CONTENTS
Wednesday 8 April 1998
Subcommittee reports
Intended appointment
STANDING COMMITTEE ON GOVERNMENT AGENCIES
Chair / Président
Vacant / Vacant
Vice-Chair / Vice-Président
Mr Tony Silipo (Dovercourt ND)
Mr Alex Cullen (Ottawa West / -Ouest L)
Mr Michael Gravelle (Port Arthur L)
Mr Bill Grimmett (Muskoka-Georgian Bay / Muskoka-Baie-Georgienne PC)
Mr Bert Johnson (Perth PC)
Mr Dan Newman (Scarborough Centre / -Centre PC)
Mr Tony Silipo (Dovercourt ND)
Mr Joseph Spina (Brampton North / -Nord PC)
Mr R. Gary Stewart (Peterborough PC)
Substitutions / Membres remplaçants
Mr Rosario Marchese (Fort York ND)
Mr Gerry Phillips (Scarborough-Agincourt L)
Also taking part / Autres participants et participantes
Mrs Marion Boyd (London Centre / -Centre ND)
Clerk pro tem / Greffière par intérim
Ms Donna Bryce
Staff / Personnel
Mr Andrew McNaught, research officer, Legislative Research Service
The committee met at 1002 in room 228.
SUBCOMMITTEE REPORT
The Acting Chair (Mr Rosario Marchese): I call the meeting to order. We have a subcommittee report. I'm not sure if people have had a chance to review that. If you did, we just need a motion to approve the subcommittee report.
Mr Bill Grimmett (Muskoka-Georgian Bay): So moved.
The Acting Chair: Moved by Mr Grimmett. All in favour?
Mr Gerry Phillips (Scarborough-Agincourt): Just a question, Mr Chair. We're very anxious about the Ontario Trillium Foundation. I see in the latest quarterly financial statements that they've been given $1 million of taxpayer money to transform the Ontario Trillium Foundation into an agency which will distribute video-lottery-based funds up to $100 million. We're anxious to chat, obviously, with the board. I'm just curious about why there's not a time for one of the requested directors to appear.
Clerk Pro Tem (Ms Donna Bryce): The office has been trying to schedule Linda Thom for April 15. There is some question right now as to whether she'll be able to attend at that date. The deadline for her to be interviewed doesn't expire until April 22, so if the House doesn't return prior to that time there's one more Wednesday to schedule her in. If we know that the House is coming back, then at the meeting on April 15 the committee can determine whether or not they want to seek unanimous consent to extend the deadline for that particular appointment. You've got another week to sort that one out.
Mr Phillips: We'll meet on the 15th and she has until the 22nd to appear?
Clerk Pro Tem: Right.
Mr Phillips: It's possible we could meet on the 22nd, I guess you're saying. Is that right?
Clerk Pro Tem: I think the 20th is the Wednesday.
Mr Phillips: I added seven to 15.
Clerk Pro Tem: You're right, it would be the 22nd. Sorry.
Mr Phillips: Have you got that, Rosario? Have you got your calculator there?
The Acting Chair: I'm not going to be here, but let's look at this.
Clerk Pro Tem: It's the 22nd.
The Acting Chair: The 22nd is a Wednesday.
Mr Phillips: Fine. Just as long as we have a chance to chat with all these directors. Thank you.
Mrs Marion Boyd (London Centre): Donna said something about it being just one of the directors that you were going to speak to?
Clerk Pro Tem: Yes. There's only one so far who has not confirmed for the 15th.
Mrs Boyd: Who has not confirmed. I'm sorry. Thank you.
The Acting Chair: On Mr Grimmett's motion, all in favour of the subcommittee report? Any opposed? That carries.
INTENDED
APPOINTMENT
DAVID BROWN
Review of intended appointment, selected by official opposition party: David Brown, intended appointee as member and chair, Ontario Securities Commission.
The Acting Chair: We welcome you, Mr Brown, to this committee.
Mr David Brown: Thank you, Mr Marchese.
The Acting Chair: We usually allow people to make some comments by way of opening remarks if they want to and we offer you that opportunity if you would like.
