Madam Speaker, I am pleased to participate in this debate on Bill C-46, an act to amend the Criminal Code (capital markets fraud and evidence gathering). This is a very important piece of the puzzle that is needed in Canada to reassert and re-establish confidence in capital markets.
The stories we hear about Enron and WorldCom in the United States create some questions in our minds as to what this means for Canada. We have heard of the Sarbanes-Oxley legislation in the United States and many wonder why we are not implementing similar legislation. A number of us on this side of the House decided to pursue this question.
The capital markets provide the lubrication for the efficient operation of Canada's economy. If the markets are threatened, the economic growth in Canada is impeded. Fewer jobs are created and the economic well-being of Canadians is attacked.
When we look at what has gone on in the United States with Enron and WorldCom and the response in terms of the congressional and legislative approach in Sarbanes-Oxley, we need to understand that Canada has a different set of capital markets. Canada has a different mosaic in terms of the jurisdictions that are involved in the capital markets. We need to design our own solutions here in Canada.
Bill C-46 is a very good start. It deals mostly with the enforcement and compliance components of dealing with capital markets fraud. Bill C-46 introduces new measures to strengthen enforcement against serious capital market fraud offences, measures previously outlined in budget 2003. This legislation tackles capital market fraud by creating a new Criminal Code offence of improper insider trading. It also protects employees who report unlawful conduct within their corporation from retaliation by creating a new employment related intimidation offence.
Bill C-46 also raises the maximum sentences for existing fraud offences and establishes aggravating factors to assist the courts in determining a sentence that would reflect the seriousness of the crime. It also enhances the evidence gathering tools available to investigators by amending the Criminal Code.
These are very important measures supported by the six integrated market enforcement teams that will be established across Canada over the next two years. These teams will be comprised of RCMP investigators, forensic accountants, lawyers and other investigative experts. These teams will be responsible for tracking down corporate criminals and deterring future occurrences of these crimes. This is a very important enforcement and compliance measure which I certainly support.
Canada is exposed to economic crime along the lines of Enron and WorldCom. In fact, many would argue that we have had some occurrences of that already. Many members in the House and many individuals across Canada are familiar with Bre-X Minerals. YBM Magnex, Philip Services, Livent Inc., Laidlaw, Cinar and Castor Holdings were fairly sizeable market frauds perpetuated here in Canada. We need to deal with this in Canada as well.
When we look at the approach to dealing with this type of economic fraud in Canada, we find that there is quite a quilt of different players and different jurisdictions. For example, the Canadian Public Accountability Board has been set up to monitor the independence and the role of auditors when they examine financial statements.
This body, which is actually chaired by the former governor of the Bank of Canada, will establish the rules by which audit firms can engage in non-audit work, such as tax work or management consulting, for audit clients of listed companies. It will set these guidelines in the sense of when auditing firms will be seen to have crossed the line of conflict of interest. It will also ensure that the firms that are auditing public companies have established mechanisms for quality control, for professional development. It will have the authority to delist auditors who fail to comply with the rules that have been established by this particular entity.
Our group that looked at this believes that this needs to be given a chance to work. We have confidence that it will work and it will deal with the question of auditor independence and auditor quality control.
When we look at the Sarbanes-Oxley legislation that was passed in the United States, there are many important best practices that are established in Sarbanes-Oxley dealing with the separation of the chairman and CEO roles, the question of the independence of directors and a host of other issues. What we need to do here in Canada is make sure that we pick those best practices that were established and where there is general consensus within the financial and investor community, these best practices should be adopted, whether they are in Canada, the United States or anywhere.
There is an important tool in Canada to show leadership in this particular area, and that is the Canada Business Corporations Act. The Canada Business Corporations Act affects many companies in Canada. In terms of the breadth of coverage of the Canada Business Corporations Act, it is something like 17% of all companies in Canada. It is quite a sizeable grouping of companies that are incorporated under this federal statute.
It is through this act that the federal government can exert some leadership by building into the Canada Business Corporations Act some of the best practices that most observers would conclude are the best practices in terms of corporate governance and a host of other items. One of those is the splitting of the chairman and CEO roles. It is probably more advantageous to separate those roles so that the chairman operates more independently and can act on a more objective basis on behalf of all the shareholders.
We have the question of the independence of the boards of directors. Too often we find that the board of directors is selected indirectly by the executive management group of corporations. They ultimately can become beholden to the management of the company. It seems to me that we need to have independent directors on the boards of public companies and we need quite a large number of them.
Let us look at the audit committees. Probably most public companies today have audit committees. It is quite important that these audit committees have directors that are well versed in financial reporting and financial affairs so that they can diligently do their work, listen to the reports of the external auditors and the internal auditors and take the steps that are necessary to protect the interests of the shareholders and other stakeholders.
In Canada, as I said earlier, there are a number of jurisdictions involved in dealing with corporate governance. For example, the federal government is responsible for the regulation of trade and commerce. It is responsible for banking and the incorporation of banks. It is responsible for patents and copyright. It is responsible for peace, order and good government and other matters not exclusively assigned to the provinces.
By the same measure, provinces are responsible for the incorporation of companies with provincial objects. They are responsible for property and civil rights in the province. They are responsible for the management of lands and resources and generally all matters of a merely local or private nature in the province.
