One-Man Commission Rides In to Reform Vancouver Exchange

IT has all the makings of a good Western: Officials in a ``frontier'' Canadian province, beset by financial corruption and lawlessness, call in a hired gun to set things right.

The drama in question involves the Vancouver Stock Exchange (VSE), which since 1907 has been western Canada's source of financing for numerous ventures, most typically mines. It has also been a source of scandals that have left many investors smarting. The ``hired gun'' brought in by the British Columbia government as a one-man commission to propose regulatory improvements is James Matkin, a respected attorney and university professor.

Mr. Matkin fired off proposals this week in a report stemming from his eight-month inquiry. The provincial government is studying the proposals now. ``We'll know within the next few weeks'' how seriously the reform package will be taken, Matkin says. He adds that political support seems to be growing.

The VSE says its shady, Wild West days are over and that no hired gun is needed to restore order to its modern, computer-operated trading floor. Officials say the exchange's regulations are in line with other North American markets.

With the VSE pushing strongly against radical changes, Matkin says he hopes the business community will boost reforms. The VSE ``fills an economic niche by supplying stronger, developmental-stage companies with high-risk capital,'' his report notes. But the exchange's successes ``are overshadowed by the continuing occurrence of shams, swindles, and market manipulations.'' The VSE's share of the Canadian equity market declined from 12 percent in 1980 to 3.5 percent in 1992.

Matkin's report calls on the province to:

* Replace the British Columbia Securities and Exchange Commission, which he calls ineffective, with a Securities and Exchange Board. The financial community would be represented on the board, but a majority of the governors would represent investors and the general public.

* Allow class-action lawsuits by investors for damages arising from misleading information issued by VSE-listed companies or stock promoters.

* Boost maximum fines by the securities board from $100,000 (Canadian; US$76,178) to $1 million.

* Require the VSE to improve the flow of information to investors in company financial reports, company news releases, and insider trading reports. As promoter Murray Pezim puts it: ``Speculators and risk-takers do not mind losing money as long as they are told the truth.''

* Have the new securities board appoint administrative law judges to hear cases. The overlapping duties of the current commission raise conflict-of-interest concerns, as it investigates and prosecutes fraud but also provides panels to judge the cases.

* Allow the VSE, not just the provincial securities board, to prosecute administrative cases.

* Shift the VSE's self-regulation of its member brokers to a new independent organization affiliated with the Investment Dealers Association of Canada.

* Require brokerage firms to pass a one-time ``fitness test'' to show they can properly evaluate the businesses they underwrite.

William Cate, a consultant who has long criticized the Vancouver exchange, says some of these suggestions would improve VSE regulation but that further regulations are needed to control short-selling of stock by investors expecting share prices to fall. Short-selling is legal, but he is concerned about alleged ``undeclared shorts,'' where the sale is not covered by specific shares of existing stock. ``It is the most lucrative practice the Vancouver brokers engage in,'' he says.

Another issue for future policymaking, Matkin says, is the burden of unneeded regulation, which some observers worry is deterring companies from listing their stocks on the exchange.