Clearer, Simpler, Faster, and, of course, Harsher

And if these adjectives do not sell investors and companies on British Columbia’s new securities regulatory framework, and cheaper.

Hoping to shed this province’s long-disparaged reputation for being a risky locale for investors and a bureaucratic morass for public companies, the province passed a new Securities Act on May 11. The province wants business and investors to believe that the regulatory wet noodle has been replaced by a lightweight, aerodynamic two-by-four.

The new Securities Act, unveiled by John Les, the minister of small business and economic development, takes aim at swindlers and charlatans while making it easier and cheaper for companies to go public. It also aims to cut the regulatory costs and burden borne by the B.C. Securities Commission.

For companies considering an IPO, highlights for Bill 38 include a streamlined capital-raising process, replacing the current prospectus disclosure system with one that takes advantage of continuous disclosure requirements adopted across Canada March 30.

Investors scouring the financials of freshly-minted public companies quickly realize the huge costs associates with preparing an offering document. Instead, materials already in the public domain and easily accessible will suffice.

While the province consulted with other provincial regulators, underwriters, investment bankers, brokerage firms and public companies, there is concern that the changes contained in Bill 38 will create a regulatory regime too different from other provinces.

“How does this fit into the national system?” mulls Warren Funt, Investment Dealers Association vice-president of member regulation for Western Canada. “It is difficult when any one province goes its own way. There appears to be good intentions and good ideas within the [Bill 38] model, but it is very difficult to see how any benefits of those ideas are realized if other commissions and regulators are not on-side.”

Kim Johnson, a partner and lawyer at Amelia St.’s Ross Johnson and Associates, says provisions within Bill 38 may be foot-in-the-door for a future “passport system” for securities firms and issuers. Johnson, who worked with ACD Systems, PCNet and BatteryPowerOnline on public offerings, says deferring to the national continuous disclosure system provides for a Canada-wide point of reference that could lead to a single jurisdiction to qualify for market access.

“This could be very positive since participants would not have to comply with two or more sets of requirements,” Johnson says. He says currently, provincial variances force him to hire other lawyers in other provinces simply to vet private placement offering memorandums.

BCSC vice chairman Brent Aitken considers Bill 38 “evolutionary, not revolutionary.”

“It [Bill 38] takes the fundamental, time-tested investor protection elements that have served us well over the years and modernizes them,” Aitken says.

He says most documents and information contained in prospectuses and disclosures are already in the public realm and can be easily accessed a variety of ways.

“All of the continuous disclosure filings, no matter where you are in Canada are done on Sedar. It is a central electronic database that everyone in Canada has access to,” Aitken says. “The notion that someone filing a document in B.C. but not in Alberta is wrong. If you are filing on Sedar everyone can get at it.”

Aitken estimates that the cost to make a public offering in B.C. can be cut by up to 80 percent due to changes within Bill 38.

One of several strikingly unique aspects of Bill 38 allows for registration of brokers through firms instead of the BCSC.

“This system holds employers more clearly accountable for the proficiency and contact of their representatives subject to disciplinary action for misconduct,” summarizes minister Les in the news release announcing Bill 38’s generalities.

However, Bill 38’s “firm-only registration” which places greater disciplinary responsibility in the hands of brokerages, appears to run contrary to current industry trends. This is particularly evident when considering rules recently imposed by the IDA, which operates at the pleasure of the BCSC, upon member firms.

In October 2002, the IDA formally adopted its much-ballyhooed “policy 8”. After years of sparring with member brokerages, policy 8 set minimum reporting requirements for information registrants must submit to the IDA. “Information” ranges from client complaints against brokers to civil claims going before the courts. Prior to adopting Policy 8, IDA members argued to disclose to the IDA. In most cases, it was left to the brokerage’s discretion to vet information and then the primary goal was to secure a non-disclosed settlement with aggrieved or allegedly wronged investors.

This allowed for the burying of possibly serious infractions so the relevant brokerage’s reputation remained unsullied, freeing unscrupulous brokers to move between firms. Bill 38 appears to return reporting discretion to the brokerages.

“There are contradictions [between Bill 38 and certain IDA rules],” Funt says. The contradictions are not necessarily with the Pacific district of the IDA, he says, but with the greater regulatory regime in Canada.

“While the IDA makes up its own rules, all have to be approved by the members of the Canadian Securities Administrators, including provincial securities regulators. The rules are a reflection of the regulatory structure of Canada,” Funt says.

Aitken says Bill 38 will not impinge on the IDA powers nor will it change the SRO’s function in B.C. He says firm-only registration only affects “the physical process” of registration.

“All the machinery of the enforcement and discipline and proficiency will still be controlled by the BCSC and the IDA,” Aitken says.

Johnson suggests some changes within Bill 38 appear to have been crafted to benefit big, bank-owned brokerages. He says while there are still “small, lone-wolf brokerages where individual brokers are considered independent entrepreneurs,” the firm-only registration appears an attempt to transform the broker-brokerage relationship into more of an employer-employee association.

For investors currently dealing with the IDA (a body committed to promoting its members as much as the public) and the government through the quasi-judicial BCSC, the regulatory process is often frustrating and futile. While this will likely not change, for those investors committed to seeing a complaint through, Bill 38 does propose quantifiable and substantive relief, including a specific mechanism to recover loses:

- BCSC is authorized for the first time to order disgorgement of ill-gotten gains.
- The maximum fine a provincial court may order is increased to $3 million. The court may also make restitution and disgorgement orders.
- Investors are given broader rights to sue. For example, investors will be able to sue market participants for misrepresentation in offering and bid documents and oral statements by company officers. Includes a process for investors to make claims against ill-gotten gains under commission or court orders.
- The maximum penalty the BCSC may order is increased to $1 million per contravention.

Lawyer Johnson is skeptical the additional legal artillery will have its desired effect. “People lock their doors to keep the honest people out,” Johnson says. He believes that no matter the degree of punitive action, those individuals committed to swindling investors and running roughshod over regulations will continue to do so.

“This [increased penalties] may have the unintended effect of scaring individuals away from serving on [public company] boards and require additional legal costs,” Johnson adds.

“There are some changes from the status quo,” Aitken says. “But really, when you look at it, the legislation maintains all of the same investor protection elements that have guided securities regulation for years.”

By Lyle Jenish
Business Examiner Editor
ljenish@businessexaminer.net