Ontario Securities Commission Research Articles

From IDA to IIROC: Has self‐regulation in the Canadian investment industry evolved?

AbstractThis article analyzes the enforcement practices of the Investment Industry Regulatory Organization of Canada (IIROC) and compares them with its predecessor, the Investment Dealers Association of Canada (IDA). The study collected data from IIROC's tribunal cases decided between June 2008 and December 2019 and compared them with data on the IDA's enforcement of complaints from 1984 to 2008. The findings reveal no statistically significant difference in the fines imposed by the two regulatory bodies. Furthermore, IIROC has refrained from issuing lenient penalties such as retaking examinations/courses or mandating terms and conditions for offenders. The results also indicate no significant impact on the number or distribution of offense types committed in the industry over time. Most notably, the Ontario Securities Commission, the Canadian Securities Regulators, and the new Self‐Regulatory Organization of Canada should consider these findings when formulating policies concerning the role of self‐regulation in the financial markets.

The dark side of blockholder control: evidence from financial statement fraud cases

PurposeThe purpose of this study is to investigate whether large blockholders are associated with financial statement fraud at their companies. Although a substantial body of prior studies has focused on chief executive officers’ motivations to manipulate financial statements, the correlation between majority shareholders and financial statement fraud has received little attention. This paper aims to fill this gap by investigating whether the sample firms have controlling shareholders or executives (i.e. blockholders vs management) and whether financial statement fraud schemes, motivations and consequences differ between blockholder- and management-controlled firms.Design/methodology/approachUsing a clinical approach, the authors Study 12 Canadian financial statement fraud cases uncovered by the Ontario Securities Commission between 1997 and 2020.FindingsFirst, the authors find blockholder control in six cases. These findings infer that these large shareholders received private benefits at the expense of minority shareholders. The comparative analyzes suggest that fraudulent firms controlled by blockholders go bankrupt more often than those controlled by managers. The authors also find that improper disclosure is the most common fraud scheme in blockholder-controlled firms.Originality/valueThe authors conduct a deep analysis of financial statement fraud cases to examine the of blockholder control on the likelihood of financial statement fraud. This paper adds new insights to the research on financial crime by investigating whether large shareholders affect the probability of fraud and the extent to which they might do so.

Investigating aggravating & mitigating factors considered by IIROC in penalty imposition

ABSTRACT The purpose of this study is to analyze the aggravating and mitigating factors considered by the Investment Industry Regulatory Organization of Canada (IIROC) hearing panels in penalty imposition. This research is based on data from 386 individual offender sanction hearings between 2008 and 2019 that were collected from IIROC’s website. Descriptive and correlation analyses were used to analyze the data. The findings from this research indicate that mitigating factors have more influence on penalties than aggravating factors. More than two-thirds of the frequently found mitigating factors considered by IIROC are related to post-offense. Another significant finding is that more than two-thirds of the frequent aggravating factors considered are also found in the frequently identified but not considered aggravating factors. These findings indicate that hearing panels were using mitigating factors to mitigate sanctions as opposed to the aggravating factors, which can escalate sanctions. It is hard not to see the Ontario Securities Commission and Ottawa not using the findings to inform self-regulatory reforms in Canada.

Can Continuous Disclosure Defaults Be Attributed to Big 4 versus Non-Big 4 Auditor Differences?

ABSTRACT The numerous scandals attributed to lack of independence on the part of Big 4 auditors have reignited one of the most controversial issues in the accounting profession: Do Big 4 auditors provide higher audit quality? The objective of this paper is to examine whether the auditor's reputation affects non-compliance with disclosure obligations and the type and number of defaults detected by the Ontario Securities Commission. Using an internet-based list published by the Ontario Securities Commission in February 2020, I develop a sample of 286 firms consisting of 143 issuers in default and their 143 matching firms. Results show that the presence of a Big 4 auditor is associated negatively with the various default types and the number of defaults. One implication of these findings is that hiring a reputable auditor may prevent firms and shareholders from being on the “shame list.” JEL Classifications: G38; G34; G32.

