It has been almost five years since retail investor anger with the securities industry reached a boiling point in public hearings. Unfortunately, little has changed since then.

In the summer of 2004, a legislative committee in Ontario held two days of hearings. The ostensible purpose was to review securities regulation, but the hearings were marked by a parade of frustrated investors.

The result was a report delivered in the fall of 2004 that called for some major reforms to securities regulation. It included proposals for improved investor redress mechanisms, the separation of the Ontario Securities Commission’s adjudication function, a fundamental rethink of self-regulation, and greater legislative oversight of the commission.

The provincial government accepted the committee’s recommendations and promised to act on them. Yet, nearly five years later, it’s difficult to see much improvement. Certainly, none of the major recommendations have been acted upon by the government. If there has been any progress on investor issues following the 2004 hearings, it originated with the OSC itself, not the government. In 2005, then-OSC chairman, David Brown, convened an investor town hall, which gave even more retail investors an opportunity to voice their concerns.

Out of that effort, the OSC committed to three basic things: improving how it handles complaints, ensuring access to restitution, and creating an investor advisory committee to give retail investor concerns a more prominent place in the commission’s policy-making machinery.

Of those three promises, the one that is seeing some progress is dealing with complaints. In mid-February, the Investment Industry Regulatory Organization of Canada released the latest version of its proposed new complaint- handling rules, which impose some standards and deadlines on how firms must investigate and deal with client complaints. Among other things, the rule will give firms five business days to acknowledge a complaint, and 90 calendar days to investigate the issue and report back to the client. It also requires them to appoint a designated complaints officer to oversee the process.

This rule proposal was originally released for comment in the fall of 2007, and the IIROC has made some notable changes from the first version. It has narrowed the definition of what constitutes a complaint. The original proposal also called for a six-month deadline to resolve complaints, but that has now been reduced to 90 days. The reason is that the original proposal was also meant to apply to any internal ombudsman process that a firm may offer, whereas the latest version excludes the ombudservice from the deadline.

In comments received on the proposed rules, the IIROC reports that, among other things, those who commented sought less-stringent deadlines: some wanted 10 days to acknowledge a complaint, rather than five, and argued that 90 days would not be long enough to investigate complaints and report back.

However, the regulator stuck to its guns on both time limits, noting that 90 days is a reasonable standard, and is longer than firms get in other countries, such as Ireland (25 days), Australia (45 days), and Britain (eight weeks).

Still, firms will have some work to do to meet the new standard. The regulator reports that from January 2004 through the end of 2007, firms were delivering substantive responses to aggrieved clients within 90 days, 62.2% of the time (and responding within 180 days, 83.6% of the time). The IIROC says that given the industry’s existing performance, the 90-day limit “would seem to be a reasonably achievable undertaking.”

The IIROC rule is out for comment until March 16, and will take effect after it receives the blessing of the securities regulators. The Mutual Fund Dealers Association of Canada is also proposing similar changes to its complaint-handling policy, and the latest version is slated to go to its board for approval in the first week of March. The securities commissions will also impose comparable standards on the firms they regulate directly as part of the registration reform initiative.

Assuming that the new complaint-handling standards eventually receive securities commission approval, the other two big issues from the OSC town hall remain outstanding.

Arguably, the restitution issue has not been dealt with at all. The Ombudsman for Banking Services and Investments has revised its terms of reference in an effort to make it more investor friendly, although it didn’t go as far as some investor advocates had hoped. Moreover, ideas such as regulators ordering compensation to aggrieved investors, or developing an investor compensation fund — which were recently proposed by the federal Expert Panel on Securities Regulation — have not been explored in Ontario.

@page_break@As for improving investor input, the commission did initially deliver on its pledge to create an investor advisory committee, although it was abandoned once the original two-year term expired. Instead, the OSC, IIROC, MFDA and OBSI formed another committee that aims to examine retail investor issues. Last year, for example, it studied suitability, but that effort isn’t seen as adequate by investor advocates.

Indeed, in late February, the OSC again found itself facing a legislative committee (the Standing Committee on Government Agencies this time), which heard testimony echoing some of the complaints that were voiced back in 2004.

At the SCGA hearing, Pamela Reeve, a philosophy professor and a member of the original IAC, suggested that retail investors need their own dedicated body to represent their interests, modeled on the Consumer Panel that is funded by the Financial Services Authority in Britain. Reeve said that such an entity is required to address the fact that retail investors aren’t well represented at the commission.

Ermanno Pascutto, a former regulator, now the executive director and driving force behind a new investor advocacy body — the Canadian Foundation for Advancement of Investor Rights — went a step further, and suggested to the committee that the OSC should be looking to add investor representation to the commission itself.

Pascutto points out that the top management of the commission — the chairman, two vice chairmen and the executive director — are all either lawyers or investment bankers, and that it is seeking more of the same to fill vacancies on the commission.

“I don’t think they have a shortage of investment bankers and Bay Street lawyers. If you look at the various committees that they have you’ll see an endless list of investment bankers and Bay Street lawyers. They do not have representation from retail investors,” Pascutto told the committee.

“I think this is a good time for the committee to say that retail investors and shareholders should have adequate representation on the governing body of the commission, and, of the three current commissioners [being sought], at least one should be expressly allocated for a retail investor representative,” he said.

The committee also heard a variety of other criticisms of the current system from the investor community. Both Reeve and Pascutto called for improved legislative oversight of the commission. The last five-year review of securities regulation, which was supposed to be an ongoing exercise, was completed in May 2003. And the committee that convened to consider that report was the last opportunity for investors to bring their concerns to the legislature, which is supposed to be providing oversight on their behalf.

Pascutto recommended that this legislative scrutiny be beefed up, including a requirement that the OSC table its annual report before a committee that can then hold hearings. He also proposed that a regulatory audit should be carried out, and the results reported back to the legislature.

From the institutional investor perspective, Stephen Griggs, executive director of the Canadian Coalition for Good Governance, also appeared at the hearings and championed the cause of shareholder democracy.

He reported that his group has lobbied the Canadian Securities Administrators to take on some basic shareholder democracy issues that it supports, such as: individual director voting, majority voting, shareholder approval for a broader range of transactions, improved shareholder access to the management proxy circular, and better policing of the proxy voting system.

Griggs said that the CCGG believes that these basic improvements to shareholder democracy will not be adopted voluntarily at most companies, because they are fundamentally contrary to the interests of existing boards and management.

Pascutto is also concerned about the protection of shareholder rights, which he believes has taken a step backwards in recent years. He argued that it is fundamentally a conflict of interest to allow the Toronto Stock Exchange to regulate listed companies while also operating a for-profit business.

He recommends that the regulatory function must either be made more distinct within the TSX, or that responsibility should be given over to a full-time regulator, such as a securities commission or a self-regulatory organization.

Among other things, Pascutto also called for the government to take on the cause of improving financial literacy, both in the province and at the national level. “This is something that’s been done in other countries. The U.S. and Britain both have national financial literacy strategies; we don’t in Canada,” he said.

Indeed, in the wake of the financial crisis, many regulators around the world are taking retail investor issues more seriously. The U.S. Securities and Exchange Commission’s new chairwoman, Mary Schapiro, recently hired a special advisor that will champion investor issues at the SEC, including creating an Investor Advisory Council, looking to improve proxy access and evaluating shareholder advisory votes on executive compensation.

Canada’s regulatory structure may be lodged firmly in the last century, but there’s no reason why the content can’t be more progressive and pro-investor. IE