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Commissions Unbound: The Changed Status of Securities Regulators in Canada

Type: Research Studies
Date Published: November 19, 2001
Research Topics:
Prior to 1995, the budgets of the securities commissions of Alberta and British Columbia were set by their provincial governments through the appropriation process commonly used for nearly all government spending. That year, the Alberta Securities Commission (ASC) and the British Columbia Securities Commission (BCSC) were given Crown Corporation status, which gave the commissions the ability to control the fee revenue generated from their activities and determine their own budgets. The Ontario Securities Commission (OSC), the Quebec Securities Commission (QSC) and the Manitoba Securities Commission (MSC) have since converted as well.

There were calls for the change in the status of the commissions because it would insulate them from the vagaries of negotiating appropriations with governments for financing their activities. In effect, they would be assured the resources necessary to do an effective job in maintaining the credibility of the securities markets. As it is now more than five years since the first of these conversions took place, it is appropriate to assess the consequences of these changes. Has the removal of a budget constraint affected the levels of spending undertaken by the commissions in carrying out their duties? Has it affected the ways in which they spend their money?

The purpose of this study is to examine these and other questions about the consequences of the changed status of the commissions through a review of the behaviour of the ASC, BCSC, and OSC. Evidence suggests the reduced financial accountability inherent in the commissions' changed status appears to have worked to the detriment of low-cost, efficient regulation of the securities industry.

In our assessment, we have found that since conversion in 1995, the ASC and BCSC have increased spending on average by almost 20% and 14% a year. Since its conversion in 1997, spending by the OSC has more than doubled. A major reason for this explosion in spending is staff increases. The BCBS and ASC have increased their staff by approximately 50% in the five years since conversion while the OSC increased theirs by 67%. Salary growth was another factor. Average salaries have been increasing at the BCSC by an average of over 5% per year while at the ASC they have been increasing 13.5% per year.

Between 1996 and 2000, these two commissions beat private-sector counterparts in investment intermediaries, accounting, and law in salary growth. In 1996, the executive director was the only staff member to receive a salary greater than $100,000 at the OSC. In 2000, 64 surpassed this mark. Senior management at the commissions are beneficiaries of the salary growth. In 2000, the salaries of the Chair of the OSC and the Vice Chairs and Executive Directors at the OSC and ASC were more than double 1996 levels. Comparisons with positions of similar responsibility suggest salaries at the commissions are excessive. The OSC Chair now earns 2.6 times the salary of the Chair of the US Securities and Exchange Commission (SEC).

Despite the higher spending, fees were set at excessive levels that generated large surpluses. By the end of 2000, the three commissions combined held over $60 million in reserves despite transfers to their provincial governments of over $60 million by the OSC and $12 million by the BCSC. Overall, the conversion of the commissions into crown corporations was not a success but a lesson on why bureaucrats should not have independence in setting budget and salary levels. Little was achieved in that the commissions had adequate policy independence before the conversion. The change came clearly at the cost of financial accountability.

Measures are needed to restore financial accountability. The budget of the securities commissions should be subject to arm's length review and approval. The salaries and benefits of the commission's senior management should be based upon clearly stated benchmarks of positions of similar responsibility and authority. The fee levels of the securities commissions should be set to cover commissions' legitimate expenses over a medium term horizon. Provincial auditors should periodically conduct performance (Value-for-Money) audits on securities commissions.
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