Streamlining Regulation: An Interview with BCSC Chair Doug Hyndman
Beyond Numbers · April 2003
By Michelle McRae, Editor
In the past 12 issues of Beyond Numbers, we've discussed the fallout from corporate scandals in the United States. This included detailing new American regulations, such as Sarbanes-Oxley, and pondering their implications for Canada.
We've also discussed the initiatives of a number of Canadian organizations, including the Accounting Standards Oversight Council (AcSOC), and the Canadian Public Accountability Board (CPAB). This month, we look at the work of Canadian securities regulators by talking to BC Securities Commission Chair Doug Hyndman. Hyndman offers his insights into the current state of securities regulation and his vision for their future.
Q: The last couple of years have been pretty tumultuous for the accounting profession and the securities markets. What do you think the lasting impact of Enron and other corporate scandals will be on investors?
A: I think investors will show a lot more scepticism before they buy into stories of vast and unlimited sources of wealth, which I think is healthy. It's not just Enron and WorldCom-the whole dot.com bubble, the market bubble, of the late '90s was, as Allan Greenspan described it earlier in the cycle, "irrational exuberance." People got carried away with notions of a new economy, notions that the old rules didn't apply anymore, and forgot about investing fundamentals and fiscal fundamentals. I certainly hope the lesson of the last few years will stick with people for a long time.
Q: What about the lasting impact on regulators?
A: Lessons for regulators are still being debated. Personally, I think regulators need to focus a lot more on what we can and can't do to protect investors. I think trying to adopt complicated and prescriptive rules to tell companies how to run themselves is the wrong answer, although some regulators seem to be drawing that message.
I think regulators need to make sure we focus on sources of risk in the market and apply all of our tools to protecting the market and investors from those risks that are inappropriate. Obviously, business risk is inherent in investing and we can't protect against it, but we can protect against risks of dishonesty and deceitful conduct. But I don't think you do that by imposing a lot of complicated rules on everybody in the market. I think you do that by focusing your resources on areas of potential risk and going after them.
Q: What about capital markets? Where do you think they are today, and where will they be in 6 to 12 months time?
A: Well one of the things I've learned as a regulator is: Don't get into forecasting markets. That's why I'm in regulation and not in the securities business. But, having said that, the markets have obviously taken a pretty big hit and a lot of people are suffering from the lower volumes and lower prices. I don't know whether this is the bottom and it's going to come up again or not, but I do know the markets are amazingly resilient and can adapt to changing circumstances, and I think we're seeing that right now. So I think the markets will survive and this tough patch will pass, but whether it will happen in six months or a year is pretty hard to predict.
Q: Can you talk to us about the future of securities regulation in Canada? Are we, for instance, going to go to a national securities commission?
A: I don't know. This is a really interesting time in securities regulation because of all of the processes, discussions, and examinations that are going on about how we do securities regulation, and what structure we use to deliver it. Clearly a lot of people question the efficacy of our decentralized structure of regulation in Canada. But I think the proponents of a single regulator actually overstate the degree to which centralization is the solution to the problem.
I think our regulatory system is clearly not as effective as it could be and is more expensive than it should be-not so much in terms of the operating costs but in terms of the compliance burden it imposes on people in the market. So we need to address these problems. We need to make regulation less burdensome and more effective. A single regulator might contribute to that, but I actually think a lot of the burden results from the complexity of our rules, rather than who's administering them. Even where we've got perfect uniformity in rules, they've become very complex, difficult to understand and comply with, and in a lot of cases are of questionable value for protecting investors and market integrity.
We have an opportunity over the next year to look at all of these issues and come up with ideas for making regulation more effective and less burdensome. But it's the governments that will decide whether to move to a single regulator or continue with a decentralized structure. I'm going to be arguing in this process that although centralization is an interesting question, we should also talk at least as much about the philosophy of regulation in Canada. I don't think we should, for example, just copy the US system, which is designed for a market 20 times as big as ours, with much bigger companies and a system that can absorb much higher compliance costs.
Q: Is harmonizing regulation the way to go?
A: I think harmonizing is important and we certainly should be working on it, but I also think we need to focus on other concepts. For instance, one of the things we're looking at now is what we call the "passport system," a system in which securities firms or public companies only have to deal with the regulator in one jurisdiction (probably their home jurisdiction) to gain access to the full Canadian market.
They're talking about that kind of system in Europe, and there's no reason why we couldn't do it in Canada as well. It would allow us to eliminate a lot of duplication and might eliminate the necessity of getting down to the last comma on making sure everybody's harmonized. And it would allow scope for variation and innovation among the provinces-as long as there were reasonably robust and effective systems of regulation in each province, they wouldn't all have to be the same.
