators are moving in.
I mentioned that we are working on a harmonized and continuous disclosure rule for public companies. The idea of
that rule is to raise the level of disclosure that is provided on an ongoing basis by companies, by ensuring that they
make an annual filing that provides disclosure. I will not say that this should be done at a prospectus level, because
prospectuses have become too long and complicated and contain more information than anyone needs or wants. We
can have full and true disclosure of everything that is truly material made on an annual basis by public companies and
have that supplemented on an ongoing basis as material developments occur in company affairs.
It is feasible to have that process made available to investments. All corporate filings are now on the SEDAR Web
site that I mentioned earlier. Our regulatory Web site makes the information available to anyone who has a computer
and a modem, which seems to be an increasing number of people and certainly most investors. Companies now have
their own Web sites, as do dealers. Information can be made easily accessible to investors, brokers and to anyone
interested in a particular company.
Our continuous market access proposal would say that if we can get companies up to that level where on any day of
the year you can look at their disclosure record and have everything you need to know about the company to make an
investment decision, there is no longer any need for companies to file prospectuses when they want to make public
offerings. We can make the public offering process much simpler.
Our commission has been working on a cost-benefit analysis of this proposal. We hope to publish that analysis in
the next week or two. The work is based on a survey of companies that have done public offerings in Canada over the
past two years. We have found that there would be major savings in time and expense for public companies if we could
implement a system like this. The savings from making the public offering process simpler would vastly outweigh the
increased cost the companies would incur in maintaining a continuous disclosure record, as I have described it. This is
a proposal with much merit.
This is not a proposal where we have fundamental differences of opinion with colleagues in other jurisdictions,
although we do have differences of opinion about how far and how fast we should take that change in the structure of
disclosure and offerings.
Senator Fitzpatrick: I assume you would be required to obtain approval from all of the other jurisdictions before
you would be able to proceed with this. I presume that this brings us to the question of whether to have a national
What will happen with a company in British Columbia that is under your jurisdiction and is trading on the Toronto
Stock Exchange, for example? You would have to have compliance with the Ontario Securities Commission and the
Toronto Stock Exchange. What kind of progress are you making in that regard?
Mr. Hyndman: We have agreement that we should be moving in that general direction. We do not yet have
agreement in regard to going as far as we are proposing or doing it in as short a time frame as we think we can to
implement it. However, we are moving in the right direction.
Senator, you are right, it would be most desirable if this proposal were adopted nationally, whether by a national
commission or by all of the provincial commissions under our current structure.
We are looking at the possibility, if others are not prepared to move, of proceeding locally and building a
harmonized interface. Clearly, that is not the most desirable solution.
Senator Fitzpatrick: What is your opinion on a national, single security commission?
Mr. Hyndman: My position is that our commission does not have a view one way or the other. It is a matter for
governments to decide.
Senator Fitzpatrick: This sounds like the Senate.
Mr. Hyndman: There are arguments in favour of it, certainly in terms of efficiency, but there are concerns. You will
be aware that people in British Columbia do have concerns about whether their views would be adequately taken
account of in a national commission, whether it would be unduly focused on aspects of the market that are not
important here or, conversely, that there be insufficient focus on things that are important to British Columbia.
There is also concern about what regulatory philosophy a national commission would take. People think there could
be benefits if it is done right, and I guess they are a little nervous about whether it would be.
There are also some arguments that I do not think you can ignore about the benefits of the current system, where
individual provinces can test ideas at relatively lower risk than could be done on a national basis. If they do not work,
you drop them; and if they do work, they can be adopted nationally. We have seen many examples of that in Canada
over the years. Things generated in one region ultimately mature and are adopted nationally. The current system
allows a healthy debate, discussion and innovation at the local level, which helps the national system develop. Whether
that outweighs the costs of multiple regulators is a question someone should examine, and there are proposals to do
research on those kinds of questions.
I do think that many of the proponents of a national commission overstate the potential benefits. You hear many
people say that this will fix all our problems. There is a real ``grass is greener'' syndrome here.
