International securities regulation

1. International securities regulation Sandy Jakab Kwantlen Polytechnic University – Poli-2150 States, Markets, Globalization: An Introduction to International Political Economy November 18, 2008

2. The BC Securities Commission • Government agency—funded by industry, not tax dollars • We do three things • Set the rules for securities trading • Ensure compliance & take enforcement action when necessary • Educate investors and industry

3. Enforcement • Cooperation with other regulators (national, international) • Cooperation with police … limits • Different purposes and results • Regulatory—to protect from future harm • Criminal—to punish for past misconduct

4. The BCSC cannot … • Put criminals in jail • Approve investments • Insure investments • Give investment or legal advice • Undo a transaction

5. The BCSC can … • Ban from trading • Impose monetary penalties • Disgorgement • Disciplined persons list • Red Alerts

6. Contact us at …. • www.bcsc.bc.ca • www.investright.org

7. What we’ll cover today • Content of securities regulation • Regulatory structures • International organizations and relationships • International cooperation in action

8. Content of securities regulation • Protect investors and market integrity • We do that through • Disclosure • Adviser and fund manager registration • Structural oversight • General market conduct prohibitions

9. Disclosure • Prospectus • Timely and regular disclosure • Abbreviated disclosure

10. Dealers and portfolio managers • Proficiency • Financial viability • Character and ongoing business conduct

11. Structural oversight • Exchanges • Alternative trading systems • Clearing houses • Self regulatory organizations • Investor protection funds

12. General market conduct prohibitions • Manipulative and deceptive trading • Trading or tipping on inside information • Front running • Misrepresentation • Trading without registration • Distributing without a prospectus

13. Securities regulatory tools • Rules and guidance • Industry education • Compliance examinations • Compliance action • Enforcement action • Investor education

14. Regulatory structures - Canada • Provincial and territorial responsibility • Federal, too? • Direct government regulation (e.g. NWT) • Independent securities regulatory agencies (e.g. BC) • Financial services regulatory agencies (e.g. SK)

15. Regulatory structures – Canada (cont’d) • Self regulatory organizations – IIROC, MFDA • Exchanges – TMX, TSX-V, CNQ • Trade associations - IIAC

16. Regulatory structures – the U.S.A. • Federal regulators – SEC & CFTC • State regulators • Self regulatory organizations - FINRA

17. Regulatory structures – the U.K. • Financial Services Agency (FSA) • Exchanges – e.g. LSE, LSE-AIM • E.U. Directives – UK signatory

18. International organizations • IOSCO – International Organization of Securities Commissions • CESR – The Committee of European Securities Regulators • NASAA – North American Securities Administrators Association

19. Tools for international regulation • MOUs (Memoranda of Understanding) • Information sharing rights & responsibilities • Process for conducting investigations • Evidence gathering rights & responsibilities

20. What part do they play? • Consultants to G20 nations • Possibly stronger oversight of members

21. International regulation in action • Enforcement - Rocky Mountain Gold case • Market policy - Temporary short-selling prohibitions • Intermediary policy – Mutual recognition projects (Australia and USA)

22. Rocky Mountain Gold case • Rocky Mountain Gold – shell – Delaware • RMG Mining Inc – BC • Sole officer & director for both in BC

23. Rocky Mountain Gold case (cont’d) • Delaware co sells shares to intermediary in Panama • Panama co uses boiler rooms in Spain • UK investors think they are buying shares in a British Columbia mining company • Victims share purhase $ to Ontario bank

24. Chain of events • BCSC and OSC get anonymous tip from bank about unusual account activity • BCSC visits RMG office – say they are not raising capital but $2.4 million in account! • OSC starts work to freeze accounts – order & accounts frozen two days later • After that, no additional $ to accounts from investors

25. Chain of events (cont’d) • Banking records showed European origins – eventually able to track 168 UK investors • Enlisted help of UK’s FSA – wrote to 168 investors & got 125 responses within 3 weeks • All purchased from 6 or 7 “dealers” – Spanish boiler room

26. Rocky Mountain Gold lessons • Bring all international regulators together early – invaluable • Sort out differences between legal systems early • Use practical tools early • Think outside the box – here, cost of receiver to return $ prohibitive so OSC, BCSC, FSA did it themselves, with court oversight

27. Short selling • Short selling = placing order to sell securities you have borrowed • Short sell when believe price will decrease • Improves price discovery & liquidity

28. Temporary short selling prohibitions • Tied to vulnerability of financial institutions • Regulators feared excessive short selling could cause unnecessary volatility in price • SEC ordered no short selling in publicly traded financial institutions • Canadian regulators acted immediately to ensure issuers listed both in US and Canada were treated the same

29. Temporary short selling prohibitions • Timing tied to first availability of bail-out money to US financial institutions • SEC tied its actions to those of European and Australian regulators • Order amended twice before expired • Twice, Canadian regulators followed immediately • Prevented “regulatory arbitrage”

30. Mutual recognition projects • Established project = EU = operational • New projects = SEC initiated • SEC and ASIC have signed a MOU framework – not operational

31. Regulatory change is in the air • Market stability regulator (s) • Clearing facilities for credit default swaps • Convergence (CFTC with SEC?) • Dawn of new age of international regulation

32. Questions? Sandy Jakab (604) 899-6869 sjakab@bcsc.bc.ca