Empirical Data On How Investors Are Harmed When Companies Do not Disclose Information About Violence and Lack of Indigenous Consent

The Justice and Corporate Accountability has filed a number of complaints to the Ontario Securities Commission, the British Columbia Securities Commission and the United States Securities and Exchange Commission relating to the failure of Canadian mining companies to disclose information on community conflict, violence and Indigenous consent. An analysis of the cases found four indicia that showed that the information disclosed in the complaints (but not disclosed by the companies) was important material information relating to the health of the company, including a drop in share price; divestment by institutional investors; and shareholder class action law suits against the company. The study recommends that extractive companies should have more explicit guidance related to disclosure of violence and human rights issues, including specific disclosure requirements relating to free, prior, and informed consent of Indigenous peoples (FPIC). This study is a follow-up to the JCAP report, “The Canada Brand: Violence and Canadian Mining Companies in Latin America” (2016), which found that publicly listed companies reported only 24.2% of the deaths and 12.3% of the injuries listed in that report.

The Impact of Whistleblowing Awards Programs on Corporate Governance

Since the introduction of a whistle-blower awards program by the US Securities and Exchange Commission in 2010, securities regulators in other countries, including Canada, have adopted, or are considering adopting, similar programs. For example, in 2016, the Ontario Securities Commission adopted its own whistle-blower award program. Although the primary main reason for these programs is to encourage the reporting of securities violations to the regulator, they could also have an impact on corporate governance. This is because the implementation of such a program may prod companies to design, and then instigate, a more effective internal whistle-blowing system. A truly successful internal whistle-blowing system can enable a company to detect and correct potential wrongdoing before it causes significant harm. This article closely examines this connection between whistle-blowing award programs, companies’ compliance and risk management systems, and how a whistle-blowing award program might well result in more effective internal whistle-blowing systems without the need for a regulator to resort to the imposition of prescriptive rules. As such, this article reflects upon how whistle-blower award programs fit within new governance regulatory theory that challenges traditional “command-and-control-type”regulation in favour of an outcome-driven approach.

Home Capital Group - The High Cost of Dishonesty

This instructional case presents the problems that began in the summer of 2015 when Home Capital Group (HCG) announced it had cut ties with 45 mortgage brokers for falsifying figures on mortgage applications regarding the earnings of prospective home purchasers in Canada. The case details the subsequent investigation by the Ontario Securities Commission in 2017 that resulted in a run on the bank and consequent efforts by HCG to stay afloat. While emphasizing the importance of strong corporate governance and Corporate Social Responsibility (CSR) initiatives, this case also stresses the influence of various stakeholders including short-sellers, regulators, shareholders, management, depositors, and customers in the evolution of subsequent events. As a whole, this case provides an interesting context for the discussion of stock market efficiency.

Abnormal returns on Canadian insider purchases before press releases

PurposeThis study aims to examine whether insider purchases made within 30 days prior to the publication of various kinds of press releases earn higher abnormal returns (AR) than those in the absence of such announcements. It also attempts to identify the factors that explain ARs.Design/methodology/approachThis study considers data for Canadian insider purchases made on the Toronto Stock Exchange 60 Index. An event study methodology is used to calculate AR, and a mixed regression model is used to evaluate the effect of corporate news on AR.FindingsThe empirical results indicate that insiders achieve greater ARs when they purchase stock prior to press releases; findings also show that these returns are specifically related to purchases made before the announcements of mergers and acquisitions, ongoing projects, financial structure, financial results and asset disposals. This is because of the firm effect.Practical implicationsThese findings have important implications for Canadian market regulatory authorities, especially the Ontario Securities Commission and other market participants who are interested in corporate governance, such as boards of directors and shareholders.Originality/valueThe present findings show that regulatory bodies must work with companies to raise awareness of improper insider trading.