Our research, for example, the cost-benefit analysis I just referred to, suggests that, of the public companies we
talked to, 87 per cent of their time is spent on complying with regulations that are already basically uniform on a
national basis. Therefore, making one set of rules under one commission will not save anything in that area. It will
eliminate some of the compliance costs, although not all of them, on the other aspects of what they do. You need to be
careful not to overstate the benefits in cost reduction of a national commission.
Fortunately, it is an issue on which I do not have to decide. Governments will discuss it and make their decision over
the coming few years.
Senator Fitzpatrick: I have many other questions, but I better let others have the floor.
Senator Kelleher: You discussed with Senator Fitzpatrick the concerns of British Columbia with respect to a
possible national securities commission. I can certainly understand those. In that regard, I should like to ask you, as I
am sure you figured you would be asked, about Quebec. They do not appear to have been rushing towards any
consolidation of the securities systems that presently exist. Given the importance of Quebec in this particular area, I
was wondering if I could have your views and comments with respect to the Quebec situation.
Mr. Hyndman: With respect to a national securities commission?
Senator Kelleher: Yes, and harmonization.
Mr. Hyndman: You said yourself that there does not seem to be any interest in Quebec in moving towards a national
securities commission. We and our colleagues in all the other provinces work quite closely with the Quebec Securities
Commission. They are part of, for example, the harmonized rule we are developing on continuous disclosure. They are
part of most of the harmonization work we do. They do opt out in some cases, but that does not happen frequently.
They have recognized that harmonization and cooperation is important for our market to work effectively. Frankly, if
they want our provincially based system to continue to be effective as a regulatory system in Canada, they recognize
that they really need to work closely and cooperatively with us.
I shall not posit a view on the political decisions in Quebec about things like a national commission, but I can
observe, like anyone else, that it does not appear to be a starter in that province.
Senator Kelleher: As you know, yesterday, Dr. David Smith was here representing the Canadian Institute of
Chartered Accountants. After I listened to him and questioned him on the area of discipline and penalties, I sort of
came away with the impression that there were more smoke and mirrors than there were definitive powers of
regulations with teeth in them.
I am a lawyer by profession. Lawyers like to be self-governing, and we like to feel we are doing a good job. We do
not need regulators checking us out. I get the feeling that accountants share that view. I was underwhelmed by the teeth
in any new regulations coming forward in their area. I did not think there was too much to it. Perhaps I am wrong.
Would you comment on this?
Mr. Hyndman: Are you talking about the new Canadian Public Accountability Board and its powers?
Senator Kelleher: Yes, and just the opinion of the profession in general towards outside regulation.
Mr. Hyndman: Like most professions, they are interested in maintaining self-regulation. Like most self-regulatory
organizations, there must be a balance. The best way that we have seen in the securities business of ensuring that an
SRO deals effectively and has adequate penalties and supervision is to ensure there is a government overseer looking
over their shoulder so that the SRO recognizes that if it does not do a good job, it will not be able to maintain that
I believe that the accounting profession does recognize that it needs to raise the bar in terms of the standards that are
imposed and that it needs to be more effective in examining, supervising and penalizing misconduct among its
members. Time will tell whether what we are proposing now is enough.
There are some important things going on. Certainly, in British Columbia, we have been talking to the Institute of
Chartered Accountants, seeking some changes to their legislation to increase the size of the penalties they impose and
to give the institute jurisdiction over firms rather than just individual accountants. That change has been made already
in a few provinces, but we have not gotten there yet in BC. We need to beef up those provincial institutes because they
are an important part of the network, working with the Canadian Public Accountability Board, the national board.
The trick at the national board will be to ensure that we get the right people involved. We have made a good start by
getting Gordon Thiessen to agree to chair it and by getting it adequately resourced. Again, the accounting industry will
be paying for that and have agreed in general terms to budget it. It will effectively double the amount spent on
supervising and regulating the accounting profession. It will also cost money to get the right people to do the
examinations of the firms to ferret out any misconduct in the way that public company audits are performed. What is
being done is a significant effort. However, we will not know whether it is enough until it is in place and has been
running for a few years so that we see what the results are.
