Friday 28th October 2016

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‘Scrap IIROC, fix the BCSC’

The Venture Capital Markets Association offers a rescue plan for junior financings

by Greg Klein

Should anyone misunderstand this British Columbia group’s stance on the Investment Industry Regulatory Organization of Canada, Don Mosher’s quick to clarify matters. “We want to throw IIROC right out of the goddamn province. The hell with them.” The B.C. Securities Commission should be doing that job, he declares, but only a radically restructured BCSC could do it fairly. Put simply, that’s the manifesto of the Venture Capital Markets Association expressed to B.C.’s legislature in an open letter that’s gaining “overwhelming” support.

The group fears for the viability of the junior exploration sector, already hammered by the lengthy downturn. “Strangulation through regulation” threatens the juniors’ ability to raise capital, the VCMA argues. As a result the entire sector, and the thousands of jobs it supports, faces a “death knell.”

The Venture Capital Markets Association offers a plan to save junior financings

That’s more or less been the VCMA’s message since the group surfaced in May 2013. But Mosher says the open letter distributed August 13 is getting “quite a bit of traction” and even the support of B.C. cabinet members Andrew Wilkinson and Bill Bennett, respectively ministers of advanced education and mines.

As president of the VCMA and a partner at B&D Capital, Mosher argues that banks, among Canada’s biggest businesses, control IIROC to the detriment of smaller brokerages and small cap issuers. But IIROC operates in B.C. only because the BCSC delegates some of its responsibility to the organization.

“IIROC has the ability to set regulations, police regulations, act as judge and jury, and carry out the sentencing, which I would argue is an inexcusable situation in a democracy,” he maintains.

“I think there is actually an intent to consolidate the financial industry in Canada down to maybe 10 or 12 members, and those 10 or 12 members will obviously be the largest institutions in the country. Why would they do that? Well from IIROC’s standpoint, it makes their job much easier. Instead of a couple of hundred brokers, if you get it down to 10 or 12 it makes your job much easier. So they’ve continued to pile on regulations to the point where 60% of a broker’s revenue goes to compliance and surveillance costs.

“What we’re dealing with here is the biggest businesses in Canada running the financial sector, intentionally putting the smallest businesses out because of costs.”

Turning to the BCSC, he says, “We need to restructure this thing. The salaries are ridiculous. They need to justify what they’re doing and there needs to be meaningful discussions with the business community.”

He points to some BCSC salaries in the half-million-dollar range. Out of 170 staff, “you have to go down to 114 in their employee list to get the first person below $100,000.” Numbers divulged by the Vancouver Sun for the 2013-2014 fiscal year bear that out. Meanwhile, “here’s our market on its death bed.”

Fines help pay those salaries, although the BCSC states most of its revenue comes from filing, registration and application fees.

The commission creates unnecessary obstacles to venture financing, for example with the accredited investor clause and an unwieldy process for rights offerings, Mosher says. “Theoretically they answer to B.C.’s minister of finance. But the reality of it is, when they pass a regulation they send it to the department of finance which basically rubber stamps it because they don’t understand the regulations. They put so many regulations in place that nobody understands them.”

What we’re dealing with here is the biggest businesses in Canada running the financial sector, intentionally putting the smallest businesses out because of costs.—Don Mosher, president
of the Venture Capital
Markets Association

In addition BCSC staff are “policing their own regulations, acting as judge and jury and sentencing people they convict of doing something wrong.” He maintains that commission proceedings work on the presumption of guilt and there’s no recourse for people who believe they’ve been maltreated. In one example, Mosher says, the BCSC abandoned a case about five minutes into the tribunal, but not before subjecting the accused to “several months of lost sleep and anxiety, and thousands of dollars in costs for lawyers.”

Some of Mosher’s comments, however, conflict with an e-mailed response to from Richard Gilhooley of BCSC media relations. BCSC staff and the BCSC tribunal operate independently of each other, Gilhooley wrote, separating the roles of prosecutor and judge. Decisions and orders issued by a tribunal can be appealed to the B.C. Court of Appeal or respondents can apply to the tribunal for a variation of the order, he added.

The BCSC led a project that brought proposed amendments to rights offerings to the Canadian Securities Administrators. The comment period closed in February. “The proposed changes were strongly supported by industry and the dealer community, [and] are currently being considered by staff,” according to Gilhooley.

But as for a BCSC response to VCMA’s open letter, “We don’t comment on our correspondence with stakeholders.”

What might be most controversial about the letter is the VCMA proposal that the BCSC answer to “a new independent board controlled by members who reflect the industry.” Mosher sounded unprepared for any concerns about a fox guarding the henhouse.

Yet initial response to the letter inspires his optimism. “We didn’t think this would accomplish anything,” he says. The original intention was to provide an historic document for people 10 years hence, “when the Canadian unemployment rate is running over 20% because there’s no job creation, when people ask, ‘What happened to the venture market?’ [The letter would show] this is what happened.”

Now “overwhelming” support—including that of two senior cabinet ministers—has brightened his outlook, Mosher says. “A very fragmented industry is starting to understand it needs to come together and speak with one voice.”

Read the VCMA’s open letter Strangulation by regulation: The death knell for B.C. jobs.

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