International securities regulation Sandy Jakab Kwantlen Polytechnic University – Poli-2150 States, Markets, Globalization: An Introduction to International Political Economy November 18, 2008

The BC Securities Commission Government agency—funded by industry, not tax dollars We do three things 1. Set the rules for securities trading 2. Ensure compliance & take enforcement action when necessary 3. Educate investors and industry

Enforcement Cooperation with other regulators (national, international) Cooperation with police … limits Different purposes and results  Regulatory—to protect from future harm  Criminal—to punish for past misconduct

The BCSC cannot … Put criminals in jail Approve investments Insure investments Give investment or legal advice Undo a transaction

The BCSC can … Ban from trading Impose monetary penalties Disgorgement Disciplined persons list Red Alerts

Contact us at ….

What we’ll cover today Content of securities regulation Regulatory structures International organizations and relationships International cooperation in action

Content of securities regulation Protect investors and market integrity We do that through 1. Disclosure 2. Adviser and fund manager registration 3. Structural oversight 4. General market conduct prohibitions

Disclosure Prospectus Timely and regular disclosure Abbreviated disclosure

Dealers and portfolio managers Proficiency Financial viability Character and ongoing business conduct

Structural oversight Exchanges Alternative trading systems Clearing houses Self regulatory organizations Investor protection funds

General market conduct prohibitions Manipulative and deceptive trading Trading or tipping on inside information Front running Misrepresentation Trading without registration Distributing without a prospectus

Securities regulatory tools Rules and guidance Industry education Compliance examinations Compliance action Enforcement action Investor education

Regulatory structures - Canada Provincial and territorial responsibility Federal, too? Direct government regulation (e.g. NWT) Independent securities regulatory agencies (e.g. BC) Financial services regulatory agencies (e.g. SK)

Regulatory structures – Canada (cont’d) Self regulatory organizations – IIROC, MFDA Exchanges – TMX, TSX-V, CNQ Trade associations - IIAC

Regulatory structures – the U.S.A. Federal regulators – SEC & CFTC State regulators Self regulatory organizations - FINRA

Regulatory structures – the U.K. Financial Services Agency (FSA) Exchanges – e.g. LSE, LSE-AIM E.U. Directives – UK signatory

International organizations IOSCO – International Organization of Securities Commissions CESR – The Committee of European Securities Regulators NASAA – North American Securities Administrators Association

Tools for international regulation MOUs (Memoranda of Understanding) Information sharing rights & responsibilities Process for conducting investigations Evidence gathering rights & responsibilities

What part do they play? Consultants to G20 nations Possibly stronger oversight of members

International regulation in action Enforcement - Rocky Mountain Gold case Market policy - Temporary short-selling prohibitions Intermediary policy – Mutual recognition projects (Australia and USA)

Rocky Mountain Gold case Rocky Mountain Gold – shell – Delaware RMG Mining Inc – BC Sole officer & director for both in BC

Rocky Mountain Gold case (cont’d) Delaware co sells shares to intermediary in Panama Panama co uses boiler rooms in Spain UK investors think they are buying shares in a British Columbia mining company Victims share purhase $ to Ontario bank

Chain of events BCSC and OSC get anonymous tip from bank about unusual account activity BCSC visits RMG office – say they are not raising capital but $2.4 million in account! OSC starts work to freeze accounts – order & accounts frozen two days later After that, no additional $ to accounts from investors

Chain of events (cont’d) Banking records showed European origins – eventually able to track 168 UK investors Enlisted help of UK’s FSA – wrote to 168 investors & got 125 responses within 3 weeks All purchased from 6 or 7 “dealers” – Spanish boiler room

Rocky Mountain Gold lessons Bring all international regulators together early – invaluable Sort out differences between legal systems early Use practical tools early Think outside the box – here, cost of receiver to return $ prohibitive so OSC, BCSC, FSA did it themselves, with court oversight

Short selling Short selling = placing order to sell securities you have borrowed Short sell when believe price will decrease Improves price discovery & liquidity

Temporary short selling prohibitions Tied to vulnerability of financial institutions Regulators feared excessive short selling could cause unnecessary volatility in price SEC ordered no short selling in publicly traded financial institutions Canadian regulators acted immediately to ensure issuers listed both in US and Canada were treated the same

Temporary short selling prohibitions Timing tied to first availability of bail-out money to US financial institutions SEC tied its actions to those of European and Australian regulators Order amended twice before expired Twice, Canadian regulators followed immediately Prevented “regulatory arbitrage”

Mutual recognition projects Established project = EU = operational New projects = SEC initiated SEC and ASIC have signed a MOU framework – not operational

Regulatory change is in the air Market stability regulator (s) Clearing facilities for credit default swaps Convergence (CFTC with SEC?) Dawn of new age of international regulation

Questions? Sandy Jakab (604)