Hyndman calls for criminal crackdown

“If Canadians want stronger deterrence against securities fraud, our governments have to remove the obstacles in the criminal justice system,” Hyndman said to the predominantly Toronto-based business audience this morning.

Hyndman’s prepared speech indirectly responded to Finance Minister Jim Flaherty’s recent push for a single regulator to replace the 13 provincial and territorial agencies that monitor the industry. Flaherty, who relied on research from Columbia University professor John Coffee to support the need for a nationwide capital market regulator, argued that a single regulator is needed to lower costs, improve efficiency and strengthen enforcement.

In an attempt to counter Flaherty’s assertions, Hyndman proposed that the true reason for the disparity between Canadian and U.S. records of enforcement — and thus perceived and real improprieties — has less to do with regulators than with how the criminal justice system responds to white-collar crime.

“Our criminal justice system takes white-collar crime less seriously in relation to violent crime than does the U.S. system,” he said. “[The] effect is that Canada has fewer securities-related prosecutions and convictions than the U.S. and we impose much lighter sentences for securities fraud.”

While Hyndman placed the onus on enforcement agencies (both federal and regional), he did not deny the role regulators can play.

“Criminal and regulatory enforcement serve different but complementary purposes,” he pointed out. “Criminal enforcement punishes wrongdoers for past misconduct. Regulatory enforcement protects investors and markets from future misconduct. Both provide deterrence but in different ways.”

He continues by stating that “the major problem we face is that Canada relies too heavily on regulatory enforcement to deal with serious fraud. Because our criminal justice system largely ignores these cases, we divert regulatory resources away from regulatory violations, for which our powers are best suited, and toward serious fraud, for which they provide an inadequate deterrent.”

In this context, Hyndman asserts there is little evidence that a single regulator will deter, prevent and prosecute issues of white-collar crime.

“Canada has debated for decades whether some form of national securities commission should replace our decentralized system of provincial regulators,” he said. “This is a legitimate public policy debate. But, in their zeal to promote their favoured option, the proponents of a national regulator have been making statements that are untrue and harmful to Canada’s capital markets.”

Hyndman asserts that he, personally, is not against the idea of a single, nationwide regulator. However, he quickly states that the current public and, at times, international criticism of our system is doing little to allay domestic and international concerns over Canada’s ability to respond to crisis in the market. As such, Hyndman suggests the industry “propose and argue for structural or other changes to make our system better,” but not by “irresponsibl[y] promot[ing] an alternative by using misinformation to denigrate our regulatory system.”

For Hyndman, the current structure of 13 provincial and territorial agencies that monitor the industry “actually stands up well in international comparisons.”

He points to examples from other G7 countries, where three of the countries are federations and all three of those “regulate at the sub-national level.” He adds that both Germany and the U.S. have “significant state regulation, in addition to federal regulation” and that Germany uses an independent body, the Exchange Supervisory Authority, to regulate the Frankfurt Stock Exchange.

“If we didn’t have provincial regulation in Canada, we would probably have to invent it. Securities regulation has to deal with activity at all levels — international, national and local,” he said. “It’s relatively easy to do national and local regulation through a single agency in a country that’s entirely in one time zone. It’s much harder in a country that spans a continent, which is why the state regulators play such a crucial role in the U.S. Monitoring and investigating illegal and abusive market activity requires boots on the ground, people in the area who know the market players.”

Hyndman rounded out his speech by stating that the recent credit crunch that started in the U.S. and trickled into the Canadian market “had little to do with securities regulation” and that the provincially mandated regulators had kept their end of the bargain by staying in contact and providing support to the bankers and financial institution regulators that were directly involved.

Filed by Romana King, Advisor.ca, romana.king@advisor.rogers.com

(09/19/07)