Anyone wondering why the industry and investors are seemingly at loggerheads need only look at the remarks Ontario Securities Commission chairman David Brown made during his exit interviews.
Brown, in describing what the OSC has been doing, is quoted as saying: “We’re balancing competing interests. We’re balancing investor protection against the fostering of healthy capital markets.”

What? Since when has securities regulation become a zero-sum game? Do Brown and his cohorts really believe that if investors win, the industry loses? Do they really think their mandate is to cut back on investor protection in order to foster healthy capital markets? It appears so and it goes a long way to explaining the deep distrust and disregard that investors increasingly have for securities regulators.

The long-simmering feelings of investors are manifest in submissions to numerous committees and task forces and at the Investors Town Hall Meeting that Brown convened in his final weeks as chairman.
The merit of their feelings has been acknowledged by Jarislowsky Fraser Ltd.,
which observed: “The greatest weakness of the regulatory system is that it does not protect investors.” Similar views have been expressed by others, including the Ontario Teachers Pension Plan.

These remarks are a damning commentary on the regulatory system. Something’s fundamentally wrong. But before it can be fixed, there needs to be an attitudinal change to the interpretation of the regulatory mandate. We need to revisit the
interpretation being given to the so-called “purposes” of the Securities Act: (i) to provide protection to investors from unfair, improper or fraudulent practices; and (ii) to foster fair and efficient capital markets and confidence in capital markets. Despite the mode of expression, this is not a dual mandate. It is not a mandate that pits investors against the industry or the industry against investors or that even requires the balancing of their separate interests.

The “two purposes” are one and the same. One cannot foster fair and efficient capital markets and confidence in them unless investors are protected against unfair, improper or fraudulent practices. In order to protect investors, it is essential to foster fair and efficient capital markets and confidence in them. You can’t have one without the other. Balance or, more preferably, reasonableness, is, of course, a necessary element in fulfilling this mandate.

Regulators are doing a disservice to both the industry and investors by approaching regulation from the perspective of pitting the interests of investors against the interests of the industry and setting off investor protection against industry gain or advantage. It is unfortunate that they have been encouraged to do so by a vocal, well-organized, well-financed but short-sighted industry that has had the ear of the regulators, government and some media.

This cannot continue. It is in the interests of both the industry and investors to align their interests. It is important to keep in mind that what is good for the investor is good for the industry and will foster efficient, effective capital markets. Without investors, the capital markets will wither, as was evidenced during the crisis of confidence following the 2000 market meltdown when investors moved to the sidelines.

Long-identified and much-needed regulatory
reforms must be implemented now. These centre on ensuring fairness and integrity, and information and knowledge.

A good starting point that would strengthen the industry and operate to the mutual advantage of the industry and investors would be to deal with the fundamental issues underlying fairness and integrity in the advisor/client relationship. These issues were pushed aside for further study when the fair-dealing project was disbanded.
These include aligning proficiency requirements to sustain the advisory relationship that dealers/advisors hold themselves out as providing to their clients;
realigning regulation around advice-giving;
and eliminating compensation that skews advice by inducing financial intermediaries to place their interests ahead of their clients’. This is the right thing to do. Let’s do it. IE