Securities settlements as examples of crisis-driven regulation

International bodies have criticized Canadian financial markets for being lax in the area of enforcement. We examine whether such criticisms are applicable to settlements struck by the Ontario Securities Commission (OSC). We reach a number of important findings. First, the total number of parties sanctioned and the total amount of payments made to the OSC increased after the 2008 financial crisis, although these numbers decreased in subsequent years. Second, there is no discernible trend in the types of proceedings by which cases were concluded, although the OSC does use settlements more than other provincial regulators. Third, corporations, first-time offenders, and financial service companies are more likely than individuals or repeat offenders to settle and the OSC tends to settle less often when the case involves serious offences such as fraud or manipulation. Finally, penalties imposed as a result of a settlement were not statistically different than those imposed in a hearing. Interestingly, while there are outliers, financial service companies did not pay higher penalties than other parties, nor did repeat offenders although this has recently changed with the introduction of no-contest settlements. Our data support the idea that regulatory activity follows a cyclical pattern and, following a crisis, regulatory activity increases.

“Bringing Canadian Women on Board”: A Behavioural Economics Perspective on Whether Public Reporting of Gender Diversity Will Alter the Male-Dominated Composition of Canadian Public Company Boards and Senior Management

In the majority of jurisdictions with developed public markets, the debate on the gender diversity of boards and senior management, practically speaking, has moved from “why” to “how” in recent years. It is now arguably far more accepted that increasing the percentage of women on corporate boards is good for society and good for business. The new debate surrounds the mechanisms needed to increase the number of qualified women on boards and in senior management positions. Several jurisdictions around the world have tackled the issue by implementing fixed quotas. Other jurisdictions have followed a softer touch approach by requiring listed companies to comply with gender diversity targets or explain their failure to do so. Largely supported by industry, the Ontario Securities Commission adopted a disclosure model in 2014, which was subsequently followed by eight other Canadian jurisdictions. This model requires TSX-listed and other non-venture issuers to comply with disclosure requirements for a range of gender diversity initiatives in their annual public corporate governance disclosure or explain why they do not comply. This article considers the gender bias and implicit prejudice that the new disclosure regime attempts to remedy and the effectiveness of such a disclosure regime in the context of behavioural economics heuristics and theories, focusing specifically on the “debiasing through law” versus “debiasing law” methodology presented by Christina Jolls and Cass R. Sunstein. Based on this analysis, suggestions are made to increase the effectiveness of the new disclosure regime, including whether the quota debate should be re-opened if meaningful quantitative evidence of increased gender diversity is not demonstrated by 2018.

Corporate Social Reporting Initiative - Report to Minister of Finance

In response to a Private Member’s Resolution calling upon the Ontario Securities Commission to conduct a consultation on corporate social responsibility and environmental, social and governance reporting standards and to adopt an enhanced standardized reporting framework, the Hennick Centre for Business and Law and Jantzi-Sustainalytics undertook a multi-stakeholder consultation process in respect of requirements regarding corporate social disclosure standards. This report to the Minister of Finance reflects a synthesis of the views that emerged from that process. The recommendations herein complement those contained in the Commission’s report to the Minister of Finance, dated December 18, 2009 (regarding environmental and governance disclosure), as well as those reflected in OSC Staff Notice 51-716. They reflect a growing demand for improved social performance disclosure to facilitate better governance and decision-making on the part of issuers, investors and other stakeholders.

Accounting and Auditing Activities of the Ontario Securities Commission, 1960s to 2008 Part 3: The Fifth Chief Accountant, 1996-2008

