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Consultation process will determine rules

Special to The globe and Mail

When the U.S. government passed the Sarbanes-Oxley Act last August, which set down strict rules for corporate governance, Canadian companies listed on U.S. exchanges were forced to comply.

Many companies had already put the practices required under Sarbanes-Oxley into place. Even so, Canadian securities regulators are now examining this country's patchwork of rules to determine if stricter regulatory requirements would benefit the rest of corporate Canada.

In the next few months, both the federal government and provincial finance ministers will be completing studies of Canadian securities regulations. Topics for discussion will include the establishment of a national securities regulator, similar to the U.S. Securities and Exchange Commission, and the value of a more rules-based regulatory system over the principles-based system currently in place.

"The process here in Canada will see us preparing draft rules, publishing them for comment, and then doing quite an extensive consultation before it becomes law in Canada," says David Brown, chairman of the Ontario Securities Commission.

This process will likely start in early June, Mr. Brown says, and will involve consultations with members of the Canadian Securities Administrators (CSA) across Canada.

"We've wrestled with rules versus guidelines," he says, noting a balance will be sought between principles and rules -- a distinction from the U.S. regulatory system, which is rules-based.

Indeed, some Canadian regulators, such as Toronto Stock Exchange president Barbara Stymiest and B.C. Securities Exchange Commission chairman Douglas Hyndman, have argued that the U.S. rules would impose too great a burden on smaller Canadian companies.

Currently, companies listed on the Toronto Stock Exchange must disclose and explain any differences between their corporate governance practices and the TSX's best-practice guidelines on an annual basis. Companies are not required to comply with the 14 guidelines.

"Issuers are in the best position to decide what system of governance is most important for their company, given their industry and state of development," says Robert Fabes, vice-president of advisory affairs for the TSX. "We don't believe that we should be saying there's only one way of achieving good corporate governance."

Last April, the TSX published amended guidelines in response to a report by the Joint Committee on Corporate Governance, co-sponsored by the TSX and the Canadian Institute of Chartered Accountants. In October, the TSX issued another set of revised guidelines in response to a request by the OSC to examine the current system, Mr. Fabes says.

The OSC will soon have additional powers granted to it by the Ontario legislature under Bill 198. The proclamation of the new act is expected in the next few weeks, Mr. Brown says, and will include the power to impose fines on companies of up to $1-million, and to make them disgorge ill-gotten profits.

"The overall thrust [of Ontario's new legislation] is to give us tools to restore investor confidence," says Mr. Brown, noting the well-publicized string of corporate scandals south of the border that prompted last year's U.S. regulatory changes.

Problems in corporate governance have resulted from ethics, behaviour, culture and boards of directors, he notes. "You can't legislate culture or ethics but you can try to get the incentives right, so that people are encouraged to act appropriately, and put checks and balances in place. What we hope to do with the new legislative powers is to help change the culture."

Good results are already evident in relations between audit firms and corporations, he says. Problems have arisen in the past when auditors have been directed by management, when they are supposed to be auditing management on behalf of shareholders.

"What the U.S. is doing, and we propose to do, is to have an independent audit committee directing the scope and course of the audit, essentially to make the audit committee the client of the auditor. I'm told this cultural shift is happening."

Audit committee members used to worry whether they knew enough to ask tough questions of the auditors, Mr. Brown says, but now they are finding the auditors coming to their meetings, presenting issues and indicating what management wants them to do. "So the atmosphere has become very different."

The TSX's current position is to propose, as a listing requirement, that a majority of audit committee members be defined as "unrelated" or independent, Mr. Fabes says.

Its current guideline -- that the audit committee should be composed exclusively of independent directors -- will remain a guideline.

"So it provides flexibility to smaller issuers who will be able to meet the listing requirement, and have the opportunity in disclosure to let investors know why not all directors are independent."

The newly formed Canadian Public Accountability Board will oversee the auditors of Canadian public companies. Its chairman, former Bank of Canada governor Gordon Thiessen, describes CPAB's goal as raising auditing standards in Canada.

Mr. Thiessen favours a principles-based system of regulation. "We're seeing in the U.S. that companies are managing to abide by the strict letter of rule, even if not by the spirit of the rule. I think there is a risk. We want boards of directors and audit firms to worry about whether they're living up to the principles.

"I don't know that you'll ever have a system where regulators can see and do everything. What you need is a strong sense of commitment and concern on the part of boards of directors."

On the issue of a national securities adviser, Mr. Fabes says the TSX has not taken a position but is "encouraging discussion of the topic. Obviously it's of primary importance; we want to make sure all of Canada remains competitive in terms of the ability to attract capital."

A national securities commission isn't "crucial," Mr. Thiessen says, but he stresses the importance of co-operation among the various provincial regulators. "We want to make it feel like there's a single regulator, even if there isn't."

Mr. Brown believes a national regulator is essential, and suggests a pan-Canadian securities commission, appointed by all the provinces and responsible to the respective provincial ministers.

"It's important to have the same rules in place across the country, and also have them interpreted consistently.

"We're preparing a uniform securities law, so at least we'll have uniform securities rules across the country. Right now, we have a patchwork quilt. But even with [a uniform law] in place, if we have local administrators applying the law, it won't be long before it deteriorates."

© The Globe and Mail

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