March 20, 2012 / 3:32 PM / 6 years ago

UPDATE 2-OSC's post-Sino review faults listing process

* Regulator makes 24 recommendations to protect investors

* Sino-Forest scandal led to criticism of OSC

By Euan Rocha and Jennifer Kwan

TORONTO, March 20 (Reuters) - A review of Canadian stock listings by companies with most of their operations in China and other emerging markets found a web of shortcomings that could put investors at undue risk, the country’s main securities regulator said on Tuesday.

The OSC initiated the review last year after China-focused forestry company Sino-Forest was accused of exaggerating its assets. Sino is the most prominent of a dozen companies with Chinese operations whose accounting or disclosure practices came under fire, shaking investor confidence in the oversight of Canadian regulators.

A 24-page report, published on Tuesday by the Ontario Securities Commission, pointed out weak links at every stage of the listing process, including the role played by issuers, underwriters, auditors and the exchanges themselves.

The regulator recommended stronger corporate governance practices by the boards of emerging market issuers. It said the quality of audits for such companies needed to be improved, and recommended more transparent due-dilgence requirements for underwriters.

“The OSC is showing that it is stepping up and doing its job. It’s a very good first step, but we have a long way to go,” said Ermanno Pascutto, executive director at the Canadian Foundation for the Advancement of Investor Rights.

In many cases, auditors and underwriters had inadequate understandings of companies seeking Canadian listings, said Pascutto, a former regulator in Toronto and Hong Kong.

“They’re outsourcing the work, in a sense, without really knowing whether the outsourced work is going to be done properly, and without having access to the audit papers to see if it has been done properly,” he said. “That’s a very big problem.”

The OSC also recommended exchanges reexamine their special procedures and policies for issuers with operations in emerging markets, and boost transparency when waiving any listings requirements.

The regulator found no particular problem with either initial public offerings, direct listings by issuers already listed overseas, or reverse takeovers.

That may have come as a surprise to some. The reverse takeover process, through which a company takes over a shell company that already has a listing, has faced heavy criticism, as it entails less regulatory scrutiny than an IPO.

Sino-Forest is an example of a company that secured a Canadian stock listing through a reverse takeover.

TMX Group, operator of the Toronto Stock Exchange and the small-cap TSX Venture Exchange, said it supports the OSC report. It said in recent months it has consulted public companies and market participants about amending its guidelines for emerging market issuers.


The allegations against Sino Forest first surfaced last June, when short-seller Carson Block and his firm Muddy Waters accused the company of fraud. That triggered a collapse of Sino-Forest’s share price, a rash of lawsuits and multiple investigations.

Sino’s own internal probe was unable to address of all of the allegations, and its shares have been under a cease-trade order since last August.

The regulator, when it began its probe into the emerging markets issuers last July, said at the time its investigation would not target China-focused companies alone.

The OSC said on Tuesday it reviewed companies that had main operations in Asia, Africa, South America and Eastern Europe.

The OSC said the review was a first step in identifying problems in the listing process and would have to follow up.

“This review uncovered a number of areas where issuers and gatekeepers need to improve in order to meet their obligations and we will be monitoring their progress to ensure the interests of investors are placed first,” OSC Chair Howard Wetston said of his agency’s report that listed 24 recommendations.

The OSC said some files under review were referred to the agency’s enforcement branch, and suggested investigations had been launched.

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