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OSC targets listing practices for emerging market companies

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The Ontario Securities Commission is taking aim at boards of directors, underwriters, auditors and stock exchanges over the quality of their work in helping companies from emerging markets such as China list on Canadian stock exchanges.

The commission unveiled a report Tuesday looking at problems with emerging market issuers in Canada, and listing a slew of areas that will be targeted for detailed study and new policy development to ensure investors can trust the information they receive from foreign-based companies operating in far different business environments.

"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 chairman Howard Wetston said in a release.

The review was launched last July after a U.S. short seller published a report condemning Chinese forestry company Sino-Forest Corp. as little more than a "Ponzi scheme," sending the company's share price plummeting on the Toronto Stock Exchange. The OSC later suspended trading in Sino-Forest's shares while investigating the company's financial disclosure.

In its report Tuesday, the OSC said it reviewed 24 foreign issuers in depth over the past nine months and found a concerning "form over substance" approach to compliance from the companies, their boards and their auditors.

"In our view, the level of rigour and independent-mindedness applied by boards, auditors and underwriters in doing their important jobs -- management oversight, audit, due diligence on offerings -- should have been more thorough," the report concludes.

Among its recommendations, the OSC calls on stock exchanges to assess whether additional listing requirements are needed for foreign companies, and to examine whether the exchanges should be required to publicly disclose cases where it gives a waiver to a foreign company from following a listing requirement.

The OSC calls for the development of a consistent set of standards that must be followed by underwriters doing due diligence on foreign companies selling shares in Canada.

The report lists numerous areas where governance practices should be improved by Canadian boards of directors overseeing foreign companies, noting they are too often far removed from the executives running the companies in foreign countries.

"In some cases it appeared that the board had very little contact with senior management in the emerging market jurisdiction running the business," the OSC said.

Some board members were unaware of banking practices, currency restrictions and the regulatory and legal environment in which the company operates, the report said. Some relied on senior management to give an overview of key business documents written in another language, rather than obtaining a translated version and reading the documents for themselves.

Many foreign companies have highly complex structures with various holding companies controlling an operating company, which the OSC said may impact the board's ability to properly understand the full extent of operations. The OSC said it was also concerned that boards and management did not have processes in place to identify and approve related-party deals, which can be far more common in some countries than they are in North America.

As a result, it said boards need to develop better disclosure standards and better risk-management processes that recognize the risks to investors from different business practices in emerging countries.

The commission also suggested in the report that it found some significant problems in its review, and referred files to the OSC's enforcement branch for investigation. It did not say how many files were sent to enforcement or explain the outcome of the investigations.

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