Investors must seek better protection

These are grim times and we can’t pretend everything’s all right. We’re wrapping up a year in which pervasive uncertainty about the global economy and plunging stock markets combined with cripplingly low interest rates to devastate the retirement savings of many 50-plus Canadians; a year when revelation after revelation of corporate misdeeds and corruption battered our confidence as investors.As we reflect on the current state and future direction of our lives, many of us are facing the fact that the hard work we put into building our retirement savings may not guarantee a secure future.

Amid all the bad news clouding the horizon lately, there is a silver lining: better investor protections are certain to emerge as regulators strive to reclaim the credibility of the investment industry. As these reforms take shape, it is crucial that we make our views known.

U.S. change is momentous
Changes are already under way here and especially south of the border, where scandals have transformed once-respected company names, such as Enron, Worldcom and Tyco, into synonyms for fraud. The passage of the Sarbanes-Oxley Act, signed io law by U.S. President George Bush in July, marked a massive overhaul in securities regulation as U.S. policy-makers moved to restore investor confidence.

The bill contains strict rules for financial disclosure, audits, governance, codes of business conduct and ethics by publicly traded companies. Notably, there are rules for independent boards and audit committees, rules that, had they been in place previously, would certainly have helped prevent many of the worst abuses. Granted, not all details have been hammered out, but the mandatory rules go a long way in preventing the recurrence of malfeasance by company executives.

Next page: Canadian regulation must be effective as well

Canadian regulation must be effective as well
Here in Canada, we’re also on the cusp of momentous change. Interested groups, including public accountants and investment dealers, are setting new standards as they bid to reclaim credibility. Meanwhile, securities regulators are beefing up their monitoring, reviewing more public companies and implementing tougher disclosure rules.

These are good initiatives, but there’s still resistance to change. For example, in the debate over whether mandatory rules for corporate governance, along the lines of Sarbanes-Oxley, are necessary in Canada, critics say implementing U.S.-style rules would be too costly for smaller companies and could hamper a company’s ability to do what’s best. Voluntary guidelines, they contend, are enough. This is a dangerous outlook.

In a recent speech to the mutual fund industry, OSC chairman David Brown said it’s fortunate the worst of the scandals that ravaged financial markets took place in the U.S., noting that no other country has the resources and resilience to weather such events. He also remarked that in order for Canada to compete in global financial markets, our securities regulation must be as effective as that of our southern neighbour. He’s right. In the context of recent upheaval, the impetus for change has never been stronger, and we should heed whatever harsh lessons we’ve learned.

Less talk, more action
Unfortunately, talk of reforming has been greater than any change thus far. In the past, we’ve discussed the serious shortcomings of an investment industry that polices itself, as well as the problems of an incoherent securities regulatory regime that encompasses 13 separate regulators and disparate rules. These concerns remain front and centre.

While current initiatives seem positive, we must continue to pressure corporate executives and boards, securities regulators, and auditors to ensure that investors are their highest priority.

It’s never been clearer that mature Canadians have a huge stake in ensuring any new securities rules have teeth. We’ve learned painfully that simply accepting everything we’re told at face value can spell disaster. We’re heartened by what we hear from some readers — that they’re actively participating, scrutinizing and responding to proposed changes to the industry. In short, battling back. Even upheaval can be constructive if something better rises from the ruins.