All the regulators are trying to do is give securities dealers a little friendly relationship advice. But many of those dealers would prefer the regulators keep their noses out.

Earlier this year, the board of the then-Investment Dealers Association of Canada — which has since completed its merger with Market Regulation Services Inc. to form the Investment Industry Regulatory Organization of Canada — approved a series of proposed rules that aim to improve the three-way relationship among clients, advisors and their dealers.

The so-called “client relationship model” (a.k.a. the CRM) calls for improved transparency in that relationship — specifically, in terms of the account-opening process, the costs paid by clients for their accounts, the conflicts of interest that dealers and advisors face, and both the account performance and the risks being taken to achieve that performance.

The Mutual Fund Dealers Asso-ciation of Canada has also been working to address some of the same basic issues, and in mid-June it published two proposed rules. One deals with account supervision, improving disclosure when accounts are opened and ensuring ongoing suitability. The second proposal focuses on performance reporting.

The MFDA has yet to produce a single regulatory proposal that covers all of the issues dealt with in the IDA model. But the MFDA’s two proposed rule changes are intended to deal with several of the items raised by the former IDA, along with concerns that the MFDA has uncovered in its own compliance and enforcement work.

The MFDA’s proposed amendments are now out for a 90-day comment period.The IDA published its proposal in late February, and the comment period closed at the end of May.

Not surprising, many of the comments submitted regarding the IDA proposals are highly critical of the initiative. Some respondents worry about the lack of harmonization between the two self-regulatory organizations on this project — the fact that the IDA came out with its proposals long before the MFDA did, and that the industry was expected to comment on one without having seen the other.

This is further complicated by the fact that the Canadian Securities Administrators are proposing an overhaul of the registration regime, which is itself a mammoth undertaking, and considers the CRM as part of this effort. And securities and insurance regulators are also collaborating on an overhaul of the point-of-sale disclosure provided by investment funds, under the auspices of the Joint Forum of Financial Market Regulators.

The CSA registration reform project completed its second comment period at the end of May, too, and throughout the summer, regulators will doubtlessly be wading through the avalanche of responses that proposal generated.

Meanwhile, the Joint Forum has been assimilating the comments it has received on the latest version of its proposals, which were published in June 2007. Susan Silma, director of the investment funds branch of the Ontario Securities Commission, indicates the Joint Forum plans to publish a final version of its proposal sometime in the autumn. After that, it will be up to the various individual regulators to implement the regime.

Despite all of these initiatives, some in the industry remain baffled by what regulators are trying to accomplish. From the comments submitted concerning the IDA’s CRM proposal, some object to the notion that anything has to be changed in the regulation of the client/advisor/dealer relationship.

Some respondents don’t believe that the regulators have demonstrated that there’s a genuine market failure to address concerns; others claim the IDA’s approach is overly prescriptive and should be more principles-based. Critics complain that the regulators haven’t carried out a cost/benefit analysis to show whether the expense of adopting these new rules is worth the trouble.

“The current regulatory regime in Canada is already far too detailed and complex,” notes the Investment Industry Association of Canada in its comment, “with rules that govern the advisor relationship with clients as well as the internal operations of firms. The proposed CRM simply adds to this regulatory burden.”

And some commentators suggest that this burden is being increased without a corresponding gain for clients. In its comment, Vancouver-based PI Financial Corp. adds: “We are not aware of any securities dealer that believes CRM affords anything other than marginal additional benefits to clients.”

The comment goes on to say that PI Financial believes the costs will be “significant,” particularly for smaller dealers.

@page_break@If there is a problem with disclosure, some in the industry suggest, it’s that there’s already too much of it.

For example, the comment from Toronto-based Assante Wealth Management Ltd. claims that clients actually want less disclosure, not more: “Based on informal feedback from the field (clients and registered representatives), it is clear that less information/documentation is wanted. It is overwhelming for clients to receive numerous documents pertaining to their account(s) and particular securities purchased.”

The IIAC further argues: “An imbalance exists between the regulations aimed at protecting the inves-tor and the detailed mass of paper generated by these regulations that most investors do not read. This imbalance has been exacerbated as more regulation is introduced without evidence supporting the need for it.”

The IIAC calls the CRM initiative “a prime example” of this tendency to boost disclosure requirements without justification.

Investor advocates would agree that the current disclosure system is not working well, but they don’t see the solution as simply reducing the volume of material investors receive.

“In our view, prevailing industry sales practices, marketing materials, fee disclosure and accounting, performance tracking and complaint resolution are in such a sorry state that a revolutionary cultural change needs to accompany any proposed rule changes,” says investor advocate Ken Kivenko, president of Toronto-based Kenmar Associates, in his comment. “Improved client/dealer relationships are a first step toward implementing the revolutionary changes that are required.”

Kivenko details a number of areas in which that relationship should be improved, including better product cost disclosure, the inclusion of cost as a factor in suitability assessment and the provision of personalized rates of return.

Kivenko maintains that personalized rates of return are fundamental to assessing the quality of the advice that clients receive. “The current proposals do not address this issue, citing a number of well-worn excuses,” his comment letter notes. “We argue that a firm or advisor that is unable or unwilling to provide periodic personalized performance metrics cannot be considered to be in the advice business.”

However, not everyone in the industry is completely sour on the regulators’ efforts to improve disclosure and transparency. The Social Investment Organization, a Toronto-based trade group for the socially responsible investing sector, applauds the IDA’s effort, noting: “Recent events such as the asset-backed commercial paper crisis show that the financial services industry badly needs to reformulate the bond it has with its clients to emphasize better client disclosure and improve client suitability.”

The SIO calls the proposed CRM “a major step in the direction of improving the information provided to clients and determining client suitability.”

Indeed, the SIO wants to increase the disclosure requirements imposed on dealers and advisors beyond even what the IDA proposal contemplates.

“We believe that this lack of advisor inquiry into social and environmental concerns by their clients represents an important gap in the client suitability assessment process,” the SIO comment letter says. “Just as it is absolutely essential to assess client suitability on issues such as risk tolerance, investment horizon and liquidity requirements, it is also absolutely essential to determine client concerns with regard to social and environmental issues, and the interest in socially responsible investment.”

The SIO points to Australia as a possible model for this, noting that social, environmental and ethical concerns are considered in disclosure guidelines both for advisors and investment fund manufacturers in that country. These issues are part of the suitability assessment Aussie advisors make, but are mandated in a fairly flexible, principles-based fashion.

“We believe the Australian approach has a lot of value and wisdom,” the SIO comment says. “It mandates that inquiries should be made, but does not specify a check-box approach. It also suggests that the general client suitability rule does pertain here, but leaves it to the advisor to determine the importance of social, environmental and ethical considerations for any given client. This encourages advisors to become engaged with their clients on social and environmental issues, not just to regard this matter as one more compliance requirement.”

The SIO suggests that a similar approach could work in the IDA’s and the MFDA’s CRM efforts. And this idea is further endorsed in the comments from several manufacturers of socially responsible funds, including Vancouver-based Ethical Funds Co., Meritas Financial Inc. of Cambridge, Ont., and Inhance Investment Management Inc., also of Vancouver.

For example, in its comment, Ethical Funds recommends: “All advisors in Canada should be mandated to inquire into the social and environmental concerns of their clients, and these concerns should be written into the agreements and disclosures available to clients.… Integrating considerations that are important to a majority of investors will strengthen trust in the relationship between advisors and clients.” IE