So harmonization is obviously still desirable, but it's not as necessary in a system where you only have to deal with one jurisdiction.
Q: Where is the passport system now in terms of development?
A: It's a discussion we're now having in a number of different contexts. It's one of the things we've incorporated into the Canadian Securities Administrators' proposed Uniform Securities Act. In that context, we're talking about a passport system for the registration of dealers across Canada. Broader concepts of the passport system, covering the full range of regulatory activities, are also being considered in some of the regulation discussions.
Q: What's your sense of the BC government's view on all of this?
A: Well the government is very focused on de-regulation, and our commission has taken that on as a challenge. Even before this overnment took office, we knew that their policy would be to streamline and simplify regulations. I suppose as a commission we could have said "No, that shouldn't apply to us. We should try to get an exemption because we're securities regulators and we're different." But that wasn't the way we went. We said, "You know what, they're right. Our rules have become too voluminous, too complex. We should take this as an opportunity to do something meaningful to streamline and simplify our rules." So we went to the government with our plan to make securities regulation simpler, easier to comply with, and more effective at the same time. The government accepted our proposed strategy, and we're working on it now.
But in some ways, "de-regulation" isn't the right word to describe what we're doing because it makes people think about getting rid of regulation. Again, what we're talking about is streamlining and simplifying regulation. If you look at the government's guidelines for their de-regulation project, they make no bones about the fact that they are not intending to weaken the protection of the public.
What they're trying to do is get rid of rules that don't really do an effective job of protecting the public, write rules in plain language, and keep them simple and principles-based rather than getting into detail with a lot of prescriptive requirements. Our commission has accepted that enthusiastically, and we're pushing hard.
Now, there's an extra challenge for securities regulators, compared to some other regulatory bodies in the province, because the securities markets are quite integrated nationally and, to some extent, internationally. So we do have to pay attention to what's going on in other jurisdictions. What we definitely do not want to do, by creating a simpler and more streamlined system in BC, is create new barriers to business-whether across the border, or between BC and other parts of Canada. And so the second leg of our plan is to make sure we impose the minimum regulatory burden necessary to achieve our goals of protecting investors and market integrity, while at the same time not unduly compromising the principle of national uniformity. Obviously we're trying to have our cake and eat it too here... but we're very focused on keeping those protections in place.
Q: Are you finding a lot of resistance to this idea of simplifying and streamlining, especially in light of the scandals in the US?
A: There is some resistance-there's no doubt about it. There are people who say, "You guys are going in completely the wrong direction post-Enron..."
Q: Sending the wrong message to the public?
A: Yes. But we have thought about that. We did a reality check, and our conclusion was that we shouldn't change direction at all-that, if anything, the problems in the market in the last cycle actually demonstrate that we need to make regulation more effective by making it simpler and more principles-based. I mean how could anyone suggest the problems happened in the US because they don't have enough rules or because the rules aren't complicated enough? The US has the most voluminous and complicated rules for securities in the world.
Q: What are some other steps the Commission has taken to simplify and streamline regulations?
A: We've published several sets of papers describing some different concepts we're working on, and next month we'll be publishing draft legislation that will incorporate and illustrate those concepts. We're talking about taking whole complex sets of our rules and replacing them with something much simpler.
The one that's been most prominent, and which will probably get the most attention, is what we call the "continuous market access system." Under this system, once you become a publicly traded company, you no longer have to file a prospectus in order to do an offering. The deal is that issuers in the public markets maintain continuous full disclosure of material information. And in exchange for that, if you want to sell your securities to the public, it's a very simple process-there's no need for you to file a prospectus, get it approved by securities regulators, and figure out what disclosure and documents you need to provide to investors in the context of doing the offering. You have nothing new to say in a prospectus because everything material about the company has already been disclosed. This would allow us to cut away rafts of complicated regulations and complex systems.
Q: Do you think we'll see a Sarbanes-Oxley North? If so, how do we deal with the fact that we have so few big companies listed relative to the United States?
A: Well I'm quite focused on making sure we don't have Sarbanes-Oxley North. I don't think it makes sense to apply all of the additional complex burdens and regulations to Canada. I think even people who were advocating that last summer have pulled back and are now saying we need a made-in-Canada solution. We have to recognize the differences between our jurisdictions, our markets, and the size of our issuers here in Canada. So I don't think we'll see a wholesale adoption.
Still, I think everybody's agreed that Sarbanes-Oxley is not completely crazy; there are some important principles in there worth looking at, and probably some ideas we can get for dealing with risks in our system that we might not have focused on before the Enron and WorldCom events. But I think we have to be quite selective and careful to ensure that whatever we do here will actually make things better in the Canadian markets.
