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Part 2: BC’s Over-the-counter market rule goes national

In Part one, we talked about the big problem that British Columbia had with unscrupulous operators using the loosely regulated US over-the-counter (OTC) markets to fleece investors.

Now, I am going to outline how we are cleaning up this market to protect BC investors and its reputation. Unfortunately, there was no one silver bullet to clean this market up. We initially used enforcement as our main tool, but the cases were often cross-border, hard to prove, and very time consuming.

In 2008, we brought in a new rule to deal with the problem. Companies with a BC connection now have to comply with the same timely and continuous disclosure requirements as those who trade on the TSX Venture Exchange. We also impose restrictions on dealers for their trading activities in the US OTC market. Finally, we report geologists, lawyers and accountants who aid and abet this unscrupulous behaviour, and pursue them if they contravene our securities laws.

Since the rule took effect, about 400 of the 800 OTC companies with a significant BC connection have left the province or gone out of business. Of the remaining 400, over 200 have been cease traded for failure to comply with the rule, leaving a manageable population of less than 200 companies that are monitored by BCSC staff.

Prior to the adoption of the rule, new OTC companies, mainly shell companies, were being created at a rate of two or three a week. Since the rule came into force in September 2008, only about 25 new OTC companies with significant BC connections have been created.

Because we learned that some companies moved their operations to other parts of Canada, we convinced most of our colleagues (with the exception of Ontario) to follow our example.

On June 10, 2011, most Canadian securities regulators put a rule that builds on the BC approach out for comment, following our lead and cracking down on this market segment. This is a positive result to a difficult problem, which we continue to deal with, day in and day out.

Nevertheless, significant challenges with OTC companies in BC remain.

Investors must watch out for inappropriate promotions. But, with the dedication of BCSC staff, and with the cooperation of our Canadian counterparts and US regulatory authorities, we believe that we have made great progress. Protecting investors and the integrity of our markets is our primary responsibility.

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