This article was originally published in Maclean's Magazine on January 23, 2006
It's safe to assume Canada's market authorities are now investigating the alleged Nov. 23 leak of the federal government's decision not to tax INCOME TRUSTS. The Ontario Securities Commission, Market Regulation Services, and even the Investment Dealers Association, are populated with professionals who take seriously their obligation to protect investors and sniff out wrongdoing in the markets - so you can be pretty sure they're doing their jobs.
But let's say you don't want to assume. Let's say you're the type of person who likes to know about possible criminal activity, either when picking stocks or choosing a government. In that case, you'd be out of luck because the organizations charged with enforcing the rules of Canada's capital markets prefer not to talk about such things if they can avoid it. For the most part, you're stuck assuming.
The market cops like this system. It gives them an easy line to feed reporters, and keeps a lot of unpleasantness on the Q.T. Every once in awhile, however, a crack appears and a little light spills in. For one reason or another, the powers that be sometimes tip their hand and let you know where suspicion lies - as in the current kerfuffle over Ottawa's income trust misadventure. We know the RCMP is looking into the matter - they told us so a few weeks back - and this burst of transparency has made things a whole lot more complicated in the parallel worlds of politics and business.
Buzz Hargrove, for one, figures the Mounties screwed up big time when they announced, in the middle of an election campaign, that they were investigating whether somebody in Ralph Goodale's federal Finance Department blabbed the trust decision, and triggered a little rush of insider trading. He told CBC Radio listeners that the Mounties' revelation was "not proper police work," and hinted that the RCMP might be politically motivated. It was left to listeners to guess at just what those political motivations might be, but this much was clear: Buzz figures democracy works best when voters aren't troubled by peripheral issues, such as criminal investigations into the sitting government.
Bay Street heartily agrees. The traders, fund managers and analysts, who live on the ebb and flow of privileged information, figure the probe is a wild goose chase. Most say the spike in the trust market on the day of Goodale's announcement was just clever investing. A skeptic might wonder how so many seemed to get the same brilliant idea, simultaneously, on the very day that the good news was released. But when it comes to police meddling in their trade, Bay Streeters aren't a very curious bunch. Questions make them queasy.
The average citizen feels differently though. The public is, in fact, very curious about such things. Many even subscribe to the quaint old notion that they have a right to know. To them, it's pretty obvious the RCMP was right to reveal its investigation, even if it upset some politicians and their pals. The problem isn't openness, it's inconsistency - you just never know when the market cops are going to level with you, and when they're going to enter the cone of silence. And in cases like this one, with some cops talking and others keeping mum, things get especially problematic.
The OSC and other provincial agencies like to say that secrecy protects the stability of the markets, the rights of the accused, and the integrity of their investigations. But the commission's own guidelines allow for disclosure when they're looking into "credible allegations" that are "substantially in the public domain," and when the failure to inform the public may harm confidence in the markets and the regulator. The income trust case meets all the criteria, and yet the OSC still refuses to discuss the trust matter.
The silence would be easier to grudgingly accept if the market regulators stuck to an iron-clad policy of non-disclosure, but they don't. A couple of years ago, for example, the commission announced that Biovail Corp. was under investigation for possible breaches of accounting and securities laws. The OSC said it made the announcement because Biovail had hinted publicly that no such investigation was underway, so it was duty-bound to correct the record. It's a rather fine hair to split: no information is okay, but information that could be misunderstood is unacceptable.
More often, investigations drip out into the open. Once the media get wind of problems, speculation morphs quickly into presumptions of guilt, and silence from the authorities does nothing to calm investors. Such probes are generally considered material information, so companies are forced to reveal them anyway. All in all, the veil of confidentiality begins to look pretty thin.
Like any system in which the rules are arbitrarily and inconsistently applied, Canada's regulatory system produces lousy results for all concerned. The public never feels like it has the whole story, companies live in fear of breaking arcane regulations, and investigators leave themselves open to accusations of abuse whether they opt for openness or secrecy. The only way out of the quagmire is to have rock-solid standards that apply equally to everyone. If regulatory probes in the public markets are material information, then the only reasonable solution is to disclose them all, except in extreme cases where the public interest is better served by temporary suppression.
It wouldn't be perfect. Some innocent companies would have to deal with the stigma of being named as targets. Misguided probes might cause needless worry among investors from time to time. But there's a useful lesson in the RCMP's recent candour: given the choice between the problems of too much openness or too much secrecy, take troublesome transparency every time.
See also STOCK AND BOND MARKETS.
Maclean's January 23, 2006