Judge denies OSC penny stocks policy

A judge has struck down an Ontario Securities Commission (OSC) policy designed to control abuses in the sale of speculative penny stocks.

In a 42-page decision, Justice Robert Blair of the general division of Ontario Court ruled the policy is outside the commission’s jurisdiction, Canadian Press reports.

Blair said the policy amounts to a new regulation, which only the Ontario legislature has the authority to issue.

“The Ontario Securities Commission is the regulator of the securities industry, but it is not empowered to make the regulations,” Blair wrote. However, he said his ruling doesn’t mean such a policy

isn’t needed. “I am satisfied that the information which the commission had before it . . . amply justified its concern,” he wrote.

The commission said its policy was a response to numerous complaints about penny stock sales, including high-pressure sales tactics and selling to people who should not be holding speculative investments.

The policy was due to take effect June 1 but was put on hold because of the court action.

Among other things, it would have required sellers of the stock to give potential investors a statement outlining the risks involved in penny shares. The ruling is a victory for the 9-member Securities Dealers Society of Ontario, which launched the lawsuit against the commission last September. The dealers claimed the policy represented a deliberate attempt to put them out of business.

These firms — which are generally smaller than the investment dealers that are members of the Toronto Stock Exchange — specialize in selling shares in junior companies, especially in the natural resource sector. The highly speculative shares are called penny stocks because of their low price. They trade in the over-the-counter market.

Mark Gordon, senior legal counsel with the OSC’s enforcement arm, said commission officials will review the judgment and consider an appeal. Blair did not rule on the securities dealers’ claim for $1 million in damages.