Canada’s ‘Frankenstein Monster’ of a Securities Regulator Needs To Be Tamed

There have been some recent absurd and disquieting events at the OSC (formally, the Ontario Securities Commission, though I generally refer to it in this column, with conspicuous justification in my own experience of it, as the Office of Stupidity and Cowardice).The conservative instincts of the Ontario premier, Doug Ford, were throttled in his first term by the Covid pandemic, which caused him to join in lockstep with Prime Minister Trudeau and Mayor John Tory of Toronto to impose outrageous and largely superfluous constraints on the population.In his second term, the premier and his colleagues are showing their moderate, conservative, intelligent selves, including in securities matters. Imperceptible to most of the public, securities regulation in most advanced countries has grown into a lunging, hypertrophic monster, careering recklessly about our economic life, meddling and obstructing, frequently fooled by charlatans and often persecuting the innocent.Securities regulation really sprang to life independently of the civil and criminal prosecution of fraud in the 1930s, to give the appearance of more comprehensive and focused discouragement of unethical practices in the issuance of securities.Following the great stock market crash of 1929, many believed that misrepresentation in the underwriting and reporting of stock market equities was a widespread practice that had contributed to the misery of the Great Depression.When President Franklin D. Roosevelt appointed Joseph P. Kennedy as the first chairman of the Securities and Exchange Commission, he was asked by a reporter why he had nominated a man who had such a controversial record of stock market manipulation, and famously replied: “Set a thief to catch a thief.”The real problem was that much of the value of publicly traded equities had been acquired with borrowed money, and when the market finally reached the point of what is called a “correction,” to allow for overvaluation, the decline triggered forced sales of stock bought with debt and an increasing quantity of stock was sold automatically and without regard to price.This quickly became an avalanche, as over-borrowed investors ran out of collateral. The Dow Jones industrial average declined by 90 per cent in just over three years and a huge proportion of the apparent accumulated net worth of the populations of virtually all of the economically advanced countries suffered terrible deflation. Unemployment rose to about 30 per cent in most advanced countries and there was no, or minimal, financial assistance for the unemployed. In these tumultuous circumstances, when Adolf Hitler came to power in Germany, there was a great deal of acute political instability and prosperity was only restored due to the high spending and absorption of the unemployed in military and defense-industry jobs that were required to conduct the Second World War.Dishonest stock exchange and underwriting practices had been reasonably adequately dealt with by the fraud specialists in the police forces of the various levels of government and the setting up of securities commissions was essentially for optics, as they enabled political leaders to represent themselves as vigilant monitors of their societies’ economic interests, fighting the scourges of corrupt stockjobbers and swindlers.This was a pose, but as the prosecution of crooks and fraudsters was conceptually popular, there has been very little push-back on the relentless growth of what has become the gigantic Frankenstein monster of securities regulation and the securities bar.The OSC has over 600 well-paid employees with ironclad job security, and has developed a quasi-religious cult of endlessly intensified and redoubled “investor protection,” which justifies a herniating mass of onerous regulation for public companies and a veritable army of aggressive and often capricious enforcement.It is hard to imagine that financial ethics would deteriorate or the public interest would be less well served if the OSC and its analogues were abolished and their ant-hills of personnel disemployed, so long as it came with modest corresponding increases in the numbers and sophistication of police forces concerned with the prosecution of fraud.The foregoing reflections are prompted by the current controversy over the nomination of a new non-executive chairwoman of the OSC’s board of directors, Heather Zordel. She seems to represent the premier’s admirable desire to assist in capital formation and encumber the lives of honest people in that pursuit as little as possible.It conforms to the government’s much-needed five-point plan to revive confidence in Canada’s principal capital market. Ms. Zordel has an extensive background in related activities, including serving as part-time securities commissioner at the OSC, in which capacity she wrote two extremely well-reasoned and well-written dissenting opinions on matters that she believed to be over-regulation.Because her appointment seemed to indicate the beginning of a slight retreat in the authoritarian intrusiveness of the commission, there was the customary escalating bureaucratic recourse to malicious leaks to the media, principally the Globe and Mail, unattributed defamatory comments about the new chair-designate and inter-office backbiting at the OSC itself. These are routine improprieties when an imperious bureaucracy is ruffled.The securities establishment, both the regulators and the securities bar, have confected the self-serving piety that a memorandum of understanding from the Ford government in 2019 effectively conferred complete autonomy on the OSC, which would henceforth self-select its commissioners.This has been deemed to be necessary to preserve the ”integrity” of the OSC, by which, of course, is meant the unanswerable omnipotence of the self-selected commissioners in their untouchable sinecures. Ms. Zordel has been smeared, two commissioners have resigned in protest over her appointment (though one of the resignations seems to have been as much a righteous smokescreen for an unrelated issue).Various self-interested securities lawyers have insinuated themselves into the media, uttering unctuous claptrap about how the investing public will be disserved and under-protected if the provincial government exercises its right and duty to name the commission’s chair, especially when the person designated has twice had the effrontery to dissent, articulately, from regulatory overreaching.My normally sensible friend Ed Waitzer, a former OSC chairman, made the mistake of getting into an exchange in the National Post with Professor Jeffrey MacIntosh, in which Ed unsuccessfully peddled the bunk that the Zordel appointment would dilute the integrity of the commission. It doesn’t, and the OSC doesn’t have enough integrity to fill a thimble anyway. Ms. Zordel may give it some.If this imaginative and insightful appointment is, as it appears, a foretaste of the Ford government’s intention to trim the bloat and arrogance of the OSC, all of us who are concerned by the flight of capital from Canada have something to celebrate.From the National Post

Canada’s ‘Frankenstein Monster’ of a Securities Regulator Needs To Be Tamed

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