We present Part 3 of a historical review and analysis of the role played by the Ontario Securities Commission (OSC) in accounting and auditing from the 1960s onward. Part 1 dealt with the period from the 1960s to 1985 (Zeff and Radcliffe, 2010a). Part 2 reviewed the work of the first four chief accountants, from 1986 to 1996 (Zeff and Radcliffe, 2010b). This third and final part reviews the work of the fifth chief accountant, John A. Carchrae, from 1996 to 2008. It began with the reorganization of the OSC and the reassignment of functions. The chief accountant position was now that of a permanent employee, albeit still as head of a very small department. The second part of Carchrae's tenure was dominated by the need to respond to the financial crises of the early 21st century with extensive regulatory change as well as addressing the shift to international accounting standards in Canada. Activites de comptabilite et d'audit de la Commission des valeurs mobilieres de l'Ontario de 1960 a 2008 — Troisieme partie : le cinquieme chef comptable, 1996–2008 Resume Les auteurs presentent la troisieme partie d'un survol historique et d'une analyse du role joue par la Commission des valeurs mobilieres de l'Ontario (CVMO) dans la comptabilite et l'audit, a partir des annees 1960. La premiere partie de ce survol portait sur la periode allant des annees 1960 a l'annee 1985 (Zeff and Radcliffe, 2010a). Dans la deuxieme partie, les auteurs passaient en revue le travail des quatre premiers chefs comptables, de 1986 a 1996 (Zeff and Radcliffe, 2010b). Dans cette troisieme et derniere partie, ils se penchent sur le travail du cinquieme chef comptable, John A. Carchrae, de 1996 a 2008. Cette periode s'amorce avec la reorganisation de la CVMO et la redistribution des fonctions. Le poste de chef comptable sera desormais un poste permanent, bien que son titulaire soit a la tete d'un tres modeste service. Dans le second volet de son mandat, John Carchrae a ete accapare par la necessite de reagir aux crises financieres du debut du XXIe siecle en procedant a d'importantes modifications de la reglementation et par la conversion aux normes comptables internationales au Canada.

The Materiality of Climate Change and the Role of Voluntary Disclosure

Investor groups in both Canada and the U.S. have petitioned the Ontario Securities Commission and the Securities and Exchange Commission to issue statements clarifying the application of existing disclosure requirements to climate change-related risks. Even if issuers are meeting their current obligations with respect to disclosure of climate change risks, however, the “materiality” threshold for disclosure would likely leave a gap between what issuers are required to disclose under the law and what interested investors would like to know about how issuers are responding to the challenges posed by climate change. This is due to the fact that if an issuer has determined that climate change will not have a material impact on its financial results, it is under no obligation to disclose its reasons for reaching this conclusion. Investors interested in environmentally-responsible investing, however, may want to know these reasons. It may be relevant to their investment decisions, for example, whether the reason is because the issuer has already reduced its greenhouse gas (GHG) emissions, rather than because it has purchased carbon credits on the futures market which it can use to meet any regulatory limits on emissions the government may seek to impose. But it does not necessarily follow that mandatory disclosure under securities regulation should provide this information. A preferable approach is for voluntary disclosure regimes, such as the Global Reporting Initiative (GRI), to fill this gap. Although take-up by corporations of the GRI standard for disclosure has been slow, environmental reporting in compliance with the standard can provide interested investors with credible and comparable information.

Victory for Access to Justice as Supreme Court of Canada Upholds Certification Decision in 'Market Timing' Class Action

In a major victory for mutual fund investors, the Supreme Court of Canada has upheld a decision to certify the “market timing” class action (AIC Limited v Fischer). The decision means that securities class actions can proceed even where fines have been imposed or settlements reached in parallel regulatory proceedings by the Ontario Securities Commission (OSC). The decision has significant and positive ramifications for access to justice and has been described as “the most important class action decision this year”.

Anti-Takeover Provisions, Software Companies, and Value Creation

Many high-tech companies adopt anti-takeover provisions (ATPs). This has been especially prevalent in the software industry. These companies argue that takeover protection is necessary to protect the company from ‘opportunistic’ takeover bids; and thus, to enable the company to focus on long-term innovation and value-creation. This has induced some regulators, such as the Ontario Securities Commission, to re-evaluate their restrictions on ATPs. Thus, I test if ATPs can encourage value-creating innovation in companies in the software industry (‘IT companies’, for short). I analyze the impact of ATPs on investments (acquisitions) made by IT companies. I find that Protected-IT companies, as marked by a preponderance of ATPs, make acquisitions that create more shareholder wealth (as proxied by acquirer returns and post-acquisition Tobin’s Qs) and are more likely to undertake acquisitions that increase innovation (as proxied by increases in R&D). This suggests that ATPs might be beneficial in high-tech companies.