Mr Brown: I would welcome that opportunity, Mr Chairman. I thought I might spend two or three minutes just summarizing my experience and qualifications, perhaps to give the committee some idea of why I may have been asked to take on this responsibility.
For the past 30 years, I have been a lawyer in private practice here in Toronto. Although in the course of that time I have been involved in a great number of different matters, a wide range of different matters, I think the focus has been principally on corporate finance and capital markets. That has involved pure securities-type transactions, prospectuses and issuing and distribution of securities, and it has also involved takeover bids, a fair amount of banking regulation and generally any part of the practice of law that involves raising capital for corporations.
In addition, throughout that period I have spent a fair amount of time advising the provincial and federal governments on various policy matters. I have been fortunate to serve on a couple of task forces on policy matters and have advised on legislative matters, indeed have assisted in drafting legislation.
In recent years a large part of my practice has been involved in advising boards of directors and special committees of boards of directors on various strategic issues involving mostly public corporations. I have been a partner at the same law firm now for 28 years. It's the Toronto law firm of Davies, Ward and Beck. I think it is considered to be one of the leading firms in the corporate securities field in Canada.
I joined the firm in 1969 and I was the 12th lawyer in the firm. We now have well over 100 lawyers. I believe I have participated in the shaping of that firm and the growth of the firm. I'm also, I think, a product of the environment of that firm.
I have been teaching advanced business law for the last seven years now to the third-year law students at Osgoode Hall Law School, and much of that course has involved securities regulation.
I have had some community involvement. For several years I was a member of the board and the vice-chair of Princess Margaret Hospital, which is a large cancer facility here in Toronto. I also was on the board of the Toronto Hospital, which is a teaching hospital right across the road from Princess Margaret, and in fact assisted with and was instrumental in merging the cancer facilities of those two hospitals to create what is now the largest cancer facility in the world. I am now the chair of the cancer facility. That's a volunteer program.
I'm also a member of the board of the Royal Agricultural Winter Fair and chair the finance committee.
I'm married and I have four grown children. I live on a farm in a small community north of Toronto. That's my life in three minutes.
The Acting Chair: Thank you, Mr Brown. We'll begin with questions and we'll start with the government members.
Mr Grimmett: How about starting with the opposition?
The Acting Chair: The government members defer questions.
Mr Grimmett: We'll reserve our time, if we could, Mr Chair. You have caught us off guard.
The Acting Chair: Okay. Mr Phillips.
Mr Phillips: How do you plan to proceed? Do we split the time?
The Acting Chair: You have 10 minutes each, opposition, and government members will have about eight minutes to ask their questions.
Mr Phillips: I appreciate your being here, Mr Brown. You have a fine reputation in the business community, so that's not in question at all.
The reason we were anxious is that I happen to think this is one of the most important bodies in Ontario. So many people now have their own self-administered pensions. They are investing in the markets, and the security of the marketplace -- the equity markets and the financial markets -- is extremely important. I don't want to put added pressure on you, but you've got a huge responsibility, in my opinion, and it's changed dramatically even in the last 10 years. There are just so many more people now whose retirement relies on the security of the market.
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I was just anxious to get some of your views on some of the issues. Hopefully you can comment on them. I think there are many who feel that we should be looking at a national securities commission in some form or other rather than the proliferation -- have you any view on that?
Mr Brown: I agree with you. I think national treatment of the securities industry is very, very important. I know there was an initiative a few years ago to try to create an actual national securities commission. For reasons that I'm not fully familiar with, it didn't proceed. But what the securities administrators across the country have done, and I think it is a very worthwhile initiative, is to try to at least administer the securities rules across the country as though there were a national securities commission. I don't know whether it's the press or they themselves who have dubbed it as a virtual securities commission.
Essentially, what they're trying to do is to allow issuers and investors who have contact with the securities regulatory system to have only one point of contact. As it stood before this initiative took place, if an issuer wanted to raise capital across the country, the issuer had to deal with all 10 provinces and indeed perhaps the two territories as well in order to be able to have a successful issue. What the administrators have put in place is that an issuer in those circumstances would go only to a single jurisdiction, a principal jurisdiction, usually where the issuer's head office is, and the commissions would then take the responsibility for dealing with one another across the country. That's been in place now for two or three years. There are still some bugs being worked out of it, but from a practitioner's point of view, I think that initiative has been very worthwhile.
