BEWARE THE ANTI-TRUSTERS.

Acornerstone of the governance of financial regulators is their l egislated mandates. But does anyone care?

The Ontario Securities Commission ( OSC) has provided a clear example of a regulator ignoring its mandate with its diversity rules. Mandates set out the responsibilities of regulatory agencies. Mandates ensure regulators operate efficiently in achieving their objectives without wasting their own resources or the resources of those they regulate. But when regulators start giving themselves added responsibilities, often no one tries to stop them. Interest groups commonly lobby for regulators to exceed their mandates when it suits their own interests or agendas. In some cases, regulators are tacitly endorsed or even encouraged by the governments that they are responsible to. Even those being regulated usually stay quiet, rather than stick their necks out.

The OSC, whose members include a highly diverse group of corporate lawyers and accountants, led other provincial securities regulators in setting new rules in 2014 regarding women on corporate boards of TSX-listed companies. The rules included disclosure of the number of women on the board and in executive officer positions, and internal policies regarding representation of women on boards. Although it is unlikely that many i nvestors actually read these disclosures ( as is the case with most regulatory disclosure), the rules appear to have produced results. The percentage of directors that are women rose more than 21 per cent in the second year following implementation of the rules, and the percentage of boards with at least one woman had increased by 18 per cent over the same period. Despite this success, the OSC is considering options for further strengthening these rules, such as adding guidelines or disclosure enhancements.

The diversity rules may support a social policy that many people consider important. But do the rules contribute to securities regulators achieving their legislated mandates? Do the OSC diversity rules protect investors from unfair, improper or fraudulent practices? Do the rules help foster fair and efficient markets? Or do the rules address some problem that is hurting confidence in capital markets? Those are the objectives of the OSC’s mandate, but it would clearly be a stretch to link the diversity rules to any of them. Instead, resources are being drawn away from activities central to the mandate, such as combating fraud, while TSX- listed companies incur compliance costs to adhere to the OSC’s non- mandate priorities, including foreign companies that likely are perplexed as they must comply with rules that support Canadian progressive values.

Rather than advising the OSC in 2014 that its rules were outside its mandate, the Ontario provincial government encouraged the OSC to take this step, and swiftly approved the diversi ty rules. The province’s Ministry of Finance issued a press release that included the minister claiming that enhancing gender representation on corporate boards will help grow Ontario’s economy.

So who should care about financial regulators sticking to their mandates? How about investors with legitimate grievances that the regulator declines to investigate because of resource constraints? How about registrants frustrated with compliance costs and unnecessary restrictions on activities that deliver capital to Canadian companies? Or how about anyone who recognizes the value of efficient markets in the capital-allocation process? Anyone who supports aspirations for Canada to be a global leader in financial services, directly generating economic activity and employment, should also care, as regulators flouting their mandates create undesirable unpredictability in regulations. And regulators should care, too, as more efficient markets mean greater financial activity and a larger role for their organizations. Mandate creep should be discouraged even by those who believe the objective is laudable. The alternative is regulators running increasingly amok.

DO THE OSC’S DIVERSITY RULES PROTECT INVESTORS FROM UNFAIR, IMPROPER OR FRAUDULENT PRACTICES?