Canadian Lawyer InHouse

A LACK OF SUBSTANCE T MEASURES AS ONTARIO SECURITIES COMMISSION DEMANDS MORE SCRUTINY FROM OVERSEERS. By Michael McKiernan FOREIGN ISSUERS TOLD TO SHARPEN THEIR OVERSIGHT exchanges and those involved in bring- ing them to market in a scathing report that accused boards of directors, under- writers, auditors, and exchanges of fall- ing short in their obligations. And while the jury is still out on he Ontario Securities Commission has fired a shot across the bows of emerging mar- ket companies on Canadian stock listed sive physical distance between issuers' emerging market bases and their Bay Street partners was reflected in the dis- connect between companies' local man- agement and their Canadian governance. Management oversight, they found, was also hampered by a lack of local business practice knowledge and language barriers. For Ermanno Pascutto, the executive The OSC also found that the mas- whether the commission has the will to follow through on its tough talk with concrete action, most agree the spotlight shone on questionable practices in the area is unlikely to shift any time soon, especially with high-profile collapses still working their way through the regulatory and legal systems. In March, the OSC released its director of investor rights group Canadian Foundation for Advancement of Investor Rights, the OSC is late to the party with its assessment, one he says is long overdue. "These are concerns I've had for a Emerging Markets Issuer Review after a nine-month study of 24 Ontario report- ing issuers with significant operations in emerging markets, such as Asia, Africa, South America, and eastern Europe. That sample accounted for just over one-fifth of Canada' Together, they had a market capitalization totalling around $40 billion. Central to the OSC' s 108 emerging market issuers. apparent "form over substance" approach to compliance by issuers and gatekeepers alike. "In our view, the level of rigor and independent-mindedness applied by boards, auditors and underwriters doing their important jobs – management oversight, audit, due diligence on offerings – should have been more thorough," reads the report. in s concern was an long time. In two decades of promoting these listings, they haven't addressed them at all. I've mentioned it to the Toronto Stock Exchange on a number of occa- sions, that the Canadian market is basi- cally not equipped to handle emerging market issuers as the situation stands right now, lots of money, except investors, and very little attention is paid to the great prob- lems until there' " he says. "Everyone has been making one month after a devastating report by short-seller Carson Block labelled TSX- listed Sino-Forest Corp. a "multi-billion dollar Ponzi scheme. pany has been delisted from the stock exchange, and the OSC has levelled its own fraud allegations against it and its former executives. Another Chinese com- pany, sportswear manufacturer Zungui Xaixi Corp., which is listed on the TSX Venture Exchange, has also kept the issue in the headlines after it was accused of capital market abuse. Both companies are also the targets of proposed class actions " Since then, the com- 26 • AUGUST/SEPTEMBER 2012 WWW.CANADIANLAWYERMAG.COM/INHOUSE The review was launched in July 2011, s a crisis." by investors. Still, late is better than never, according to Pascutto. "It' at least acknowledged the problems and started to dig in," he says. "The review has opened the eyes of the regulators to the extent of the problem, but it stopped halfway, in that it didn't lay out a roadmap with concrete steps on how to tackle them, and a timetable to make sure they're doing it on a timely basis." Instead of new rules or policies, the s good to see this commission has OSC emphasized its current expectations that issuers and gatekeepers "discharge all of their responsibilities in a way that pro- motes the protection of Ontario inves- tors and confidence in our markets," and recommended the "development of guid- ance, best practices, or enhanced vigilance" to help them get up to those minimum requirements. Ed Waitzer, a former chair of the OSC, currently a partner at Stikeman Elliott LLP in Toronto, says the "aspirational" recom- mendations fall short. "It' what we expect.' But what you would have hoped for is something about how you can get there, and what they're going to do if you don't meet those expectations. There' no real practical guidance," he says. s fine for the OSC to say: 'here's s Waitzer says, was a critique of the roles of lawyers and the OSC itself. "They point the finger at all kinds of Notable by their absence in the report, people, but not at themselves, which makes me think that people who live in glass houses shouldn't throw stones," he says. "Its incompleteness undermines the integrity of the analysis from my perspective. " INHOUSE ROBERT CARTER

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