Regulators’ approach needs improving

Although some ratings improved in these categories compared with last year, others declined. And COs and company executives across the board indicated that regulators could take steps to make their policies clearer and more flexible.

“There’s not a lot of leeway or acknowledgment of different sizes of business; it’s just blanket rules for everybody, regardless,” says a chief CO (CCO) with an Alberta-based investment dealer in a comment about the Investment Industry Regulatory Organization of Canada’s (IIROC) policy decisions. “[IIROC puts out] pretty detailed notices, but there’s still room for improvement.”

Although IIROC’s policy- making regime is not perfect, the self-regulatory organization (SRO) has improved its process for consulting industry players when developing new policies, as well as its methods of communicating the rules, survey participants said. As a result, IIROC’s rating in the fairness category increased to 7.1 from 6.6 last year while its rating in the transparency category rose to 7.7 from 7.2 in 2015.

There was similar correlation in the ratings in the two categories at all regulators, suggesting that the regulators that do a good job of making their policies fair also communicate the rules clearly.

For example, the Ontario Securities Commission’s (OSC) ratings in both categories rose this year, with strong improvement year-over-year in the fairness category to 6.7 from 5.1.

“From my experience, anything that [the OSC] has recently legislated or decisions that they’ve made seem logical; they’ve been willing to [consider] circumstances and not apply [rules] across the board,” says a CO with an Ontario-based investment dealer about the fairness of the OSC’s policy decision. As for the transparency, the CO adds: “Before anything is changed, they have discussions.”

In an emailed statement, the OSC states it has adopted various measures for gathering industry input in the policy-making process in the past few years, including hosting more roundtable discussions.

In contrast, the regulators that received lower ratings in the regulatory policies categories did so because there’s less consideration of industry input in the formation of new policies, COs and company executives said.

For example, the Alberta Securities Commission (ASC), garnered the lowest ratings in both policies-related categories, at 5.8 for fairness and 5.9 for transparency (down from 6.8 and 6.2, respectively, in 2015). The declines were fuelled largely by COs and company executives with exempt-market dealers (EMDs), who are frustrated with the ASC’s handling of the recent changes to the offering memorandum (OM) exemption.

“[The ASC] sent out a notice for comment regarding industry thoughts on [the investment limit] proposal. That cap was ferociously rejected in the industry, [but the regulator] completely ignored the comments,” says a CCO with an EMD in Alberta.

Adds a CO with another Alberta-based EMD: “[There’s] some confusion about this OM: how it works, who is accredited and who is eligible.”

In an email, the ASC stated it considered industry input when making changes to the OM exemption and modified the proposed investment limit for eligible investors in the policy after receiving a “significant number of comment letters from the industry.”

Survey participants on the Mutual Fund Dealers Association of Canada’s (MFDA) platform expressed similar complaints about that SRO’s process for considering industry input when making policy decisions. That’s one of the reasons the MFDA saw its rating in the fairness category drop to 6.7 from 7.3 over the past year.

“[The MFDA] says it wants input from the industry, but then ignores it,” says a company executive with a mutual fund dealer in British Columbia. “[The regulator] gives the appearance that it is open, but virtually ignores any suggestions.”

Report Card survey participants also complained about the lack of flexibility in implementing the MFDA’s rules, particularly for small dealers.

“[The MFDA] seems to be governed by the big banks,” says a company executive with a dual-platform dealer in Quebec. “It’s big business running the show.”

Karen McGuinness, senior vice president, member regulation, compliance, at the MFDA, acknowledges that some of the policies and compliance requirements that the SRO’s members face might seem onerous from the perspective of small dealers: “If it’s a small firm in which the individual is saying, ‘I understand my client; everything I do is in the best interest of my client. If I might miss a few things, it’s really nitpicky’ – that’s where the friction is.”

Although certain MFDA policies may seem burdensome for smaller dealers, they ultimately protect firms in situations when things go wrong, says Shaun Devlin, senior vice president, member regulation, enforcement, with the MFDA: “People learn from experience that those requirements are helpful. Some of the smaller dealers [that] haven’t had a complaint yet, they don’t understand that someday [they’re] going to wish [they] had done it this way.”

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