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  4 | INVESTMENT EXECUTIVE NEWS March 2020 Capital markets task force must deliver report this autumn
front burner, from my perspec-
tive,” says Rod Phillips, Ontario’s Minister of Finance.
In February, Ontario estab- lished its Capital Markets Modernization Taskforce, a five-member group with the mandate of undertaking the first full review of Ontario’s securities legislation since the Crawford Committee, chaired by Purdy Crawford. The then-government named the committee members in March 2000; the committee released a draft report in May 2002 and a final report in March 2003.
The task force, which will be aided by an advisory panel of experts, will publish a consulta- tion document this summer and a final report this autumn with recommendations for reducing regulatory burden, ensuring a level playing field for market par- ticipants and improving investor experience and protection.
“The evolution of the capital markets is happening so quickly,” says Walied Soliman, chair of the task force, “that we need to listen to stakeholders and come up with recommendations very quickly for the minister [of finance] in order to make sure we’re not fall- ing behind.” Soliman is a secur- ities lawyer with Norton Rose Fulbright Canada LLP in Toronto, for which he serves as chair.
Investment industry stake- holders welcome the launch of the task force, saying that cap- ital markets have undergone
significant change in the past 17 years, including the rise of fintech and increased interest in the pri- vate capital markets.
“There’s a need to do a more comprehensive review,” says Ian Russell,presidentandCEOofthe Investment Industry Association of Canada in Toronto. Recent initiatives to reduce regulatory burden and increase market effi- ciency have been positive, but piecemeal, he says.
Says Rebecca Cowdery, a partner and securities lawyer with Borden Ladner Gervais LLP in Toronto: “We really need to look at the impact of regulation, good or bad, on financial servi- ces to help Canadians plan their retirement. It’s not just regula- tory burden; it’s everything.”
The Ontario Securities Act requires a review of securities legislation be undertaken every five years, a key reason for estab- lishing the task force, says Phillips: “From the investment and secur- ities community, I was getting very direct feedback that [the task force] was long overdue.”
However, Russell doubts the task force can undertake a full review within the timeline given: “Either they’re going to have to truncate [the process] or they’re going to have to change the timeline.”
Phillips says the task force’s mandate will be “a full review of the [Securities] Act.” However, he expects the group to focus on identifying priority areas: “I am confident that there will be some
[of the task force’s recommenda- tions] that can be more immedi- ately implemented, and there may well be more detailed review that is also recommended.” If some recommendations take longer to implement,“thatwillbefine,”he adds.
Says Soliman: “You can do a comprehensive, stakeholder- based review of the entire capital markets in Ontario without going through a page-by-page flip of the Securities Act. They’re actually two different exercises.”
The task force will work closely with the Ontario Secur- ities Commission (OSC), which has indicated that it fully sup- ports the review. In mid-Feb- ruary, the task force members met with OSC chair and CEO Maureen Jensen, who is stepping down in April, and the OSC’s vice chairs, board and senior staff to discuss how the regulator and the task force can collaborate.
“Our dialogues and discus- sions with the OSC have been excellent,” Soliman says.
When Phillips was asked whether the leadership transi- tion at the OSC will affect the review process, he said no, add- ing that he asked the task force to meet with Jensen and OSC staff as its first action. “The OSC will be a full participant in the work that’s ongoing,” Phillips says.
Phillips did not provide a time- line for appointing a permanent replacement OSC chair, saying that the province will undertake a proper search: “We want to make
sure that the leadership reflects the vision that we have for mak- ing sure that we have the most transparent and effective capital markets that we can have.”
Grant Vingoe, vice chair of the OSC, will take over as acting chair when Jensen steps down.
Phillips also doesn’t foresee any conflict between the prov- incial government’s review of the Ontario Securities Act and continued support of the Capital Markets Regulatory Authority (CMRA) project. (Kevan Cowan, CEO of the Capital Markets Authority Implementation Organization, is a member of the task force’s advisory group.)
“There are going to be some best practices that we can learn from the extensive work of the national project,” Phillips says.
How a co-operative regulator will fit in with the broader capital markets regulatory structure in Canada isn’t clear, says Russell: “Seems to me you’re adding a lot more complexity [with a co-operative regulator].”
Soliman says he views the CMRA project, plus other cur- rent regulatory initiatives, such as the Canadian Securities Administrators’ review of the role of investment industry
self-regulatory organizations, as “important inputs to the rec- ommendation work we’re doing for Minister Phillips.”
Soliman says he and the task force’s other members are meet- ing with industry stakehold- ers, contacting the task force’s advisory group and receiving calls from market participants already. “At this stage, we’re lis- tening, which is the right thing for us to be doing,” Soliman says.
After accepting the role of task force chair, Soliman, who has ties to the Ontario Progressive Conservative party, stepped aside from his role as chair of the cam- paign to elect Erin O’Toole, who is running for the leadership of the federal Conservative Party. However, Soliman will continue to play a role in O’Toole’s campaign.
The other task force members are Cindy Tripp, founding part- ner and co-head, institutional trading, at GMP Securities LP; Melissa Kennedy, executive vice president, chief legal offi- cer and public affairs at Sun Life Financial Inc.; Wes Hall, founder and executive chair of Kingsdale Advisors; and Rupert Duchesne, former CEO and dir- ector of Aimia Inc. (All firms are based in Toronto.) IE
Capital markets have undergone significant change since the Securities Act was last reviewed 17 years ago
    Fund reps with smaller books are more dependent on DSCs
Ontario Securities Commission
(OSC) unveiled their diverging plans for the DSC fund structure on Feb. 21. The CSA, which has been promising a ban on DSCs since 2018, set June 1, 2022, as the deadline for its ban.
