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  6 | INVESTMENT EXECUTIVE NEWS October 2020 Some recommendations “antithetical” to investor protection
group’s recommendations are ill-conceived, threaten investor protection and could undermine the province’s efforts for more vibrant capital markets.
The task force’s July report pro- poses a series of reforms largely designed to stoke growth in the capital markets. In addition to the Ontario Securities Commission’s (OSC) traditional priorities of investor protection and ensur- ing fair and efficient markets, the task force proposes expanding the regulator’s mandate to include an obligation to foster capital forma- tion and competition.
The task force also recom- mends overhauling Ontario’s existing regulatory structure, easing a variety of constraints on raising capital, remodelling proxy voting and corporate governance, and revisiting enforcement and investor restitution mechanisms.
Many proposals set off alarm bells and, given the speed of the consultation process and the number of bold ideas in the report, perhaps that isn’t surprising.
First of all, revising the OSC’s marching orders to include a mandate to foster market growth is sparking concern. The submis- sion from the OSC’s independent Investor Advisory Panel (IAP) warns that expanding the OSC’s mandate could undermine the regulator’s raison d’être, leaving the OSC “in the awkward and unenviable position of being seen
as a cheerleader for Ontario’s cap- ital markets when the OSC should more appropriately be positioned as a fair and objective regulator of those markets.”
Even if the government’s top priority is driving market growth, strong investor protection is a prerequisite for attracting cap- ital, the Canadian Coalition for Good Governance (CCGG) cau- tions in its submission to the task force: “Reforms that risk eroding investor protection or increasing regulatory burden for investors, risk losing the patient global cap- ital that fuels capital formation over the long term.”
The CCGG, which represents institutional investors that col- lectively manage $4.5 trillion in assets, states in its submission that a number of the task force’s recommendations — includ- ing measures to regulate proxy advisory firms, to give issuers more information on share- holders and to involve the OSC in the handling of shareholder proposals — are “antithetical” to the OSC’s investor protection mandate.
Various submissions propose that several of the task force’s recommendations threaten to diminish investor protection.
Securities lawyer Phil Anisman’s submission points to proposed changes to rules pertaining to accredited inves- tors and the introduction of an offering model based on con- tinuous disclosure (rather than
by a prospectus) as measures that would erode long-standing investor protections in favour of providing issuers with new ways to raise capital.
These concerns were echoed in the submission from the Investment Industry Association of Canada (IIAC), which warns that “the many adverse consequences of [the proposed alternative offer- ing model] would significantly degrade the reputation of Canadian capital markets.”
The IIAC also opposes pro- posals designed to enhance com- petition by pushing bank-owned investment dealers to open their product shelves to more third- party products. The IIAC’s sub- mission notes that forthcoming changes to conduct standards in the Canadian Securities Administrators’ (CSA) client- focused reforms will address any competition concerns.
Recommendations that would introduce curbs on the OSC’s enforcement capabilities are another source of concern for those worried about investor protection being degraded.
Anisman’s submission points out that several of the task force’s ideas, if adopted, could hamper the OSC’s investigations. These proposals include provisions that would expand the ability of investment firms and individuals to resist investigative orders, limit the OSC’s power to compel compli- ance and weaken confidentiality
requirements. In addition, the task force proposes that admissions made in enforcement settlements can’t be used in private litigation.
A number of the comments criticize these proposals — includ- ing the submission from the CSA, which didn’t include input from the OSC. The CSA’s submission warns that the proposed changes to the OSC’s enforcement cap- ability “could ultimately impair CSA enforcement processes and undermine investor protection.”
Kristen Rose, manager of pub- lic affairs with the OSC, says the OSC’s role in the task force’s con- sultation “has been to provide the task force with technical input and suggest areas for potential reform.”
Alongside proposals that some fear could hamper regula- tory investigations, the task force makes several recommendations for bolstering the OSC’s enforce- ment capability and boosting investor access to redress — such as expanding the OSC’s evidence-gathering capabil- ities, improving its performance at collecting sanctions, raising penalty limits and enhancing its ability to return ill-gotten gains to harmed investors.
The task force also revived the idea that the OSC’s adjudica- tive function should be hived off from the regulator and given to a separate tribunal. Back in 2004, an independent review reached a similar conclusion, which was accepted by the government at the time but never acted upon.
A number of comments sup- port the idea. For example, the IAP’s states the panel is in favour of an independent regulatory tribunal, but suggests that the tribunal should report to the attorney general rather than to the minister of finance, in order to better guard against political interference.
Similar concerns arose regard- ing the task force’s recommenda- tions that the chair and CEO roles at the OSC should be separated, with the CEO given performance targets by the government that are linked to compensation.
The CCGG’s submission states that the coalition “has serious governance concerns” with this idea, and notes that the govern- ment already has a variety of ways to drive policy direction at the OSC. The comment also states that the proposed structure would fundamentally violate the regulator’s independence.
