Regulators are faring better when it comes to dealing with small firms, according to the results of this year’s Regulators’ Report Card, as smaller dealers gave a tentative thumbs-up when asked to rate regulators on their sensitivity to the issues and concerns of small firms. That said, regulators still have a long way to go.
When it comes to the self-regulatory organizations, the Investment Industry Regulatory Organization of Canada‘s rating in the category rose significantly, by half a point to an average of 5.5 from 5.0 in last year’s survey. The Mutual Fund Dealers Association of Canada saw its rating remain relatively flat, rising by only 0.1 of a point, to an average of 4.0.
Meanwhile, provincial regulators saw the biggest increase in the rating for the regulators’ sensitivity to the issues and concerns of small firms, as the average score in that category rose by almost a full point this year, to 5.9 from 5.0 last year.
The reason for that increase tends to be based on the provincial regulators’ perceived attentiveness to small dealers’ needs. Says an executive at a small dealer in Saskatchewan: “The Saskatchewan Financial Services Commission goes out of its way to ask you what issues you may have and to see if they can fit something for your situation.”
Adds survey respondent from a small dealer in British Columbia: “The B.C. Securities Commission goes out of its way to help us.”
However, given that member firms rated their regulators out of 10, the ratings are still comparatively low. The reason? Many small dealers have had a tumultuous past with regulators. This certainly doesn’t come as a surprise to Dave Wild, the SFSC’s chairman: “Small dealers have adjusted to the regulatory environment, but I’m not sure they have come to terms with regulation.”
Wild is aware of the elephant in the room: the cost of compliance for small dealers.
Even mid-sized firms, such as Ottawa-based Armstrong & Quaile Associates Inc., feel the pinch, says Heather Phillips, the firm’s vice president and chief compliance officer: “Smaller firms don’t have the same resources or cash flow as bigger dealers. Bottom line: the profits are decreasing and our costs due to regulation are ever-increasing.”
During audits and exams, regulators and firms often lock horns. The MFDA sends out “relationship managers” to help alleviate that situation — to get to know individual businesses and their concerns, including its compliance expenses.
Regulators are also aware that small dealers, whose staff members often perform multiple roles, are working with limited resources — and time, as they say, is money. So, the regulators offer to compromise, whether with open-ended policies or helpful tools.
Take, for example, IIROC’s Rule 2600: Internal Control Policy Statements. It helps dealers maintain a system on capital adequacy — proper insurance coverage for, and custody of, clients’ and dealer members’ assets. A firm can tailor its internal control procedures “to the specific needs of their individual environment.”
IIROC is currently reviewing its compliance modules, which range from retail to integrated firms. The idea is to see what needs to be streamlined or updated, or if the focus needs to be shifted toward certain issues.
“This is an internal staff procedure,” says Susan Wolburgh Jenah, IIROC’s president and CEO, “but we’re taking into consideration the members’ feedback from audits.”
Karen McGuinness, the MFDA’s vice president of compliance, points to tools — such as guidance forms — that the SRO provides to small firms: “We recently developed a governance checklist, and we’re working on a leverage supervision guide. If there’s a template we can provide, we will try to do so, so small firms, especially, don’t spend time and energy themselves.”
The MFDA has a policies and procedures manual, templates for approval reviews and the MR-0069 guideline on how to address suitability. The MFDA has also started dealing directly with a firm’s service and back-office providers.
However, fees are one of those hot buttons for small firms on which the MFDA won’t budge. Larry Waite, the MFDA’s president and CEO, says the SRO has always been fair to all of its members in that respect: “Our largest dealers bear the largest burden of fees. We have 141 members; 21 of those members represent 3.6% of our membership and they pay 92% of our fees. Those are the banks and Investors Group Inc.”