The Case Against a National Securities Regulator

The case against securities regulation in general has never been properly made and this item by Conrad Black makes a decent stab at it.  This is a subject that has involved me all my business career and has been a source of much frustration.  Much of the criticism leveled here is true and also much is omitted.  The case for regulation itself is quite real but the application has often been awful and grossly misguided.

In short, the whole edifice needs to be well thought out from the ground up and made immune to legal gamesmanship.  This is a difficult order and impossible to construct on the floor of congress.  Imagine congress writing the rules for Texas hold’um?  This is way more difficult.

The fact is that a consumer protection mechanism is certainly needed to provide a forum for conflict resolution.  Normally the industry would provide exactly this if the government had not got into the business.

Corporate oversight is at best a disaster.  It would be obviated immediately that an effective set of immutable rules were put in place that mostly worked.  Lawyers would need to be excluded and excessive accounting oversight would need to be eliminated.  This way fraudsters would be open to litigation without a screen of audits and legalese.  Again a proper set of rules can stop the nonsense.

The USA already has a national regulator whose inability to spot the highly visible Bernie Madoff begs the question of their value.  Everything else is typically a response to real headlines and some enforcement when a complaint bears fruit.  They ended up chasing victims of a broken system.

The case against a national securities regulator
Conrad Black, National Post · Saturday, Jul. 3, 2010

A national securities regulator is a bad idea for Canada. This point has frequently been made by my Financial Post colleague Terence Corcoran and others, more knowledgeably than I can from my tropical fastness. But I may have more experience than most commentators at actually dealing with these regulators. I had an absolutely unblemished compliance record with the Ontario Securities Commission (OSC) for 30 years, as I did in the United Kingdom and, apart from a consent decree in 1986, in the United States, all countries where I was also active.

My practice of not using this or other places where I write regularly to argue my side of these matters will only be varied here to make the point that in March 2005, the OSC killed my offer of $7.60--plus a litigation trust to deal with lawsuits -- for every share of Hollinger Inc. that my associates and I did not already own (78% of the stock was already ours). The Commission did so against the strong recommendations of its own staff, led by the enforcement director, (whom had scrutinized and help construct the offer), and despite the fact that of the minority shareholders who voted, 87% voted for our proposal.

The company then passed definitively into the hands of self-serving, court-favoured charlatans who quickly led it into bankruptcy, while taking many millions for themselves. Shareholder value of $250-million was vapourized while these poseurs prattled, and some prattle yet, about fictitious "litigation assets." It was a rape of the interests of the shareholders, the protection of whom is the raison d'etre of all securities regulators. And it was implemented by the Commission at the behest of Richard C. Breeden, former chairman of the Securities and Exchange Commission of the United States, who made $50-million supervising the destruction of our companies, and sponsored and inspired the entire persecution of us, starting with all the venomous claptrap about a "$500-million corporate kleptocracy."

This is disintegrating and there will be a proper reckoning, through the appropriate legal channels, for all those responsible. But the point here is that Breeden, as he jubilated to Jacquie McNish of The Globe and Mail at the time, "lectured" the OSC that it had to stop our offer. In the strongest branch-plant, copycat, me-too traditions of the old, subsidiary Canada, the OSC obediently sent tens of thousands of ordinary shareholders to the wall, slapping their own staff down as they did so, though they had worked hard along with us to protect the small shareholders.

It is a myth that these regulators actually achieve much that is useful. They are an outgrowth of the desperate economic times of the 1930s, coupled to the political advantages of layering in more and more government in the name of reform and fairness. There have been laws against fraud and theft and commercial misrepresentation for centuries. The South Seas Bubble in the 18th century, and the Panama Scandal in the 19th, were illegal and the culprits were prosecuted successfully. These laws were perfectly adequate to deal with stock market cheats and other sharpers.

But in the awful hardships of the Great Depression, the theory arose that one of the causes of that calamity was large-scale fraud in the securities markets. It wasn't. Overborrowing followed by deflation and higher tariffs was the cause. But it was politically useful to cover that flank, and the SEC was set up with the notorious scoundrel Joseph P. Kennedy as the first chairman. When his suitability was questioned, FDR, who was an amused cynic at all times, blithely and famously replied, of his nominee: "Set a thief to catch a thief."