Given the fundamental chan- ges being contemplated by the task force and the speed of its work so far, some submissions call for further consultation before reforms move ahead.
“In view of the breadth of the initial proposals, the fact that the report discloses only two-thirds of the task force’s proposals, and their lack of concreteness,” Anisman’s comment suggests the task force should solicit another round of comments before mak- ing its final recommendations to the government. IE
   Study shows more disclosure isn’t helping investors
The study revealed that little has changed in key areas, such as investors understanding fees, in the years since the invest- ment industry adopted meas- ures designed to significantly enhance disclosure.
Researchers surveyed inves- tors in March and September of 2017, 2018 and 2019 to gauge their understanding of fees and other subjects. The results were compared with a baseline study carried out in 2016 before the reforms were adopted.
While the study found improvements in investor know- ledge, the research also revealed fundamental gaps in investors’ understanding of fees — including that most investors aren’t aware of trailer commission disclosure.
The survey found that in 2019, most investors still didn’t know that information on “indirect fees,” such as trailers, is included in the reports they receive from their investment firms.
Among the investors who reported looking at their account statements, only 42% said they were aware of these kinds of charges. While that figure is an improvement from 29% in 2016, awareness remains far from universal.
The research also found that awareness of trailers and other third-party compensation var- ied by advice channel. Awareness
was weakest among self-directed investors and investors with an advisor without discretion- ary authority (39% and 37%, respectively), compared with 44% for investors with discretionary portfolio managers and 53% for investors using brokerage advi- sors with discretionary authority.
The study also revealed just how poorly investors under- stand fees generally. While only about half of investors knew investment fees existed, almost 75% claimed to know how much they’ve paid in fees over the past year.
In 2019, 51% said they pay fees to buy, sell or hold invest- ments, and a similar percentage (52%) said they pay fees for the management or administration of their accounts. At the same time, 72% reported they knew the amount they paid to their investment firm over the previ- ous 12 months.
The report states these find- ings reveal a “disconnect” between investors’ subject- ive knowledge of fees (i.e., how much they paid) and objective facts (i.e., fees exist), and points to possible explanations for these odd results.
Citing behavioural economics research, the CSA report suggests there’s a tendency for survey participants to answer subject- ive questions “overconfidently” compared with their responses to objective questions.
The report also points to “social desirability” bias as a possible explanation — that the survey participants overstated their subjective knowledge out of a desire to portray themselves as “engaging in behaviour or holding views that are socially deemed to be good.”
There are other apparent dis- connects in the research.
For example, 80% of the investors claimed to have a “good understanding” of how fees are affecting their returns; yet 51% of survey participants said they know fees impact returns, and 39% said they understand the impact of all of their fees on their returns.
Again, the report suggests this may be the result of the dif- ference in how people tend to answer subjective vs objective questions; it also could reflect the “social desirability” bias.
Whatever the reasons, over- all investor understanding of fees remains poor — pointing to the implausibility of disclosure as adequate investor protection.
The study also found that 89% of investors agreed that it’s some- what or very important to mon- itor the amount of fees they’re charged — yet only 69% both- ered to read their account state- ments (essentially unchanged from 70% in 2016).
One hope was that enhan- cing disclosure would lead to more meaningful conversations
between investors and their advisors about fees, but that doesn’t seem to be happening.
While the proportion of invest- ors who reported that their advisor discussed fees with them rose in the immediate aftermath of the POS and CRM2 reforms (in 2017 and 2018, respectively), this action dropped in 2019, indicating that the trend was not sustained.
Similarly, the study found no change from 2016 to 2019 in the percentage of investors reporting that their advisor discussed their financial goals, progress toward those goals and different strat- egies for attaining them.
Moreover, there’s no evi- dence that advisors are recom- mending lower-cost options to clients in the wake of enhanced cost disclosure.
“We’re seeing that Canadians are gaining more confidence in navigating the marketplace. However, there is room for sub- stantial improvement in the investing experience, especially in understanding the impact of fees on investment returns,” notes Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés
financiers, in a statement.
The regulators want to improve the investing experi- ence through further reforms,
but these efforts face obstacles. For example, the CSA’s move to eliminate mutual funds with deferred sales charges (DSCs) is being disrupted by the Ontario government’s refusal to go along with that long-debated policy decision. And the implementa- tion of certain provisions of the CSA’s client-focused reforms is being delayed at the industry’s
Some firms in the investment
industry contend that improving investor knowledge would obvi- ate the need for more prescriptive regulatory measures aimed at enhancing investor protection. When the CSA decided to elim- inate DSCs rather than outlaw embedded compensation entirely, the regulator did so amid argu- ments from the fund industry that the POS and CRM2 reforms should be given a chance to work before more drastic reforms are pursued.
But the CSA’s survey results are evidence that disclosure alone does not provide adequate investor protection. IE
There is much room for improvement in investors’ understanding of the impact fees have on their investment returns

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