The Ontario Securities Commission on Accounting and Auditing from the 1960s to 2008–Part 2: The First Four Chief Accountants, 1986–1996*

AbstractThis article, Part 2 of a historical review and analysis of the Ontario Securities Commission (OSC), describes the role played by the first four Chief Accountants in the regulation of accounting and auditing from 1986 to 1996. Part 1 dealt with the period from the 1960s to 1985. Part 3 will treat the role played by the fifth Chief Accountant, from 1996 to 2008. As the principal Canadian stock exchange in recent times has been the Toronto Stock Exchange, the OSC has been the most important securities market regulator in Canada. Prior to this article, the academic and professional accounting literature has been largely barren on the OSC’s evolving role on accounting and auditing issues.

The Ontario Securities Commission on Accounting and Auditing from the 1960s to 2008 – Part 1: 1960s to 1985*

AbstractWe present Part 1 of a historical review and analysis of the role played by the Ontario Securities Commission (OSC) in accounting and auditing from the 1960s onwards. Part 1 deals with the period from the 1960s to 1985. Parts 2 and 3 will treat the roles played by the first five Chief Accountants, from 1986 to 2008. As the principal Canadian stock exchange in recent times has been the Toronto Stock Exchange, the OSC has been the most important securities market regulator in Canada. Prior to this article, the academic and professional accounting literature has been largely barren on the OSC’s evolving role on accounting and auditing issues.

The Ontario Securities Commission on Accounting and Auditing from the 1960s to 2008 - Part 3: The Fifth Chief Accountant, 1996-2008

John Carchrae, Fifth Chief Accountant of the Ontario Securities Commission, served 1996-2008. This term was greater than that of all predecessors combined and covered momentous events concerning accounting and auditing that produced substantial regulatory reform. During this period the OSC challenged the accounting and auditing profession to better serve the public interest. These calls were matched with regulatory action on a series of matters including, inter alia, non-GAAP measures; revenue recognition; and the development of a response to Sarbanes-Oxley that was constitutional in the Canadian context. OSC joined with other provincial regulators through the Canadian Securities Administrators (CSA) to seek harmonization of Canadian securities regulation through a series of National Instruments. Later events included the explosion of income trusts and regulatory concern regarding their accounting, especially for cash. The era closed with adoption of international accounting standards, a project encouraged by OSC for over a decade.

Corporate Social Performance: Reporting Roundtable

The purpose of this consultation (to take place in Toronto, Canada on December 7, 2009) is to elicit the views of informed stakeholders in a review of reporting and disclosure requirements under Ontario securities legislation for corporate “social” performance. In particular, the Consultation paper considers whether existing reporting and disclosure requirements on corporate social performance are adequate. If change is advisable, the question becomes what regulatory or other measures merit consideration. The Consultation is in response to a private member’s resolution introduced by the Honorable Laurel Broten (Etobicoke-Lakeshore), and passed unanimously by the Ontario Legislature (the “Resolution”). In part, the Resolution calls on the Ontario Securities Commission to conduct a consultation on corporate social responsibility and environmental, social and governance reporting standards, and to adopt an enhanced standardized reporting framework for both quantitative and qualitative social and environmental information to ensure that corporate disclosures are understandable, comparable, and outcome-focused. The Resolution called for a report, including policy recommendations, to be submitted to the Minister of Finance. The Consultation is being organized by the Hennick Centre for Business and Law at York University and Jantzi-Sustainalytics, with sponsorship from the Association of Chartered Certified Accountants.

Preventing and Detecting Accounting Irregularities: The Role of Corporate Governance

This study examines the extent to which corporate governance acts as an efficient means of protecting investors against accounting irregularities, thus contributing to the literatures on governance, on fraudulent financial statements and on the public enforcement of securities laws by market authorities. It does so by empirically testing the prediction that the seriousness or level of non compliance of irregularities detected by market authorities is negatively associated with the quality of governance. For that purpose, a sample of 107 firms identified as reporting issuers in default by the Canadian Securities Administrators and the Ontario Securities Commission is matched with 107 other control firms based on industry, size, stock exchange membership and date of default.