Reforms in store for B.C. securities markets

Major structural changes to the British Columbia securities market are expected to be recommended by a commission appointed by the province to review the operations and regulation of both the Vancouver Stock Exchange (VSE) and the B.C. Securities Commission (BCSC).

The commission, headed by James Matkin, expects to release a final report by the end of November. It will outline “new ideas and significant reforms that will severely hamper the unscrupulous without unduly restricting the more principled and prudent (traders).” The final report may also contain recommendations on how the VSE can play a greater role in creating jobs through financing new ventures.

A recent interim report found that, despite reforms of the past decade, the public is still skeptical of regulators and of the ethics of some market participants. The report suggested this “lack of confidence” may be a reason why the VSE’s market share fell to 3.5% in 1992 from 12% of the Canadian total in 1980.

During the inquiry, members of the public questioned the VSE’s ability to exercise its self-regulatory functions. Critics also suggested that the BCSC, in its role as senior regulator, failed to rectify any of the undesirable practices said to be common among promoters and some brokers. Concern was expressed that the BCSC lacks the business expertise and industry experience needed to regulate a high-risk venture market.

The current level of co-operation between the VSE and BCSC was hinted at by VSE President Donald Hudson, who suggested they should strive for a less adversarial relationship and work as a partnership “to rid themselves of some individuals blackening the name of the Vancouver market.”

The VSE was criticized for being too lenient with errant brokers and their firms. In its defence, the VSE pointed out that the BCSC “very rarely” exercised its power to take over such cases. The VSE also contended that many cases involving securities offences outside its jurisdiction had been directed to the BCSC but that they did not result in any action being taken. The interim findings were based on written submissions to the commission, as well as public and private hearings. Investor response was less strong than anticipated. However, a telephone survey was initiated to compensate for this. The survey found that most participants held their shares for less than a year. Most of the 200 respondents viewed the buying of shares on the VSE not as an “investment” but, rather, as “speculation,” “an outright gamble” or a “reasonable risk.” It was also found that 80% of all investors agreed that VSE-listed companies are “more a production of promotion than of substance,” and about two-thirds felt the VSE operates for the benefit of its members rather than in the interests of investors.

The BCSC did not fare well either. Only 16% felt it was doing a good job of enforcing existing regulations.

Some of the specific concerns and criticism raised during the review include: the quality of listings; manipulative trading practices and insider trading; broker supervision and misconduct; excessive regulation and delay; abusive promotional practices; and undeclared short selling.

Investors were also critical of professionals (such as lawyers, accountants, geologists and engineers) who create problems for regulators because of inadequate filings, deficient technical reports and superficial auditing. The investing public called for: stricter penalties and enforcement; real-time insider reporting and declaration of all short positions; a “securities ombudsmen”; improved broker conduct; and more factual disclosure. Representatives from mining made several submissions to the inquiry. In a brief presented on behalf of the B.C. and Yukon Chamber of Mines, Nick Carter noted that 129 VSE-listed juniors discovered 104 mines which produced $42.5 billion in revenue and $40 billion (present-day dollars) of future ore reserves. These discoveries were the result of an estimated $8 billion raised through the VSE. The examples included Hemlo, Pine Point, Faro, Bralorne-Pioneer, Snip, Highland Valley and most of the province’s other porphyry deposits.

The Chamber recommended increasing escrow or performance-share allotments, reducing the 1-year hold restriction on private placement financings for non-insider placees, and increasing the number of governors representing the interests of issuers on the VSE Board of Governors.