Senator Kroft: I wish to congratulate you on the announcement this morning of your joining Mr. Thiessen. He is a
familiar face around this table and we look forward to having him here in a different role. He may be a little more
forthcoming than he has traditionally been.
I have questions in two areas. The first concerns our standard area, namely, a national regulation. I understand the
complexity of this and I understand how much has been accomplished, although there is frustration over what has not
Most of your remarks in terms of the success and non-success of achieving national harmony or even a regulatory
body has to do with those working in the system and making it work. What do you think in terms of the other side,
namely, the public confidence area? Most of what we are dealing with in this post-Enron area is rooted in the
establishment or re-establishment of public confidence or its enhancement.
Do you have any concerns that, in the absence of a coherent national regulatory system in a more formal way than it
exists, there is any price paid in terms of public confidence? I talked through the whole gambit of retail and
institutional investors and the Canadian or the non-Canadian looking to use Canadian capital markets. We have not
tended to have much comment on it from that perspective.
Mr. Hyndman: I do not think it is a big factor in the investor confidence issue. It is hard to say. Investor confidence
has been shaken over the past year. There are many reasons for that, for example, the downturn in the markets
following the tech bubble, and so on. I think that is the biggest factor. There was then 9/11 and international
uncertainty, which is also a big factor. The corporate and accounting scandals in the U.S. are no doubt significant. I
am not sure they are as significant as the other two, though. However, in the absence of the other two, I am not sure we
would be having these discussions.
Regulatory structure is well down the list of things. It is important that people have confidence in our regulatory
system. There probably is some concern about it in Canada, but we were the first country in the world to have our
financial regulatory system reviewed under a new peer review process that was introduced after some G7 discussions.
The IMF and the regulators from Australia, being the peers in that case, came in and reviewed our regulatory system
for securities, banking and insurance a few years ago, and we got a clean bill of health. We were found to be up to the
rigorous standards that have been set by international bodies as being the recommended way of carrying out securities
regulation. They had some suggestions for improvement, as you would get in any report of that type. However,
fundamentally, they said we are there. That is not to say that we could not do better, though.
We could do a better job in Canada, among other things, by emphasizing the fact that despite all the debates about
structure and the debates about whether we should adopt this or that rule, fundamentally, we have a good and effective
regulatory system in Canada. We have a good set of rules. As an example, our existing rules on continuous disclosure
for public companies — that is, before we make the changes — are very good. In fact, some of the changes recently
made in the U.S. are bringing theirs up closer to our standard on continuous disclosure. We should not sell short the
system we have in Canada. That is not to say that we should not continue to try to make it better. We should focus on
what international investors perceive. Our bigger problem internationally is the efficiency issue and the problem that
international market participants see in coming to participate in our market, having to deal with multiple commissions
and it being too complicated and expensive. Without going through the disruption of changing the structure, we can do
things to make that work much better. We are talking about some of those now.
As far as the investor confidence issue, I do not think regulatory structure is a big factor.
Senator Kroft: I should like to turn to a different subject. I was interested in the general orientation of your view
toward principles as opposed to a reliance on intensive rules structure. I noted your skull and cross bones analogy that
people being informed and fairly warned about strengths and weaknesses of situations where informed judgment can
be made is a great help.
You have made a comment that is new to me in the specificity of its focus, namely, the failure of the criminal justice
system to be as effective as it might be in enforcing rules or breaches of conduct that are there now. We have the daily
images from the U.S., particularly from New York State, of the approaches being taken there. It has to do with
prosecutorial zeal and the willingness to create examples.
Could you go further and suggest what you feel? Is it that the prosecutions are less zealous than they should be, or
are judicial dispositions not as effective as they might be? I will ask you to include in this your comment as to what you
think now that the addition of civil remedies would add to this process.
