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  6 | INVESTMENT EXECUTIVE NEWS Time to think bigger on SRO reform?
for similar measures. The IAP’s submission suggests that if self-regulation remains the CSA’s preferred approach, then “self” should be redefined to refer not just to the investment industry, but to the broader investment community: “[The CSA] must abandon altogether the notion of investment industry self-regu- lation and instead embrace and internalize the concept of invest- ment community self-regulation for the communal benefit of the industry and investors.”
This call for SROs to prioritize the public interest is echoed in the Canadian Advocacy Council of CFA Societies Canada’s sub- mission, which suggests that the concept of “public interest” has been added to the SROs’ mandates over time rather than baked into their cultures.
Toronto-based investor advo- cacy firm Kenmar Associates’ submission echoes these con- cerns: “Trying to merge existing entities with existing cultures and processes is not the way forward.”
Instead, Kenmar’s letter argues that a new SRO “with a new board, new accountability framework, new mandate and new culture” is needed.
The IAP’s submission argues that the regulatory restrictions and requirements on investment dealers shouldn’t be classified as “burdens” on the industry. In fact, the costs that rules inflict on deal- ers — and the restrictions those
Soliman said.
The same thing was proposed
in 2004, following a review by Justice Coulter Osborne. In fact, the same model is proposed for the Cooperative Capital Markets Regulatory System (CCMR) — if and when that effort gets off the ground.
While there’s not much opti- mism about the CCMR coming to fruition — at least, in the short term — Soliman said that the task force’s final recommenda- tions won’t impede the creation of the CCMR.
“In fact, we are excited at the prospect of additional recom- mendations that we feel will set the stage much better for a future national regulator,” Soliman said.
In the meantime, David Brown, who was chair and CEO from 1998 to 2005, said he’s concerned about how such a separation could affect the OSC’s standing with the courts and, ultimately, the OSC’s ability to regulate.
Currently, securities regu- lators are accorded a lot of def- erence from the courts because the former are seen as experts, Brown said, adding that he wor- ries that separating adjudication could erode this expert status — and thus judicial deference. That erosion could leave the OSC open to more second-guessing of its decisions in court, inviting more litigation and ultimately compli- cating enforcement, Brown said.
“I think keeping the tribunal as part of the [OSC] is very much a part of the structure. I think
Mid-November 2020
rules impose — are a feature of regulation, not a bug: “Many of the regulations that the indus- try now characterizes as bur- densome were put in place as speed bumps to address prob- lems dealers themselves created through a multiplicity of sales channels, opaque fee structures and complicated products that they promoted aggressively to retail investors.”
Furthermore, the IAP’s letter states, rigidities and inefficien- cies in the system represent safe- guards for investors.
Comments on the CSA’s con- sultation also argue that SRO enforcement and mechanisms for investor redress must evolve in order to restore confidence in self-regulation. In particular, enforcement often targets indi- vidual advisors rather than firms or senior industry personnel. The fines imposed on individuals fre- quently go unpaid and investors are left trying to recover their losses, either through a confus- ing industry complaints process or via litigation.
The IPC’s submission suggests regulators could require firms to pay the sanctions owed by disci- plined former advisors: “This would increase collections, while also incentivizing compliance and supervision at the firm level.”
The comment from the
Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) also argues that SROs should secure com- pensation for harmed investors: “SROs should have the power to order disgorgement of profits and to direct payment of disgorged profits to harmed investors where appropriate.” IE
it’s working, and I think it would be a mistake to separate it out,” Brown said.
Veteran securities lawyer Phil Anisman has long advocated against separating the OSC’s tri- bunal from other components of the regulator’s mandate. In his submission to the task force, Anisman argued that there’s a significant benefit to housing policy-making and adjudication within the same agency.
When the OSC’s commis- sioners are involved in develop- ing regulatory policy, they have a better understanding of the pur- pose of the rules, Anisman noted. This policy knowledge can help inform the OSC’s efforts to pro- tect the public interest in their rulings, he suggested. At the same time, Anisman’s letter sug- gests, the OSC’s experience hear- ing cases can also help shape policy-making: “The benefits of this cross-fertilization have long been recognized.”
Back in 2004, the Osborne committee heard many of the same arguments and ultimately recommended that the OSC’s adjudicative function be sep- arated. In making that recom- mendation, the committee cited concerns about the perception of bias that comes from an inte- grated tribunal. The government at the time accepted the recom- mendation, but never acted on it.
Time will tell if today’s gov- ernment is prepared to fol- low through on the task force’s recommendations. IE
Association of Canada (MFDA), taking the cost savings that would hopefully result and getting on with things.
But the goal of wringing costs out of the system by merging IIROC and the MFDA isn’t res- onating with many commenters. Investor advocates and academ- ics believe a fundamental rethink of self-regulation is required.
“Cost savings alone should not be determinative of how to reform the SRO framework,” states a submission from the Investor Protection Clinic (IPC), which is run by the University of Toronto’s faculty of law.
“A simple merger for cost sav- ings, without more detailed pro- posals for reform on investor access to advice, products and complaint resolution, might lead the regulatory industry to become tired of this process, and stop before any real change has taken place,” the IPC’s letter cautions.
