Professor Poonam Puri Tuesday, June 14, 2005

1. Enforcement Effectiveness in the Canadian Capital Markets: A Policy Analysis Professor Poonam Puri Tuesday, June 14, 2005

2. Introduction • Enforcement has been identified as one of the most critical issues concerning Canadian capital markets stakeholders today. • Wise Persons Committee: • “We believe that inadequate enforcement is one of the most significant weaknesses of the current system.” • “There is a widely held view that enforcement in Canada is lax in comparison with the United States and other countries.” • Bank of Canada Governor David Dodge • Canada is a “Wild West up here in terms of the degree to which rules and regulations are enforced."

3. Introduction This study focused on 3 topics: • Some fundamental principles underlying effective enforcement by regulators. • The current regulatory structure and the allocation and division of enforcement responsibilities. • Data: measuring and comparing enforcement effectiveness.

4. Overview • Fundamental Principles • Role of enforcement in achieving the policy objectives of securities regulation. • Role of public enforcement in a comprehensive enforcement strategy. • The regulatory pyramid: • The use of the criminal law and the role of judges. • Structuring the discretion of regulators.

5. Overview • The Current Regulatory Structure • Highlighting the most critical issues arising from the current overlapping and concurrent jurisdiction of multiple regulators. • Policy setting • Priorities • Effectiveness of remedies • Sanctioning principles

6. Overview • Data • How do we measure the effectiveness of enforcement programs and activities undertaken by regulators? • How do we meaningfully compare enforcement effectiveness with other jurisdictions?

7. Fundamental Principles: Importance of Enforcement • Effective enforcement by regulators is critical to achieving the policy objectives of securities regulation • Empirical studies show that strong enforcement of legal rules reduces cost of capital and enhances investor confidence • Bhattacharya & Daouk (insider trading)

8. Fundamental Principles: A Comprehensive Enforcement Strategy Registrants Issuers Directors Officers Gatekeepers Investor Education Public Enforcement Courts& Judges Private Enforcement Provincial Securities Commissions InstitutionalInvestors Self-Regulatory Organizations(IDA, RS, MFDA) RetailInvestors RCMP/IMET Provincialand Municipal Police Federal & Provincial AGs Crown Attorneys

9. Fundamental Principles: A Comprehensive Enforcement Strategy • It may be time to re-conceive of the role of the securities regulator in the 21st century. • The securities regulator should place a greater emphasis on acting as a facilitator or catalyst in assisting investors in receiving compensation. • Securities commissions rarely apply to the courts for restitution or compensation orders, and should be encouraged to do so. • Securities commissions should be granted authority under their public interest powers to make restitution and compensation orders.

10. Fundamental Principles: The Enforcement Pyramid Criminal Quasi-Criminal Administrative Sanctions Warning Letters & Persuasion No Action • General Principle: softer, less harsh approaches should be used more frequently, before tougher, more harsh approaches are considered.

11. Fundamental Principles: The Enforcement Pyramid • The role of the criminal law & the the judiciary • The criminal law should be used only in the most egregious cases of capital markets misconduct but it should have “teeth” • Judges should receive greater education and social context training on the real harms caused by capital markets misconduct and appropriate sanctions in the criminal law context. • Specialized criminal courts for corporate and white collar crime offenders should be created.

12. Fundamental Principles: Structuring the Discretion of Regulators Contested Hearing Negotiated Settlement Hearing Panel File Closed Commission Judge Public Referrals Internal Litigation Investigation Complaints

13. Fundamental Principles: Structuring the Discretion of Regulators • When there is enough evidence to move multiple files forward through the enforcement process, which ones should be chosen? • Securities regulators need to structure the broad discretion that is afforded to them so that they have a principled, rational and justifiable basis on which they can pursue their enforcement agendas. • Risk based approaches to enforcement • The role of resources • Disproportionate targeting of smaller firms? • Rewarding high compliance market participants • Credit for co-operation policies

14. The Current Regulatory Structure • Extensive concurrent jurisdiction under current regulatory structure raises a number of issues: • Generally, a high level of co-operation and co-ordination BUT high profile cases result in lead regulator, or joint investigations or hearings, adding costs for respondents (Charles River & Associates) • Commission remedies are only effective in a particular province (CRA) • Commissions emphasize different enforcement activities (Condon Study) • Commissions have different approaches re factors relevant to sentencing (Condon)

15. The Current Regulatory Structure • Improving the Current System: • There should be greater co-operation and co-ordination in respect of policy setting, priorities, and sanctioning principles. The CSA should play an instrumental role. • A method should be devised to allow for recognition of provincial securities regulators’ orders in other provinces. • Overhauling the Current System: • A national or consolidated regulator would enhance enforcement effectiveness by allowing for the setting of policies and priorities at a national level. • It would reduce co-ordination costs for market participants and regulators, improve consistency in key policies and priorities and allow for more effective remedies.

16. Data: Measuring Enforcement Effectiveness Most regulatory bodies collect and disseminate data on raw enforcement inputs and outputs • Inputs: budgets, staff • Ontario and Quebec have significantly increased their enforcement resources with the OSC close to doubling its enforcement staff (CRA) • Outputs: number of cases opened and closed, number of active files, sanctions imposed • In the first six months of 2004, CSA members pursued 77 enforcement matters, 59 of which resulted in sanctioning orders or settlements

17. Data: Measuring Enforcement Effectiveness • Data that are currently collected and communicated to the public are insufficient to draw complete and meaningful conclusions about effectiveness of enforcement activities and programs undertaken by regulators. • Need to assess, measure and report on the impact of enforcement programs: what was the effect on the actual behavior of regulated market participants?

18. Data: Comparing Enforcement Effectiveness • Is Canada’s enforcement lax in comparison with other jurisdictions? • Some available data: (CRA) • Budgets: • The SEC’s enforcement budget is 29% of its total budget while enforcement budgets represent between 13% and 19% of the total budgets of the commissions in BC, Alberta, Quebec and Ontario. • Sanctions: • Administrative penalties and fines are comparable between Canada and the U.S. • But, U.S. penalties are 10 times higher than in Canada when SEC civil penalties, disgorgement of illegal profits and U.S. state restitution orders are taken into account

19. Data: Comparing Enforcement Effectiveness • Must take into account differences in statutory authority of regulators and practical handing of cases when comparing enforcement effectiveness across borders. • Different budget levels and quantum of sanctions do not necessarily indicate different levels of compliance, given our different regulatory frameworks and differences in our more general political, social and economic frameworks.