The corresponding figure at the OSC in those days was, at least, an honest man, Colonel George A. Drew, later premier of Ontario and leader of the federal opposition. He didn't bother honest businessmen with onerous requirements for over-compliance. These commissions were placebos, designed to bullet-proof the political leaders against charges of being soft on sticky-fingered speculators and wash-traders. It would have been better, other than in terms of political grandstanding, just to hire more people in a grandly titled section of the justice ministry, and to set up a co-ordinating office to assist companies, compulsorily if necessary, to adhere to guidelines to protect minority rights and all other reasonable definitions of the public interest.

Obviously, fraud must be discouraged and prosecuted. But in securities matters as in other spheres, government proliferates, and in any enforcement context the objective is always to have as much leeway as possible to meddle, harass and litigate, or preferably simply seize and intimidate by executive fiat. The placebos became Frankenstein monsters, competing with each other for the scalps of the prominent, posturing before the media as proactive public defenders and generally being a pestilential redundancy much of the time. But at least they answer to elected officials.

On its face, the proposal for a Canadian national securities regulator is modern, efficient and progressive. It is really nothing of the kind, however. Alberta and Quebec will opt out, and Alberta will adopt a less overbearing regime than Ottawa, and will attract tens of thousands of jobs and ultimately much of the financial industry from Toronto. There is nothing wrong with that in principle, but Canadian cities should gain from each other in positive competition upon a level playing field, not because of the political strangulation of one of them. (The political disaster of the prolonged independentist crisis is how Toronto leapfrogged the magic Montreal of the Centennial Year of 1967 and transformed itself from a backwater to be almost twice as large and with at least 250% of the economy of Montreal 40 years later.)

The enabling legislation for this new regulatory monster, which has been sent to the Supreme Court for determination of constitutionality, has been designed to make it answerable to no legislature or government, apart from an information-only annual report to the federal minister of finance (that could be included in a Christmas card to save postage). It would make up and enforce its own regulations and would receive a vast delegation of powers of criminal prosecution. This is a horrifying prospect of untrammelled official power in itself, compounded by the spectre of legal chaos in Charter and in inter-jurisdictional disputes.

The fact is that there is very little financial fraud in Canada, and what there is is thoroughly outgunned by the present forces of official virtue, fallible as they are, as they demonstrated by their corporacidal assault upon us, described above. A case can be made, and I have made it in these pages, that Canada is the best-governed advanced country in the world, as one country after another loses faith in its leadership (and Japan, Australia and the U.K. have all sent their government heads packing in the last six weeks). Stephen Harper, as I have also written here before, may be the most astute federal political manager Canada has had since the obscurantist, almost imperishable sans pareil, W.L. Mackenzie King.

But he has worrisome moments. He has the reactionaries in his corner anyway and shouldn't be pandering to them, as, again, I wrote here several weeks ago, with a retrograde, medieval sentencing and custodial policy. The emphasis on financial regulation in Canada should be on harmonization within the country and a competitive lack of needless harassment compared to what obtains in other comparable countries.

Canada didn't have bank failures and bailouts in the latest crisis. And the entirely predictable reaction of countries that have had them, such at the United States and the United Kingdom, is for the regulators who had all the authority they needed to avoid the debacle and didn't use it, to be rewarded for their failure by receiving more power to supplement the perfectly adequate ability they already possessed and did not use. In this, there is great opportunity for Canada, with such a strong record of reasonable regulation, an improving tax climate and sector stability, to attract desirable segments of the international financial industry to this country. Federal Finance Minister Jim Flaherty is being feted in The Wall Street Journal and elsewhere, and spokesmen of the Royal and Toronto-Dominion banks in particular are regularly and respectfully quoted in the international financial press.

Build on what we have. Anything that smacks of putting Toronto under an iron maiden of regulatory zeal while encouraging a capitalist flowering in the Prime Minister's home province in the shadow of the Rockies will backfire with the contemplated draconian chastisement of lawbreakers that I decried in these pages several weeks ago. These policies are repressive and divisive and they must be reconsidered for the government's own good, failing which, they must be stopped and reversed, for the benefit of the whole nation, which they would disserve. I'm sure Stephen Harper doesn't have to be protected from himself, any more than Mackenzie King did. All that is now needed is a rethink and vigorous pruning. But where is our "progressive majority" in the other three parties? I don't expect anything from the hypocrites and racist mountebanks in the Bloc Quebecois, but where are the NDP of former ex-convict and much admired MP, Ron Howard, and the Liberals of former civil liberties professor Pierre Trudeau --they are Missing In Action."

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