Moreover, the submission from the Ontario Securities Commission’s (OSC) Investor Advisory Panel (IAP) questions how meaningful those cost sav- ings will be. A study commis- sioned by IIROC estimated that merging with the MFDA could save $500 million in compliance costs over 10 years. However, the IAP’s submission notes most benefits would flow to the 25 dual- platform dealers. And the savings would be marginal in the context of the revenue generated by those firms over that 10-year period.
The IAP’s submission argues that improving investor out- comes should be an equal objective for reform — and that the CSA review should focus on optimizing the regulatory framework for both investors and the industry before tackling cost-effectiveness.
Submissions from investment industry segments regulated dir- ectly by provincial authorities — such as exempt-market deal- ers and portfolio managers — question whether self-regulation should be used at all.
The Portfolio Management Association of Canada (PMAC) and the Private Capital Markets Association of Canada (PCMA) are dead set against being drafted into the SRO world — either as the second step follow- ing an IIROC/MFDA merger or as part of the MFDA’s proposal to create a single SRO that cov- ers all registered firms.
Both PMAC and the PCMA point out that the SRO model has fallen out of favour in mar- kets such as the U.K., Australia, Hong Kong and Singapore amid concerns about inherent con- flicts of interest.
“Given the global regulatory shift away from SROs, the PCMA is wondering why the CSA would consider expanding the scope or restructuring of the existing SROs,” the PCMA’s letter states.
PMAC’s letter also states that it “strongly opposes” having its members regulated by a new SRO or a merged MFDA and IIROC.
“Expanding the mandate of
the SROs to include [portfolio managers] would only serve the interests of the SRO, and not investors,” PMAC’s submission states. The association favours direct regulation by provincial authorities — and, ultimately, by a national regulator.
“We believe that a national regulator is a better first step towards improving the regulatory system,” the PMAC letter states. “In our view, direct regulation is stronger regulation and better serves the public interest.”
However, there has been little progress toward national regula- tion and there’s growing skepti- cism that the political will to see such a project to fruition exists.
“If [SROs] are going to con- tinue to exist in Canada, the inherent flaws with the SRO model need to be addressed,” PMAC’s submission states.
In particular, PMAC’s let- ter argues, investor protection and protecting the public inter- est should be regulators’ pri- mary objectives. To that end, the letter states, SROs’ govern- ance arrangements should be enhanced and structures such as IIROC’s district councils should be reformed to address concerns about transparency and conflicts of interest.
Investor advocates are calling
      OSC could see split roles for chair & CEO
The task force will propose separating the OSC’s adjudicative function, rejigging the regulator’s governance and revising its man- date to include the goals of promo- ting innovation and competition alongside traditional objectives of ensuring investor protection and fair and efficient markets.
During the consultation phase of the task force’s work, the pro- posal to change the OSC’s man- date to include fostering capital formation and competitive mar- kets was met with criticism. There were concerns that such a man- date would create new conflicts within the OSC at the expense of investor protection, which could undermine the ultimate goal of championing economic growth.
Maureen Jensen, the OSC’s most recent ex-chair and ex-CEO, attended the policy meeting. She questioned the wisdom of revis- ing the regulator’s mandate: “My concern is that it’s very difficult to be a regulator on one hand and to be a partner in fostering new kinds of ideas and companies at the same time.”
Jensen noted that under the OSC’s existing mandate, the regulator already is expected to consider the possible effects of its rule-making on competition and to encourage innovation as part of fostering fair and efficient
markets. She said she worries that amending securities legis- lation to require the regulator to become a partner in industry innovation would go too far.
In particular, Jensen sug- gested that playing the role of market booster and enforcer at the same time could be tricky.
“What happens when you begin fostering certain kinds of startups or funds, for example, and then something happens, and you have to be the regulator of those funds? You’re really, truly not independent,” Jensen said.
The risk of tilting the balance between investor protection and market efficiency too sharply in favour of promoting growth was raised by the Canadian Coalition for Good Governance (CCGG) during the consulta- tion on the task force’s initial recommendations.
The CCGG’s letter warned that relaxing requirements to make raising capital easier for issuers in the short term could backfire if those same companies fail, tak- ing investors’ money with them and ultimately denting economic growth. The CCGG’s letter pointed to the 2008-09 global financial crisis as an example of this sort of folly and warned against pushing the OSC too heavily toward pro- moting issuers’ interests.
Not all former chairs of the OSC were against expanding
the regulator’s mandate. Howard Wetston (chair and CEO from 2010 to 2015), for example, is less bothered by the idea. Given that the OSC already plays a role in fostering competition, he argued during the conference that there’s nothing wrong with being more transparent.
Wetston said a legislative amendment to ensure that the OSC considers competition when making policy would be “a very significant thing to do because I think it will be a way of advancing our markets, growing our markets [and] growing our economy.”
Soliman told the conference that regulators in the U.K. and Australia, for example, already have pro-growth mandates. He said these mandates allow them to “reduce systemic barriers to growth, including fees and anti-competitive behaviour.”
Alongside a revised OSC mandate, Soliman said, the task force’s final report also will pro- pose separating the OSC’s tribu- nal from its regulatory function, while also separating the OSC’s chair and CEO roles.
“We envisage, in short order, a capital markets authority with an oversight and governance board, an independent chair, and a CEO with executive and regulatory responsibility for the OSC. We envisage a separate adjudicative body of administrative experts,”
“If SROs are going to continue to exist in Canada, the inherent flaws with the SRO model need to be addressed”

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