They are moving on to the second and third stages of that, because all of the participants in the capital markets must be registered. Again, if a registrant wants to deal in more than one province, that registrant has to qualify in all of the provinces. This virtual securities commission is being extended to that and it's also being extended to the process of discretionary exemptions from securities laws. When all of this is in place, I think there will indeed be a virtual securities commission. Whether that will then lead to a national commission or whether it will obviate the necessity of a national commission I don't know at this stage, but it's something that I very much want to be part of.
Mr Phillips: Good. I hope we keep pushing the envelope, as they say.
The mutual funds industry has grown dramatically and, as I say, has a huge share now of retirement funds. Have you had a chance to look at the new code that's been brought in? Do you have a view on whether you think that's as far as we need to go, or is this an interim step?
Mr Brown: I just have a very broad understanding of the new code. I've read the new code. I wasn't obviously part of the deliberations behind the scene as that code was put in place.
The mutual fund dealers, those who interface with the public, have not been regulated nearly to the same extent that other dealers in securities have been. Securities sales forces have been subject to regulation for many, many years and there's been a different regime for the mutual fund dealers. It's been a voluntary code, I think, for many years. I believe the thinking has been that the mutual fund dealers, who as you say have become very, very important in the financial needs of Canadians, should also be regulated in their sales practices.
I'm actually meeting with the executive director of the Investment Dealers Association later today, and early next week with the executive director of IFIC, which is the Investment Funds Institute of Canada, just to get their views as to how they see this system progressing and whether we've gone far enough, whether we've got it right yet.
Mr Phillips: Speaking personally, I would urge you to put some priority on that. In a rising market there's lots of smiles. When the markets are such that they don't consistently rise and start to slow down a little bit, I think there's a risk of people -- and I just hope you take a good look at it.
The budget has been around $20 million a year for the commission for the last several years, and I believe the budget will be roughly $31 million in the fiscal year we've just started. The revenues raised last year were around $46 million. I'm just not sure of what the expectation is of the securities commission now. Are you still expecting to raise $45 million to $46 million and spend $30 million, or are you planning to reduce fees?
Mr Brown: The intention is that fees will ultimately be reduced. The commission has taken in fees that have considerably exceeded the amounts that the commission has been permitted to spend. Now with self-funding status, which means that the commission, with some guidance from the ministry, will be able to spend a much larger proportion of the fees, there is quite a bit of work to be done in order to get human resources and systems in place to do a proper job.
I believe the expectation is that the current fee level will provide much more money than is required to do a proper job and that over time, perhaps not this year but in coming years, the fee levels will then be reduced so that there's an equilibrium between what the commission needs to do its job and what it raises from the industry, the very people they are regulating.
Mr Phillips: Is the expectation that you will run a surplus this year then?
Mr Brown: I think the expectation is that there will be a surplus in fees, yes. My understanding is that on a periodic basis the surplus fees come back to the ministry, and that will continue until this equilibrium I talked about is reached.
Mr Phillips: You've had a chance to sort of reach a preliminary conclusion which suggests that you think at somewhere around $30 million you can staff it adequately. Is that a fair interpretation?
Mr Brown: I've seen the budgets and I've talked to the directors, the heads of the four departments. I've talked to them about their staffing needs. It's a little early for me to know whether they've got it just right yet and I'm not sure they know themselves. They're talking about adding additional people in various areas. I don't know whether many people will be required. Whether there's a way in which the systems can be improved and fewer people will be able to do the job, it's a little early for me to get into that, but I intend to become very much part of that process.
Mr Phillips: I will again say how important I view your job because I happen to think that for our financial community to compete globally, an important element of that is confidence in our stock exchanges and in our equity markets. I view your role over the next five years as quite important to the province.
To kind of summarize to make sure I've got your interpretation right, on the national securities commission -- I don't want to put words in your mouth -- I think you're saying, directionally yes, the virtual national securities commission done electronically is a good first step but that you're open to ultimately, if it makes sense, a national securities commission that on the mutual funds -- you're not totally familiar with all the rules, the code, but it looks like a good first step. My own view is I think that should be a priority in the short term because I do worry about that.
