Matkin calls for overhaul of B.C. securities system

A report has called for a major restructuring of the system whereby securities are regulated in British Columbia.

The final report of the Vancouver Stock Exchange and Securities Regulation Commission says there is “broad consensus” that reform is required in order to rectify long-standing problems such as the questionable quality of listed companies, market manipulation, and ineffective regulation of promoters and prosecution of wrongdoers.

“These abuses must be addressed,” said Commissioner James Matkin, who was appointed by the province last year to head an investigation into the operation and regulation of the West Coast securities market. He and his advisory committee heard from various investors, issuers and other market participants.

“Nothing less than significant restructuring will improve public confidence in the fairness, efficiency and genuine entrepreneurial qualities of the venture capital market in B.C.,” Matkin declared.

As an example, he called for the Vancouver Stock Exchange (VSE) to expedite public access to an online database so that timely and reliable information is made available. This would include reports on so-called “real time” insider trading. (Historically, many of the VSE’s problems stemmed from manipulations by insiders in junior venture stocks.)

A recommendation to register promoters was endorsed by Vancouver’s best known promoter himself, Murray Pezim. “It’s time to get rid of the nominees who orchestrate from behind the scenes,” Pezim said. “Promoters should be upfront and tell the public the truth and honestly spend risk money in the ground. That has been the secret of my success.”

Another of Matkin’s key recommendations is that the VSE should no longer be responsible for the conduct and discipline of brokers. Instead, it was suggested the Investment Dealers Association (IDA) of Canada assume this duty, with more attention given to education and standards.

The VSE, however, was not particularly supportive of that proposal. “We fail to see how Mr. Matkin’s proposal to transfer member discipline from the VSE to the Toronto-based IDA — that is, from one broker-owned organization to another — will improve the results,” VSE officials stated in a news release. On the other hand, the exchange was pleased that some of its recommendations were supported in the report, including the need for regulating promoters, increasing resources for criminal prosecution and establishing the right to request that the Securities Commission hold hearings.

But the VSE remained cool to a recommendation that so-called “reverse takeovers” (RTOs) be subject to the approval of a prospectus that would be vetted by the British Columbia Securities Commission (BCSC). It said the proposal “does not take into account recent reforms that have reduced problems previously associated with RTOs.”

A fundamental recommendation of the report is that the BCSC be replaced by a customer-controlled, independent, and self-funding securities and exchange board.

“As the senior regulator of the provincial securities markets, the BCSC is seen as being too passive and over-occupied with the prosecution and adjudication of securities abuse,” Matkin said. “Its credibility in the business community has been eroded by inappropriate appointments and it has failed to provide the strategic, regulatory leadership required to change the behavior of some market participants.”

Therefore, Matkin has proposed a structure drawn from the securities systems in the United Kingdom and the U.S. The proposed system would allow for the separation of the adjudicative and policy-making roles of the BCSC. “The governors of the board would be freed from the responsibility of hearing cases, which would enable them to focus on the development of broader policies to address ongoing problems,” Matkin explained. “Adjudication would be handled by a separate group of Administrative Law Judges, as exists under the Securities and Exchange Commission in the U.S.”

He also recommended broker firms be required to undergo a test to determine whether they have the due diligence capability to underwrite new issues. He also called for administrative penalties to be increased to $1 million from $100,000 and the creation of a securities fraud office to co-ordinate criminal prosecutions.

Yet another recommendation is that class action rights be granted to shareholders in order to expand civil remedies and provide more discipline with regards to misleading press releases.

But Matkin cautioned that investors should obey the injunction caveat emptor, because the VSE is a speculative market and responsible regulation cannot protect the public from every possible misadventure or bad investment.