As I said earlier when I gave the percentage of 17%, that is the percentage of listed companies that are federally incorporated. In fact the Canada Business Corporations Act applies to roughly 40% of all corporations, listed or not, in Canada.
One of the aspects that our little group on this side of the House looked at was whether we need to differentiate the rules on corporate governance as they relate to large corporations and small corporations. We felt that we should. How to define large corporations versus small corporations is something that needs to be looked at in more detail. Our group felt that large corporations have the breadth of resources, the scope of management and the scope of operation that they could be expected to have corporate governance at a higher level than some small companies that are restrained simply by the economies of scale, the very size and scope of their operations.
In Canada we need to ensure that we have capital markets that are operating efficiently and effectively. We also have players that monitor and regulate the securities industry. There are securities commissions in every province across Canada.
One initiative that our government has been pursuing for some time is to have a national securities commission or regulator that would bring all the provincial securities commissions under one roof. This would be the most cost effective and the most efficient way of doing it. If a company wants to list in Canada, right now it has to go to all the various provincial securities regulators. A national securities agency would be very efficient and effective.
Unfortunately the politics, as they sometimes do, get caught in the middle of this. Certain provinces want to see that happen and others do not. However, in terms of corporate governance and in terms of the efficiency and effectiveness of capital markets, having a national securities regulator would certainly go a long way to improving our corporate governance in Canada and would restore more confidence in the capital markets.
One of the securities commissions that plays a very lead role across Canada is the Ontario Securities Commission, simply because of its size, the number of listings, the number of companies in Ontario, the Toronto Stock Exchange being in Toronto, and much of the activity that takes place in Ontario and the large concentration of industrial activity. The Ontario Securities Commission falls under the Ontario Securities Act. This regulatory body is responsible for overseeing the securities industry in Ontario. It plays quite an important role in monitoring the compliance in corporate governance and financial reporting.
One thing we learned from the financial debacles in the United States and Canada, whether it was Enron, WorldCom, Livent here in Canada, or Bre-X, is the importance of financial reports that are accurate and reflect economic reality. The public companies especially have to come up with quarterly reports. There is huge pressure on management to show continued growth and earnings per share. Sometimes they are caught in a situation where they perhaps have to compromise their principles and distort the economic realities so that their shares can keep moving forward, especially if they have executive compensation schemes and stock options.
Stock options for executives is something that is here to stay. Our group on this side looked at the need for those stock option schemes and the way that executives and the management team are compensated to be clearly transparent. If the president has a number of stock options, it should not be hidden away in note 25 of the annual report. It should be highlighted, perhaps in the chairman's report or the president's report. It should be fully disclosed so that all shareholders are aware of the extent to which the management team participates in the profitability of the firm.
The group that we assembled would like to see some of the best practices of corporate governance incorporated into the Canada Business Corporations Act. There should be sanctions for failure to disclose financial information in a responsible and accurate way, especially for the CEO and the chief financial officer. If it is shown that the CEO and the chief financial officer misrepresented the financial statements of the company, there should be severe sanctions for that because there are many Canadians--directly or indirectly, through the stock market, pension plans or mutual funds--who are relying on the integrity of the financial reports.
Right now, under the Canada Business Corporations Act, the sanctions for misreporting financial information is minimal. We would like to see that beefed up along the lines of the measures that were introduced by the Ontario Securities Commission and along the lines of the legislation before us here today in terms of the Criminal Code.
In Ontario the penalties in the budget measures act of 2002 increased the fines and maximum prison terms for general offences, such as misrepresenting corporate financials from $1 million to $5 million and prison sentences from two years to five years less a day. The American equivalent, increased by the Sarbanes-Oxley act of 2002, is a fine of up to $5 million and/or up to a maximum prison sentence of 20 years.
As I said earlier, we believe that the Canada Business Corporations Act could be amended to increase both the fines and prison terms so that they are more in line with those of the Ontario Securities Commission. That would mean a fine of up to $5 million and/or a prison sentence of up to five years less a day.
Bill C-46 is an important bill and I want to talk about why we should support it in the House. It is part of a thrust of initiatives that must be looked at in a coherent way in Canada. We cannot just say Sarbanes-Oxley. It would not apply in Canada. If we were to legislate Sarbanes-Oxley here in the House of Commons, it would be thrown out because we do not have that kind of constitutional power.
However, by the same token, the Canadian Public Accountability Board must do its job in ensuring that auditing quality controls are good and that there are no conflicts. The Ontario Security Commission must pushing for strong rules in terms of good corporate governance, independent directors, separation of duties between the chairman and the CEO. There must be a requirement for good, honest financial reporting and severe sanctions. The Canada Business Corporations Act must incorporate the very best practices and ensure that if CEOs and chief financial officers do not play by the rules they will either go to jail or will pay heavy fines. Then Canadians would be protected, the capital markets would be efficient and effective, and people would have confidence in the capital markets in Canada.
In conclusion, this is a bill worthy of the support of the House. We should be pushing and promoting these other measures, especially the Canada Business Corporations Act amendments. I am confident that our government will bring forward those solutions in the not too distant future.