On the budget, you're speculating that somewhere around $30 million should provide sufficient budget to get a staff that you think would be adequate to do the job. Have I caught your --
Mr Brown: Yes, Mr Phillips. I think that's quite an accurate summary, thank you, of all three points.
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Mrs Boyd: Thank you for being here today. I must say, having read all the news clippings at the time you received your appointment, I wasn't surprised, given your background, that the search committee continued to pursue you, but I understand that you were somewhat reluctant to take on this position and I can certainly understand that.
I'm going to ask you the question I ask every person I interview for a job, and that is, why do you want this job?
Mr Brown: As the press has accurately reported, I did not respond to the original advertisement searching this job. I had been asked several years ago to take on this job upon the retirement of one of my predecessors and, having given it some thought, I just decided it wasn't something I was interested in at the time. When the search committee approached me this time, I didn't give it much more thought; I reacted the way I had reacted a few years ago.
I was quite conscious of the need for someone in this job who is willing to give it a very serious effort. For many of the reasons Mr Phillips has talked about, we need very strong leadership in the securities field in Ontario. I was aware of that. I don't think I was aware of the resources that had now been put at the disposal of the chair and of the commission. The committee members, all of whom are former chairs of the commission, asked me if I would come and talk to them just about the facts, which I did, and it turned out to be quite a sales job. What they were doing was pointing out to me that there was a tremendous opportunity here for someone who was willing to take on the challenge and that the opportunity was not only the forces in the market but now the resources to be able to do it.
With that, I then turned to trying to decide whether I could bring myself to leave the law firm that I'd been with for so many years and had been part of the history and the founding and the culture of. During the course of that deliberation, somebody told me that the cemeteries were full of irreplaceable people, and I began to realize that indeed, while it would be tough on me to leave the firm, it probably wouldn't be nearly as tough on them. When those two things came together, I said to the committee that I would be willing to be part of their short list, and ultimately they told me that I was the one.
Mrs Boyd: Thank you for explaining that, because I think it is quite a challenge you've taken on. Resources notwithstanding, it certainly appears that there's a real rebuilding job to do. Although you can pass it off in a very few words saying you're going to change the human resources and financial systems, that's a very big challenge, isn't it?
Mr Brown: Yes, it is.
Mrs Boyd: I really think it's important for us to recognize that in taking on a job like this you're taking on a very big challenge, and at some sacrifice to yourself.
Mr Brown: Thank you.
Mrs Boyd: Could you, just in more general terms, talk about the whole issue of public accountability as it applies to this field? I know from your background that there's a theoretical and ethical base to the whole issue of public accountability when you take on this kind of job. Would you talk a bit about how you feel about that?
Mr Brown: The mandate of the securities commission in Ontario is to protect investors from fraudulent and unfair practices and also to attempt to ensure the integrity of the capital markets, so the whole system has to be very transparent. The rules have to be crisp and unambiguous. I don't think they need to be detailed -- I don't think there's a need to microregulate -- but the entire investment community has to know what's expected of them. One of the areas where regulators have fallen down in the last little while is in secondary market disclosure and secondary market regulation, so I think those rules need to be tightened up.
Investors also need to know that there is a firm hand on the tiller here. The capital requirements for the growth of this province are enormous, as you know. Without that investor confidence, it's going to be increasingly difficult for us in Ontario to satisfy those capital needs. I think investors have to know that there is a system of rules and that the rules are being enforced; that they're being enforced fairly but they're none the less being enforced. I don't know whether that's responsive to your question.
Mrs Boyd: It is indeed. I wonder, do you feel that part of the role of the commission is an educational role in terms of economic education, given, as Mr Phillips has pointed out, that more and more people are actually engaged in a much more direct way than has been the case in the past in this whole field but tend to be doing so without the knowledge of what they're getting into? Is that a role the commission should have?