Meanwhile, the Ontario gov- ernment is committed to main- taining the DSC option on the basis that the structure will pre- serve access to financial advice for smaller clients. Accordingly, the OSC proposed a series of lim- its on the use of DSCs by funds to combat the long-standing investor protection concerns with the structure — including the inherent conflict of interest that DSCs pose and their ability to lock investors into underper- forming funds for years — with- out banning DSCs outright.
Among other measures, the OSC wants to restrict the sales of funds using DSCs to clients with accounts smaller than $50,000, restrict sales to investors under the age of 60 or with time hor- izons shorter than fund redemp- tion schedules and ban the use of leverage with DSC funds.
The OSC proposes limiting redemption schedules to three years — essentially requiring that DSC funds be sold as low-load funds rather than as traditional DSC funds, which now have much longer lock-in provisions of five to seven years than their peers.
The OSC also proposes that
unitholders be able to redeem 10% of their holdings penalty-free each year and that fund spon- sors provide exemptions from redemption fees for unitholders facing financial hardship.
The OSC’s proposals are out for comment until May 21. The regulator anticipates adopting the new limits on the use of DSCs by the same deadline as the rest of the CSA for its outright ban.
Until then, firms will be able to sell DSC funds and the regu- lators will allow the prevailing redemption schedules to run their course. The CSA’s prohibi- tion and the OSC’s restrictions will apply only to new sales, beginning in 2022.
Toronto-based investor advo- cate Kenmar Associates’ sub- mission to the OSC compares the OSC’s efforts to limit the harm caused by DSCs to “improving the working conditions of slaves instead of banning slavery.”
Kenmar’s comment also argues that the effects of Ontario’s contrarian stance on DSCs go beyond the direct consequences and will negatively affect confi- dence in the regulatory structure: “[The decision not to ban DSCs] has impaired the public’s percep- tion of the OSC as an independent regulator, disillusioned dedicated OSC staff and led to the resigna- tion of one of Canada’s greatest thought leaders on retail investor protection” — alluding to the impending early departure of Maureen Jensen, chair and CEO
of the OSC. (Jensen stated she was “ready to move on” when she announced her departure.)
Nationwide, about 10.9% of fund assets have been sold using DSCs (7.7% under the traditional DSC structure; 3.2% in the low- load structure), according to a March 2019 report from Toronto- based Strategic Insight Inc. cited by the OSC. However, the reli- ance on DSCs varies consider- ably across the industry.
Data from the Mutual Fund Dealers Association of Canada’s (MFDA) 2017 client research pro- ject indicates that fund reps with smaller books are much more reliant on DSCs.
For example, among firms that sell third-party funds, reps with books of less than $2 million have more than half (53%) of assets held in DSC funds and another 6% in low-load funds. Further up the advisor food chain, the use of DSCs declines and reliance on front-end load and no-fee, no-trailer funds rises.
For reps with books of $20 million–$50 million, only about a quarter of assets is held in DSCs and low-load funds (21% and 5%, respectively). The majority of these reps’ assets (59%) are held in front-end load funds, with another 11% held in no-fee funds.
At the high end — reps with more than $50 million in assets — just 14% of their assets are held in DSC funds. For these reps, front- end load is the top category (55%), followed by no-fee funds (23%).
Given this disparity in DSC use, fund reps with small books clearly will feel the biggest effects — as will dealers that churn through large volumes of low-end producers.
Fund sponsor companies also will be affected, as their ability to count on DSC sales to accumu- late assets will diminish — as will the cost of financing those upfront commissions.
In Ontario (which repre- sents about 45% of fund industry assets), the OSC states, fund com- panies and dealers still will be able to generate some DSC-driven revenue, and the regulator’s pro- posed restrictions will limit the risk of harm to investors and the threat of unsuitable sales by deal- ers: “The extent of the impact will vary and will heavily depend on a firm’s revenue and cost struc- tures, the short- and long-term profitability of serving [low- er-value clients], and how com- peting firms choose to respond.”
As for investors, clients with accounts of less than $100,000 in investible assets have the highest concentration of their assets held in DSC funds, so these clients are likely to be most affected by the regulators’ plans.
The OSC states the greatest impact of its proposed restric- tion on DSCs in Ontario is likely to be on clients with $50,000– $100,000 in investible assets. Investors with less than $50,000 in investible assets still will be able to purchase DSC funds, subject to the restrictions on age, time horizon and the use of leverage. But investors with investible assets above the $50,000 threshold will have to buy their fund units differently.
The OSC estimates that if its proposals are adopted, investors’ redemption costs will decline by 50%–70% from current levels. Most of the affected investors will shift to front-end sales char- ges, currently the second-most popular purchase method for smaller investors. Investors may then have to pay an upfront sales commission, although these charges typically are waived by dealers. Still, investors also gen- erally pay a higher trailer fee for front-end load funds.
According to the MFDA, the typical trailer for front-end load funds is 60–100 basis points (bps), compared with 30–50 bps for traditional DSC funds and 40–70 bps for low-load funds. IE
The OSC’s effort to limit harm is like “improving the working conditions of slaves instead of banning slavery”

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