Talk of harmonization in the investment fund industry has been going on for years yet, despite great efforts by provincial securities regulators, mutual fund industry participants and even investor advocates, the wheels are turning mighty slowly. Harmonization is a difficult nut to crack.

Why? Well, to start, we need to define “harmonization.” To some, it’s harmonizing provincial securities regulators into one single regulator — but with what structure and what philosophy? Some like the idea of one regulator with one set of rules for all, while others prefer one regulator with 13 sets of provincial rules. There is the current situation with 13 provincial securities regulators and 13 sets of rules, but with the passport idea of accepting the rules of other provinces. Then there is the Uniform Securities Legislation initiative, put forward by the Canadian Securities Administrators, in which every province adopts the same piece of legislation but with commissions administering separately.

Another definition of harmonization refers to harmonizing financial services (i.e. securities and insurance) regulators within provincial borders, but Quebec and Saskatchewan have been the only provinces to do this so far.

And, lastly, there is harmonization of trading and sales practices of similar products such as mutual funds and segregated funds. The Joint Forum of Financial Market Regulators is a first step in this direction, but much more needs to be done in this area.

Various groups have tried to unravel this regulatory knot. The Canadian securities industry and its regulators have been trying to use an inclusive method of discussion and consensus. This, however, takes time.

Here are some of the groups that have made harmonization attempts:

> The Wise Persons’ Committee, created by Ottawa, called for the creation of a single regulator built on a joint federal-provincial model. In December 2003, it urged the federal and provincial governments to work together. It is now May 2005.

> Ottawa announced in its February 2005 budget that it was calling a with meeting with interested provincial governments to improve the existing regulatory structure

> Ontario also said in February 2005 that it was appointing a panel of “knowledgeable and respected individuals” to advance the design of a common securities regulator.

Maybe what we need to do is harmonize the harmonization process.

There has been one recent harmonizing initiative by the CSA. In March 2005, it released National Instrument 81-106, a nationally harmonized set of continuous disclosure requirements for investment funds among Canadian jurisdictions. It replaces most existing local continuous disclosure requirements. But let’s be practical. We still have a number of issues to tackle in order to achieve a harmonious and harmonized system of regulation. For example, exemptions should be the exception to the rule, not the rule itself. So while the CSA is trying to create a harmonized approach to prospectus and registration exemptions, in its proposed National Instrument 45-106, it outlines a patchwork of exceptions — exactly the opposite tack, it would seem, of a “harmonized” approach. Going ahead with this rule may in fact result in some investors being denied access to investments available in other jurisdictions.

And although the mutual fund industry has developed and adopted extensive restrictions on industry sales practices (since codified under NI 81-105), the insurance industry has not. If regulators say harmonized rules are for the benefit of investors, surely two similar investment products (mutual funds and segregated funds) should be under similar regulatory scrutiny.

So what’s the answer? Although it may sound simplistic, we need to keep working together. Industry, investors and securities regulators all have a stake in the issue. We all want to improve the efficiency and integrity of investment funds in a cost-efficient manner in order to benefit investors and the firms alike.

We’ve made a good start. Stephen Sibold, head of the Alberta Securities Commission and outgoing head of the CSA, took on a difficult job as he and his colleagues attempted to tackle the harmonization issue.
We commend him for his work, but a lot still needs to be done. To the new head of the CSA, Jean St-Gelais, president and chief executive officer of the Autorité des Marchés Financiers: bonne chance. We’re all going to need it. IE

Thomas Hockin is president and CEO of the Investment Funds Institute of Canada.