Retail investors have long struggled to get themselves heard by securities regulators. The good news is they may find a voice if the latest push to create a national securities commission succeeds.

The dearth of investor input has plagued securities regulators — the constituency that most needs help from regulators also has the least contact with them. Securities dealers, asset managers, issuers and institutional investors all have lobby groups to advocate on their collective behalf — and bright lawyers to speak for them individually. Retail investors are generally unorganized and not expert enough to advocate as effectively for themselves. Also, they don’t usually seek professional representation.

As a result, the very people that most need regulators’ protection have the least involvement in the policy-making process. Although retail investors can participate in the public comment process that accompanies rule-making initiatives, they generally don’t have the same sort of access as the industry does. When retail investors do comment on proposed rules, their views aren’t likely to be as consistent, given that retail investors comprise a vast, diverse group with widely differing knowledge, experience and interests. All this helps create a gulf between the regulators and those who should be their primary audience.

Now, amid the latest push for a national securities regulator, the question of how to bridge that gap is back on the agenda. In the January 2009 report of the Expert Panel on Securities Regulation, the panel says that it believes that “securities commissions across Canada could do more to engage and advance the interests of investors.”

As a result, the report recommends that the proposed national regulator include the creation of an independent investor panel and a dedicated investor issues group (an internal body to review all policy proposals from the retail investor’s perspective). The report says that the panel was motivated to make these recommendations because of the concerns of retail inves-tors and the demonstration of such initiatives at other securities regulators “that have made investor engagement a priority.”

With those recommendations in mind, the government body that has been charged with laying the groundwork for a new national regulator, the Canadian Securities Transition Office, held discussions in mid-January to kick around ideas for the inclusion of an investor advisory body in the new authority. Doug Hyndman, chairman of the CSTO, says that the meeting was intended to “help advance our thinking about an investor advisory committee.

“We are talking to lots of people about various design issues,” he adds. “Our recommendations on these issues will show up in the transition plan that we have to submit by July.”

The best hope for investor advocates seeking a greater voice in the regulatory process, then, is that the CSTO plan includes a robust investor panel component; and, assuming that it will, that a national regulator actually comes into being this time around.

Of course, the latter is far from certain. All previous efforts to create a national regulator have ultimately gone off the rails for one reason or another.

This latest initiative already faces a court challenge; and the concept of a national regulator will surely have to navigate its share of practical and political threats if it’s to come to fruition.

In the meantime, the fact that meetings are being held to discuss the issue of including retail investors — further meetings have been promised — can only be seen as a hopeful sign for investor advocates.

“There is definitely an appetite [at the CSTO] to create a mechanism for meaningful investor input,” says Glorianne Stromberg, one of the initial meeting’s attendees, and author of two seminal reports on the investment funds industry and former commissioner with the Ontario Securities Commission.

Stromberg hasn’t yet reached her own conclusions on how to include retail investors, although she does suggest that simply copying the model employed by Britain’s Financial Services Authority (whose Consumer Panel was cited as an inspiration in the Canadian panel’s report) is probably not the way to go.

Instead, Stromberg sees the task of securing greater investor input as part of a broader need for regulators to refocus their efforts on investor protection — and to embed that goal deeply throughout the culture of the regulator.

“This goes to the very essence of securities regulation, which has its origins in consumer protection and the prevention of frauds,” she says. “Regulators, in my opinion, have lost their focus and, along the way, have been captured by the lobbyists for the people they were created to regulate — the issuers and distributors of securities.

@page_break@“I think the greatest risk we face,” she adds, “is the creation of a national securities regulator that is a clone of the present [Canadian Securities Administrators]. Hence, my emphasis is on the need to change the focus and the culture of the regulator and to get the right people driving the process. That’s what investors and the so-called ‘investor advocates’ should be striving for.”

This sort of epiphany did strike regulators south of the border in the wake of the recent financial crisis. When Mary Schapiro took over as chairwoman of the U.S. Securities and Exchange Commission back in January 2009, she stressed that she would return the SEC to its primary mission of acting as the “investor’s advocate.”

In Schapiro’s first speech as SEC chairwoman, she announced the creation of a new investor advisory committee at the SEC: “In deciding upon regulatory priorities, it is vital that the SEC re-engages with the people we serve: inves-tors. The investor community needs to feel that they have someone on their side — that they can go to the SEC to seek redress or to have their opinions heard.”

One of the people picked to sit on the SEC’s new committee as a representative of the interests of retail investors, is Mark Latham, executive director of the Vancouver-based VoterMedia.org project. Although he says that it’s too early to tell how effective the SEC’s new initiative will be, he reports that it does appear to be “influencing SEC policy significantly in the direction of broad public interest.” And he suggests that Canadian regulators should try something similar.

Indeed, the existing provincial regulators have tried to do more to engage retail investors in recent years — from attempts to solicit comments on rule-making initiatives and interactive websites to focus groups on the design of new disclosure documents — which have met with varying degrees of success.

Perhaps the most concrete results were generated by an Investor Town Hall that was hosted by the OSC back in 2005. That event at least led to the eventual adoption of new complaints-handling rules by various authorities.

Although that may not have been the primary concern expressed by investors at the event, it was one that the regulators were able to run with — and it has led to improvements that genuinely benefit investors.

Notably less successful was the OSC’s own Investor Advisory Committee — another idea that sprang from that initial town hall meeting. It never produced any obvious results, and was not continued after its initial two-year run ended. IE