Mr. Hyndman: On the criminal side, I think it is what you mentioned and other things. It is a systemic problem. I do
not think that if we had better prosecutors or different judges we could solve the problem. It runs through the whole
system. There is an attitude that we do not take this kind of crime that seriously in Canada. I used the analogy in my
paper. We have to recognize that stealing someone's life savings through the market should be the same as breaking
into that person's house and stealing his or her money. Our system does not do that. It is difficult to get a conviction,
and when you do get a conviction, the penalties generally are light in comparison with what happens in the United
I am not necessarily suggesting that we should be putting as many people in jail as they do, but it is like night and
day. It feeds down through the whole system; it demoralizes the prosecutors and the investigators because they know
that they will put in years of work and probably not get the kind of result they would like or think would be fair at the
end of the I day. I wish I had an easy answer. It is not throwing more money at it.
In British Columbia, in the mid-1990s, we set up an organization called the securities fraud office. In fact, over a
three-year period our commission threw in $3 million to hire more RCMP officers and more prosecutors to go after
securities fraud. We got a few cases through but, frankly, nothing of any consequence.
That is when I concluded that just throwing more money at it and putting more people in place was not the way to
proceed but that we needed to think about the systemic problem and the way in which our criminal justice system treats
white-collar crime. People who know more about criminal justice than I do will have to dedicate some time to arrive at
a solution to it. I know Justice officials are on to this issue and are starting to talk about it. I would be happy to work
with them, but we have to get them focussed in terms of bringing their expertise to bear.
On the civil remedy side, it is an important addition, in light of the new legislation proposed in Ontario yesterday.
Again, we will have to see how it works out in practice. The legislation was designed by the Canadian Securities
Administrators to try to make civil remedies more available. In that way, investors trading in the secondary market
who incur losses as a result of misleading disclosure by public companies have a real prospect of going to court and
getting some restitution.
We also wanted to balance that by trying to prevent a risk of abusive so-called strike suit litigation, something that
we have seen a great deal of in the U.S. In such cases, companies are essentially extorted out of money by being sued
every time their stock price goes down, whether they have made any misrepresentations or not. They end up settling
them for large amounts of money just to make the civil action go away, whether or not it has any merit. We wanted to
bring some protections in to try to prevent that kind of abusive litigation while at the same time opening the door. As it
is tested in the real world, we will see whether the balance we have struck is the right one.
The Chairman: Does it strike you as odd that in the case of a company like Livent it took Canadian authorities twice
as long to lay charges as it did the Americans? Bre-X seemed to take forever and the Airbus affair is still going on.
When is the last time you heard of someone going to jail for tax evasion?
Mr. Hyndman: Those are examples of how our system moves much more slowly than the American one and does
not get the same results at the end.
Senator Taylor: In your brief, you seem to dismiss outside directors, as do I. I do not see an answer to it. After all,
the outside directors are appointed by the inside directors. Down the road, they may exercise a certain amount of
The Sarbanes-Oxley report recommended that auditors not be retained for much more than three or four years. It is
the same in Australia. I like the idea of pulling the name of an auditor out of a hat every couple of years. In that way,
no incestuous relationship could develop between the auditors and management. To avoid this, Sarbanes-Oxley, along
with Australia, recommended that they be changed entirely every three or four years.
Would you care to comment on that, sir?
Mr. Hyndman: Sarbanes-Oxley requires that the actual audit partner within the firm who does a particular
company's audit be rotated every five years and cannot come back for a certain number of years. They are not
requiring firms to be rotated, although they did mandate a study on that.
It is a difficult question. There is certainly a lot of appeal in saying that there should be a change in auditors, thereby
avoiding the incestuous relationship that apparently occurred in the Enron situation.
As a note of caution, I would say that auditing is a complicated business. It is important that the auditor understand
the firm. A study I was told about in Europe indicated that it is in the early years of an audit engagement that a lot of
the audit failures occur. The auditors miss things because they are simply not familiar enough with the company. Of
course, the bigger and more complex the company that is being audited, the bigger and more complex the problem.
You have to be a little cautious before imposing those kinds of solutions that, at first blush, sound pretty good. Like
anything else, the story tends to be more complicated once you get into it.
The Chairman: A similar study in Canada shows that the greatest number of mistakes are made when a change of
auditors occurs, that mistakes occur in transition.
