The market cops. (Regulation).
No doubt some of them stuck to their pledge, but soon, all was forgiven and forgotten; those who liked to play fast and loose with other people's money were plying their trade again. More terrible scandals hit the front pages, a government enquiry was called, and rules put in place to make sure this sort of thing didn't happen again.
But, it has; over and over again. For more than 300 years there has been a regular pattern of stock market fraud, investigation, and tougher regulations.
Since the early 1980s, there has been a hands-off approach to regulation. This has come out of the political philosophies of Margaret Thatcher (Prime Minister of Britain from 1979 to 1990) and Ronald Reagan (U.S. President from 1981-89). They believed that the best government was the smallest government. They cut government oversight of business in a process called deregulation. Canada fell in with this approach. The idea was that freeing business from regulations would release its great creative power to be more efficient and innovative. The power of competition would control abuses. As many investors know to their cost, abuses have not been controlled.
The latest round of skul-duggery has been the creative accounting methods of companies such as Enron. Investors who followed the rules were struck dumb. They exercised due diligence, read the company financial reports, sought the advice of experts, and still got taken to the cleaners. Many of the people who were burned will never put their money in the stock market again. This, of course, hurts the thousands of businesses that are operated honestly. What's to be done?
Regulators are supposed to protect small investors from the abuses of crooks. In the United States, some of the chief villains involved in the most recent scandals are facing prison stretches. Some tough rules have been enacted, but a profound distrust remains among investors. There will have to be a lengthy period of squeaky-clean business activity before the average citizen is ready to risk his or her retirement fund in stocks and bonds.
In Canada, there is a bit of a regulatory muddle. The Constitution gives authority over property to the provinces. So, making sure that the people in the stock market business stay on the straight and narrow falls to provincial securities regulators and the stock exchanges themselves. That means there is no national securities commission to force traders, analysts, promoters, brokers, and others to behave themselves.
There are securities commissions in all 13 provinces and territories. They operate in similar ways to the British Columbia Securities Commission (BCSC). In 1995, the BCSC was made a Crown Corporation, which gives it a fair degree of independence. It says, "Its mission is to protect and promote the public interest by regulating trading in securities:
* to ensure the securities market is fair and efficient and warrants public confidence; and,
* to foster a dynamic and competitive securities industry in British Columbia that provides investment opportunities and access to capital.
"The Commission's responsibilities are:
* to ensure that investors have access to the information they need to make informed investment decisions;
* to provide rules of fair play for the markets;
* to establish qualifications and standards of conduct for people registered to advise investors and to trade on their behalf; and,
* to protect the integrity of the capital market and the confidence of investors."
The BCSC can and does act as police force, prosecutor, judge and jury, and lawmaker. Some in the business community don't like having all these functions under one roof. However, securities commissions do go outside for help. Sometimes, police forces are brought into investigations. From time to time, crown prosecutors lay charges. Serious cases of fraud are often brought before regular courts of law. And, politicians do occasionally pass laws to govern the affairs of business.
At the top of the BCSC is its Board of Directors, all the members of which are appointed by the provincial government. There is a staff of about 175 people; these are the people who do the grunt work of probing into possible misconduct. They have a budget of about $21 million.
Despite the existence of securities commissions and a large body of law controlling business activities, investors are still warned to beware. The BCSC advises investors that its protection "is not a guarantee of your investment. You, along with advisers of your choice, are responsible for assessing the merits and the risks of the investment."
Given its size and budget, the Commission can't be looking over everybody's shoulders all the time. And, the grand old man of economics, John Kenneth Galbraith, adds that there are other problems. In a 2002 interview with The Independent (U.K.) the 93-year-old economist said many, large corporations have grown so complex that they are now almost beyond monitoring. He adds, they are "out of effective control by the owners, the stockholders, into nearly absolute control by management and the individuals recruited by management."
Canada's tax system may be partly to blame for some of the accounting abuses of recent years. A capital gain is taxed at a lower rate than a dividend. So, investors prefer to receive capital gains over dividends. This prompts corporate managers to strive to drive up the value of the company's shares (capital gain), rather than plan prudently for future profits that will be paid out as dividends.
Often, the same financial institution is involved in both sides of a deal. While a stockbroker is arranging the financing for a takeover, the same stockbroker's sales staff might be advising clients to buy or sell the target company's stock. The sales people are not supposed to know what the mergers and acquisitions folks are up to. In theory, there is an impenetrable Chinese Wall between the two to prevent privileged, inside information from leaking.
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|Publication:||Canada and the World Backgrounder|
|Date:||May 1, 2003|
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