One argument I reject is that we should adopt some of these rules just to make investors confident that we're there to protect them-regardless of whether the rules work. I say no-what we need are results. We need regulation that works, that protects investors and ensures the integrity of our market. We should design the best rules we can to do that, and if they happen to be the same as the rules intended for the States, then great; if they aren't, then that's great too.
Q: According to a recent article in The Globe and Mail,* the federal government seems to be planning new corporate governance rules for companies covered by the Canada Business Corporations Act (CBCA), and Ontario Securities Commission Chairman David Brown indicates that the OSC is planning similar new regulations. Do you see this coming into BC securities regulation?
A: Yes, I expect we will get some corporate governance requirements in our legislation, although from a different perspective than requirements in corporate legislation. I think you can expect requirements related to audit committees, certification of financial statements, and possibly some other things to find their way into securities legislation. We're trying to ensure we do it in a way that's principled and doesn't create inappropriate burdens, but still ensures accountability for publicly traded companies-that holds the directors and senior officers of those companies accountable for the conduct of the issuer in the capital markets.
As an example, one of the issues mentioned in the Globe article is a requirement that every reporting issuer have an audit committee composed of non-management directors. I think most of our companies already have this, but we have lots of non-corporate issuers, like income trusts and so forth, out there. I think we should just say, "Let's make a deal that if you're going to be in public markets, you've got to make sure you have an audit committee that's independent of management, and that's primarily responsible for determining the terms of the audit engagement and any non-audit services provided by auditors."
Q: Do you see CFO certification coming to Canada? And would there be any limits on the size of companies?
A: You know, I think certification is definitely coming to Canada, and for every issuer. Frankly, I don't think size is an issue-if anything, it's easier for the CFO of a smaller company because they generally know everything that's going on. It's a lot easier doing that with a ten-employee company than with a 50-office multinational corporation.
Q: What's your perspective on independence, and what would your advice be to the accounting industry?
A: The critical thing here is that an auditor auditing a company's financial statements should be independent of the company-of management and everything else. That's basic principle. What we have now are proposed additional rules for the accounting profession to try to be more specific in certain areas about what's required to maintain independence. And I think there's a lively debate going on as to whether those are all appropriate or whether some of them are over-reaching-for instance, whether blanket prohibitions on things like bookkeeping and financial statement preparation are really essential to preserve the independence of the auditor-because there is a risk that by imposing those kinds of prohibitions you may end up compromising the quality of the financial information, and that's not in anybody's interests.
From my perspective, whatever rules we have must ensure independence in a way that preserves enough flexibility for issuers to get the kind of help they need to prepare their financial statements properly.
Q: Any sense of what the challenges will be for the accounting profession in the next few years?
A: Well, obviously the profession has a bit of a job to rebuild confidence, which, fairly or not, has been damaged. And obviously there are new burdens and new regulation structures being imposed to try to improve the independence of auditors, to make sure they're meeting audit standards and so forth-we're talking about the new independence rules, the CPAB, and so forth-so that will obviously be a challenge for accounting professionals to cope with in their day-to-day lives. But more important, people in the audit business are going to have to refocus on what their jobs are as auditors and make sure they're doing a good job.
Q: Do you have any other messages for the profession?
A: I think the accounting profession is a critically important element of our whole capital markets system in Canada, and everywhere in the world. I think accountants have a duty to ensure they carry out their responsibilities effectively; they're given a special position in being authorized to do the audits of public companies. We as regulators rely on that to a high degree-it makes our jobs possible. If regulators didn't have that function being performed, it would be a huge challenge for us.
So I guess my message to the accounting profession is to take your responsibility seriously. You are in a perfect position; you have an opportunity to contribute to the effectiveness of the capital markets, and should see yourselves as protectors of investors and of the market system as a whole.
Doug Hyndman joined the BC Ministry of Finance in 1975 and served in various positions within the Treasury Board Staff Division. Between 1984 and 1987, he served as assistant deputy minister and was responsible for advising the government on economic, fiscal, budgetary, and tax policy. He was appointed chair of the BCSC in 1987.
Hyndman is also a member of the AcSOC and a governor of the CPAB.
* Janet McFarland, "OSC moving ahead with governance," The Globe and Mail 27 Feb. 2003: B6
In the last issue of Beyond Numbers, we neglected to credit Kent Kallberg of Kent Kallberg Studios Ltd for taking the photos of our new FCAs and Lifetime Achievers that appeared in our cover and feature stories.