Mr Brown: I think you're absolutely right. There was a report in the paper not too long ago that the commission itself had commissioned a study of investor education and investor awareness, and I think they were quite shocked at how low the level of investor awareness is. I think that has to be very much a priority of the commission: to help people take some responsibility for their own investment portfolio. They're being asked more and more, as pension plans move away from defined benefit to defined contribution plans, to assume some of the risk for their own financial future. So, yes, I agree that's very much a part of the role.
Mrs Boyd: It seems to me that as we move into this area, part of the whole business is trying to make people feel as though it's not they who are making the decisions but that they're part of that and are not alienated from that. Otherwise, it's only too easy to dupe people if they're not dealing with the basic knowledge. Yes, you may catch somebody at the end of the game, but people's life savings, as Mr Phillips pointed out, may well be gone. It seems to me that it has to be a kind of interactive process, and this is not an area where the commission has tended to be very visible in the past. It may have offered some of that, but it hasn't tended to be identified as offering that sort of thing, so it's like a new task to be taken on.
Mr Brown: I agree with that.
Mrs Boyd: Are you confident that the budget you've been given is going to allow you to attract the kind of people who will be able to perform the tasks that have been outlined? I know that's been a problem in the past, the real drain of people. They gain experience at the commission and then are able to move into positions at much higher salaries, so it's a constant training and draining process that has happened. Do you feel fairly confident that you're going to be able to stop that drain of talent?
Mr Brown: I think that process will still be part of the experience of the commission. Frankly, I would not try to discourage it. I don't think we should necessarily be looking for young people who will come into the commission and commit their lives to the commission. I would much rather get people who are young and vigorous and who are looking to give five or seven years to the commission, and if, at the end of that time, they want to go back into private life, I would send them off with my blessing.
But having said that, I think the salary levels have got to close some of the gap between the current levels in the current market. The commission has commissioned some studies from one of the accounting firms to find out where the commission fits, relative to a number of benchmarks: law firms, accounting firms, corporations that employ professionals and so on. That study's not completed yet but I've been told that they have confirmed just what you have talked about, and that is that there is a gap there to fill.
I don't think it's necessary to go right up to market levels. I think there are some benefits of public service for which we don't need to compensate people. I also think that if we do this right and we get the right people in there, they will become very attractive to other participants in the capital markets, having spent five or seven years with the commission. Indeed, that's the way it happens in the United States. It's a real badge of honour in the United States to have spent a few years at the SEC, and the law firms, accounting firms and other businesses find those candidates quite attractive. I would like to build to that type of scenario.
Mrs Boyd: A bit like acting as a clerk to the Supreme Court, perhaps.
Mr Brown: Absolutely.
Mrs Boyd: So you see it as a dynamic process and an evolutionary process and that that's not necessarily an unhealthy thing.
Mr Brown: No. I would see extending the period of time that people stay with the commission. I think traditionally it has been 18 months to three years. I would very much like to try to extend that to five to seven years, but not to stop it altogether.
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The Acting Chair: We've got three questions, beginning with Mr Grimmett.
Mr Grimmett: I think we'll probably have even more questions than that, but perhaps we'll continue to go around, Mr Chair.
The Acting Chair: To the extent that time permits. Is that what you mean?
Mr Grimmett: Exactly.
Mr Brown, I wanted to deal with an issue that Mr Phillips was talking about: the fees charged and how, as I understand it, the plan of the newly designed securities commission is that in order to make sure our markets are in line with international markets, we gradually move to a regulatory system where the fees charged are roughly in line with the regulatory cost of operating the agency. It's my understanding that there has already been one phase of that process carried out, where the revenue reduction plan has been implemented to the extent that the secondary market fee and registration transfer fee was eliminated in September 1997. Is that correct?
Mr Brown: That's my understanding as well.
Mr Grimmett: So we're already in the process of moving towards equalizing the fees with the cost of regulation?
Mr Brown: Yes, that's correct.
Mr Dan Newman (Scarborough Centre): Good morning, Mr Brown, and thank you for appearing before the committee today. I have a question that deals with financial planners and the sale of mutual funds and other securities. I guess in Ontario, anyone can hang a shingle up and call themselves a financial planner.
Mr Brown: I think that's correct. I must tell you, in anticipation, that this is not an issue I've gotten into very far. I understand it's an issue that's on the horizon and that I need to address. I don't have very many details yet on how financial planners are treated. My understanding is that they do not require registration at the present time.