Senator Taylor: I do not doubt there are mistakes made, if there is such a thing as an honest mistake. The situation
where auditors develop an incestuous type of relationship is not good either.
Do you see any conflict of interest between underwriters and brokerage houses? I am talking about when the
underwriters, the brokerage house and the security advisors are all the same person. I think in England the underwriter
is separated from the brokerage side.
Mr. Hyndman: At one time in Britain, they were separated. About 17 years ago they changed the structure to
eliminate that requirement.
This is a business that is loaded with conflicts of interest. Underwriters in the same firms are doing analyst work or
retail securities. It is important to recognize that these firms have multiple capacities and that they are conflicted.
History has shown that simply trying to separate the functions into different smaller firms creates its own problems
and its own systemic risks. I would not recommend that we try to break up the firms into different functions like that.
There are some things we can do to regulate conflicts, primarily through disclosure. However, there are probably other
things that should be done to ensure that the services and advice of these firms are not tainted by a conflict.
It is something that requires constant attention and vigilance. The best solutions are, again, in the market. If a firm
becomes known for favouring its own interests over the interests of its clients, then it will lose business. The best we can
do is make people aware of these conflicts and try to get them to focus on them. We must try to get publicity of
circumstances when companies abuse their privileged positions. In this way, investors can be aware of those and take
them into account in deciding where to take their business. This would also apply to companies that are looking to
have underwritings done because they have interests that are also subject to conflicts of interest.
Senator Prud'homme: You said that you are not suggesting that we put as many people in jail as they do in the
U.S.A. or for as long. My question is: Why not? Would it not make sense to send a strong message at the start?
In your brief on page 9, there are five actions suggested for regulators. Would it not be possible to add a suggestion
as to how to gain back the public's confidence? That seems to me to be the big debate for everyone at the moment.
Mr. Hyndman, you said that people in Vancouver, and I share their opinion, are suspicious when they hear that
only Toronto can determine the best outcome. My friends in Saskatchewan and Alberta always say that there are those
who think that only Rockcliffe people know what is best for Canada and that nothing good can come out of Alberta or
Saskatchewan. Your suspicion about too much centralization is shared for other reasons by the Quebec regulatory
board, the Commission des valeurs mobilières du Quebec, CVMQ. Some say it is for cultural reasons.
I am prompted to ask the question because it was the first question asked by Senator Kelleher. How could we, who
are suspicious and do not want to be manipulated by people who may know better how this should be done, not arrive
at the conclusion that much stronger regulation would include greater cooperation between all of the regulators?
Mr. Hyndman: Those are good questions. Concerning jail time, perhaps I should not have said that we should not
go as far as the U.S. on that issue. I guess I am reflecting the general view that the United States has more people in jail
than just about any other country in the world, and I am not sure that is the general direction that Canada wants to
I do agree that, in the area of securities fraud, imprisonment will be a real deterrent for the kind of people who are in
business. The prospect of going to jail would actually change behaviour, so I do agree that there should be meaningful
and effective criminal sentencing to try to provide that effective deterrent. I agree with you on that.
Concerning public confidence, if we do those five things that I described on page 9 of the paper, well, that will lead
to public confidence, which will result from having the market work fairly and efficiently. There are other factors that
have nothing to do with regulation that are also important for public confidence. The way to focus on confidence in the
integrity of the market — that the market is fair and well-regulated and that conflicts are properly disclosed, et cetera
— is to do these things right.
In respect of the national regulation issue, I agree. I look at it this way: I am employed in the provincial-based
system that we have now, and my job, together with my colleagues in the other provinces, is to make this system work
as well as we can. That means there must be a great deal of cooperation, harmonization of our rules and doing as much
as we can to make this system work seamlessly and effectively. We will leave it to others to make the decision as to
whether this is the right structure or whether the structure should be changed. There is much scope within our current
structure to make the system work effectively to achieve the objectives of regulation.
Senator Kroft: I am just looking for a very specific piece of information. What is the current reporting time on
insider transactions in your jurisdiction? Is there a national standard on this and where is it going? I do this in the
context of your live, current corporate information goal that you mentioned.
