The Canadian Securities Administrators’ proposal to reform registration requirements will fundamentally alter securities regulation and impact the entire industry, but it also aims to solve a few chronic problems that have specifically dogged securities dealers.
One such problem is referral arrangements, which have been a big issue in recent years as the industry has been plagued with uncertainty over just how referrals should work. The concern is whether some reps could be acting beyond the limits of their registration.
For example, by referring clients to firms that sell only one product, reps may be considered to be acting in furtherance of a trade. If it’s a product that the rep isn’t otherwise registered to sell, that’s a problem.
Regulators are also worried about conflicts of interest, client confusion and proper oversight regarding cases in which referrals are concerned.
The proposed rule aims to deal with referrals by setting out certain conditions. Among them: specifying types of referrals that registrants can engage in; that terms of the arrangement are set out in a written agreement; and that the important terms of the arrangement are disclosed to clients, including fees, and any conflicts of interest that may exist.
The referral issue has caused a lot of uncertainty, but the chore of transferring from one firm to another is a very real administrative headache. The proposed rule should make the process easier because it introduces permanent registration, and with it, the concept of automatic reinstatement. The planned change means reps will automatically have their registration restored if they find a new firm within 90 days of leaving their old one, without having to get regulatory approval.
Although both improvements are welcome, the proposed rule changes fail to deal with a few of the industry’s other bugbears. First, they explicitly decline to address the issue of whether sales reps should be allowed to incorporate.
The problem is that the securities commissions allowed mutual fund reps to incorporate when they were under the direct supervision of the commissions, but full-service brokers were prevented from incorporating by the Investment Dealers Association of Canada in the belief that such arrangements shouldn’t be allowed. Now, the fund reps don’t want to be forced to dismantle their structures, but brokers want to be allowed to incorporate, too. Regulators have been reluctant to grant permission to do that, primarily because out of concern about preserving liability and to ensure that reps aren’t able to hide behind a corporate veil.
Prema Thiele, a partner with Borden Ladner Gervais LLP in Toronto, says that the incorporation issue would make any securities lawyer’s list of most frequently asked questions. Although it’s an issue that needs to be addressed, she says, it is important that regulators get the proposed rule out there, even if it means leaving the incorporation issue on the sidelines for now.
Randee Pavalow, director of capital markets for the Ontario Securities Commission, says the OSC hopes to come to some conclusion on incorporation soon, and to have the issue included in the proposed rule, even if it requires a further publication. She also notes that, in future, the OSC intends to return to issues that have been discussed in the past but not yet addressed by regulators — such as the regulation of financial planning titles and the disclosure of complaint histories to clients.
Another big issue for dealers, which is dealt with in the proposed rule, is the ability to continue serving clients when they move from one jurisdiction to another. The proposed rule provides a very limited “mobility exemption,” which allows individual brokers to serve up to five clients, and firms to serve up to 10 clients, who move to a different province without obtaining registration in the new province.
The restrictive terms of the exemption are a bit of a letdown to the Investment Industry Association of Canada, which had been calling for a broad exemption. Ian Russell, president and CEO of the IIAC, says the securities industry trade association is disappointed that the CSA doesn’t take a more progressive approach to allowing brokers to serve clients in multiple provinces.
Russell insists that the exemption should be unlimited. The proposal, in limiting a fixed number of clients, doesn’t make sense, he argues, because it creates an unnecessary administrative burden on firms because they have to track all out-of-province clients.
@page_break@If the phenomenon of allowing brokers to serve clients across provincial borders makes sense in principle, he adds, then it shouldn’t matter how many clients are involved. The regulator in the province in which the clients live would still provide oversight, and there would be an exemption they could take away from the broker if necessary, he says.
The IIAC had hoped to see the regulators demonstrate true commitment to reducing the regulatory burden on mobility exemptions. Instead, the IIAC is left with the sense that the regulators aren’t yet ready to cut the apron strings. “I think that it’s indicative of this ‘Nanny knows best’ mentality at some of the regulators,” Russell says.
One other issue that is partly addressed by the proposed rule is improving disclosure to clients. The plan imposes a requirement that registrants provide a new “relationship disclosure document” when a client opens an account. The self-regulatory organizations are developing documents for the reps that fall under their jurisdiction, which are expected to be published this year.
For non-SRO firms, the proposed rule sets out issues such a document will be expected to cover, including: disclosure of conflicts of interest; disclosure of all fees and charges associated with an account; information on the costs of making and holding investments; and the compensation the firm will receive. Although the SROs have yet to publish their versions, the CSA rule should give some insight into what they are likely to demand from their reps. IE
Registration reform addresses some stubborn issues
Proposed changes have specific guidelines for dealing with referrals, transferring jobs and clients moving to another province
- By: James Langton
- March 5, 2007 March 5, 2007
- 11:15