Mr Newman: I've received several complaints from constituents of mine in Scarborough Centre about this issue, the fact that someone could be doing one job one day and the next day they are calling themselves a "financial planner," and people are putting their financial future in the hands of people who may not be qualified. The fact that this is their retirement money or savings that they may have and it is being put in the hands of unqualified people is frightening.
The other comment I wanted to make to you is that I truly believe that anyone selling mutual funds or other securities in this province should have to disclose what their commission is to the prospective buyer. The incident that was related to me was that someone wanted to invest in a certain mutual fund and was told by the so-called financial planner that this was not a good fund, and another fund was suggested to this person. The actual gap over the next year was about 14%. That's a significant amount on people's savings. I don't know what assurance or protection you can offer the taxpayers and investors of this province today, but I would just ask that you keep that in mind as you take on this new job and this new responsibility.
Mr Brown: Very much so. It will indeed be part of this landscape.
Mr Joseph Spina (Brampton North): Mr Brown, welcome to the committee. I'm frankly pleased that you surfaced at the selection. Articles in the paper and the scuttlebutt on the street are that for a long time we've waited for some renewed confidence in the TSE, and in the OSC, in fact. I think a man of your calibre -- you used the word "leadership," and I look forward to your leadership in that role, assuming that your appointment does go through today, because I think it will renew the confidence in the market. As Mr Phillips indicated, it's a critical element of the dynamics of the economics of the province. We do have the largest stock market, stock exchange, outside of the New York exchange, and it's an important element. In some industries, in mining for example, it's the largest in the western world at this point, I think, or has the potential to be.
There's a segment of the market I want to ask your opinion on. I'm not sure about your familiarity, but again, if it is not something that you have had experience or knowledge of, I would ask you to explore it, as you indicated with Mr Newman's comments. It has to do with access to capital, particularly for small business. I know Mr Phillips shares this feeling as well, because when we spoke with the TSE regarding the over-the-counter trading, they seemed to be quite confident that they were doing a good job. Those of us who were on an access-to-capital committee appointed by the Premier, of which I was a co-chair, were not satisfied that they were doing a good job. I wondered about your thoughts about a Nasdaq equivalent in Canada for small business capital access.
Mr Brown: I don't know the details at this point. I know that it's very much a part of what the OSC is dealing with and indeed the securities administrators across the country are dealing with. I know it's a challenge the banks are facing as well.
The Toronto Stock Exchange has a sub-trading entity called the Canadian Dealing Network. I'm not familiar enough with how that works or whether it's performing an adequate job to be able to tell you that this is the answer to your question. I agree with you that the question is a very important one. It perhaps will become more important if the trend to globalization, which appears to be coming to Canada, continues. As more and more of the financial institutions believe they need economies of scale, there is more and more a danger that the small person will be left out. I think that's very much a job of the regulators both in Ottawa and Ontario: to make sure that engine feeding our capital growth and economic growth here is not abandoned. So I agree with you that it's a very important part of it. I don't have the answers at this point as to how that can be addressed.
Mr Spina: It's appreciated.
The Acting Chair: I'll permit one last, short question if you like.
Mr Spina: Just a comment. I think that's an increasingly important element of our economic segment, of our business society, and we want to ensure it remains healthy and doesn't sort of get lost by the wayside in globalization.
Thank you, Mr Brown, and I wish you well.
The Acting Chair: Mr Brown, we ran out of time. We want to thank you for coming. I'm certain that most members appreciated your comments today. We are going to move to a motion of concurrence. If you would like to stick around, you can. If not, we thank you.
Mr Brown: Thank you, Mr Marchese.
The Acting Chair: Before we move to that motion of concurrence, I would just point out to the members that Ms Boyd obviously is here as an interested member. Floyd Laughren has resigned, as all of you know, and because the House is not sitting, we haven't been able to replace him with a motion in the House, so she will not be able to vote.
Motion for concurrence? Mr Grimmett, thank you. Any discussion? All in favour? That carries unanimously.
We thank you very much. We will adjourn until next week.
The committee adjourned at 1038.