Mr. Hyndman: The current reporting time standard across Canada is 10 days after the trade. There were differences
in that time a few years ago but it is now consistent in all jurisdictions where reporting is required. Those areas are the
significant market jurisdictions. We are working on an electronic system to enable us to obtain that information more
efficiently so that we can get it out to the public domain quickly in a more accessible way. This, like many information
technology projects, has had its hiccups and has taken longer and cost more than we had hoped. We expect that, early
in 2003, we will have the system up and running so that people may file their insider reports through the Internet. In
that way, investors will gain access to them quickly.
The United States is lowering the reporting time standard to two days after the trade, from their current time of 10
days after the end of the month when the trade takes place. That is the old Canadian standard also. The Americans are
making a huge leap by shortening it to two days after the trade. We would like to have our system up, running and
working before we consider shortening that reporting time requirement.
Senator Kroft: Is our reporting time 10 days from the trade?
Mr. Hyndman: Yes.
Senator Fitzpatrick: My question is on the same subject. It is a question of materiality and timeliness, when insiders
can trade after information has been provided to the public. We have had situations in Canada where there has been
massive trading on behalf of insiders within a month or so before a disclosure on material financial negative impacts on
the company. There needs to be a look at the questions of timeliness and of restriction — when insiders can trade.
You have just touched on the reporting, and I think the American change of reporting time, which you just
mentioned, is probably good — two or three days after an insider trades, he is required to report electronically.
Mr. Hyndman: We think it is a good change, and we would like to ensure that we have the capacity to implement it
smoothly before we move in that direction. However, I have no doubt that we will move to that time frame sooner or
later, in Canada.
On the issue of trading in advance of material announcements, it is, of course, illegal for an insider to buy or sell
securities of a company about which they have knowledge of material information that has not been publicly disclosed.
I guess it is always a question of fact as to just what the person knew, when they knew it, and when they traded. You
are certainly right: Circumstances have occurred in Canada that make many people suspicious, and those things bear
scrutiny by regulators. It is always a challenge, in these circumstances, to prove who knew what and when it was
known. We have had cases where the proof was easier to obtain than in other cases. For example, when we have such
evidence as long distance phone records, it is easier to prove a case. Usually, however, we do not have that kind of
We are working as a group with the self-regulatory organizations and the regulators to try to improve our approach
in dealing with insider trading in Canada. We do not know whether the activity is rampant or whether these are simply
unfounded suspicions, but we need to find out and do a better job of understanding this issue. Assuming there is more
insider trading than we are detecting, or following up on, we need a better system to do that. It is an example of what I
talked about — picking an important problem and fixing it. It is not something we can fix just by passing another rule
because our current rule is pretty good. We need a regulatory approach that will ferret out insider trading and that will
provide the incentive for companies to keep control of information to ensure that their insiders do not trade. In that
way, we would have a regulatory approach that would identify the situation when it does occur and that would deal
with it effectively.
Senator Fitzpatrick: How about offshore trading?
Mr. Hyndman: Offshore trading is a big issue. A lot of attention is being paid to the use of offshore accounts for
potential insider trading or manipulative trades and so forth. We have had some success in British Columbia in
catching insider trading through offshore accounts. A few cases came through the island of Jersey a few years ago.
People thought they had evaded our scrutiny but found out otherwise.
There are many places around the world where one can disguise the ownership of an account and make it difficult to
be found by Canadian regulators. We are doing some work with the securities industry regarding the know-your-client
rule and the requirement to know the owner of an account if it is an offshore entity in an effort to prevent that vehicle
from being used.
The Chairman: Thank you, Mr. Hyndman for being with us.
We are faced with a bit of a conundrum here. Most of what we are hearing can be summed up as follows: ``Mind
your own business. We will look after it.'' My question is this: If you are so good at looking after the situation
yourselves, why are we in this mess to start with? I admit that is simplistic. We will keep working at it to try to come up
with some answers. You have been extremely helpful. I appreciate your time.