Efforts by regulators to reform the registration system have sparked a flood of reactions from all corners of the financial services industry. The response is not surprising, given the scope and significance of the issue, but it also highlights the difficulty involved in making major changes.

Regulators knew they had a big job on their hands when they launched the registration reform proposal in February. They pulled out all the stops to make the industry and investors aware of their plans. They held a rare media event, issued the proposals for a 120-day comment period instead of the usual 90 days and, in May, held several information sessions across the country.

The feedback poured in and, by the end of the 120 days, more than 260 comment letters had been filed, running to dozens of pages. The ostensible reason for the vast amount of interest is that the proposed reforms will affect virtually every corner of the securities industry, and creep into areas in which regulation was previously non-existent.

The proposed reforms envision fundamental changes to the prevailing regulatory system. Among others things, they would:

> slim down and harmonize the registration categories;

> move to a permanent registration system;

> introduce registration requirements for investment fund managers and exempt market dealers;

> shift to a “business trigger” from a “trade trigger” as the threshold for registration; and

> deal with nagging issues such as referral arrangements and advisor transfers.

According to Wendy Dey, director of communications at the Ontario Securities Commission in Toronto, regulators are pleased with the number of comments received. The Canadian Securities Administrators’ working group dedicated to the issue will carefully review the feedback, she says.

When registration reform was launched, regulators had hoped to have the rule finalized by yearend. At the time, the deadline seemed optimistic; now, given the volume and the depth of the comments, it’s even harder to imagine it will be met. The CSA working group was scheduled to meet in late July, after Investment Executive’s deadline, when, Dey says, a better idea of timing will emerge.

Although the volume of comments is staggering compared with a typical regulatory proposal, a good number are virtually identical. The duplication is clearly the result of coordinated lobbying campaigns by parts of the industry — for example, by factions of the real estate industry, exempt market players and small fund managers — that expect to be negatively affected by the proposals.

Some in the exempt market arena appear to see the initiative as an exercise in predatory regulation on behalf of large, mainstream investment dealers, going so far as to call the proposals “sinister self-serving, special-interest legislation.” They also note that the effort is being guided by a committee composed of regulators and self-regulatory organizations.

There are a wide range of complaints about the details of the plan, but that is not unusual. Overall, however, most comments are in favour of regulators’ aspirations to improve the registration system.

But even more taxing than getting unanimity from market players is winning consensus from Canada’s fractured regulatory system. The project’s goal of fundamental reforms illuminates how the complexity afflicting the Canadian regulatory system impedes progress. It requires both regulatory and legislative changes across multiple jurisdictions, involves both provincial authorities and SROs, and seems to conflict with other ongoing initiatives among the regulators themselves.

First, the regulators don’t even agree on every aspect of the registration reform proposals. The B.C. Securities Commission, for instance, is questioning the wisdom of introducing a registration category for exempt market dealers. Such basic differences are driving industry participants crazy.

“We are extremely concerned that the BCSC is proposing not to adopt this important registration category,” says the Investment Industry Association of Canada in its comment, stressing the need for a level playing field between registrants (its members) and non-registrants in the exempt market.

There is also concern about the ability of regulators to apply the rules consistently, given some of the fundamental changes it contemplates to the registration system and the more principles-based approach the CSA is taking.

In its comment, law firm Borden Ladner Gervais LLP says that it sees no need for any local regulation: “…and particularly no need for any differing interpretations or administrative positions [particularly unwritten administrative positions] by different regulators.”

@page_break@That concern is echoed by the Mutual Fund Dealers Association of Canada, which suggests: “It would be useful to develop a process to facilitate discussion [among] the regulators beyond the rule drafting stage to address issues of consistency of interpretation.”

There are already indications that the regulators may interpret some aspects of the rule differently. For example, Toronto-based Tactica Capital Inc. reports that at one of the information sessions, there was no unanimity among the various commissions on “questions on the defining point at which registration is required to provide advice.”

Beyond the regulators’ ability to agree amongst themselves, there’s also the issue of disunity among their provincial masters. In its submission, Toronto-based Royal Bank of Canada expresses concern about how the new regime is being developed, given the proposed “passport” system. The passport system and registration reforms, it says, should be viewed as “partners” in creating a unified national registration system, yet the passport model hasn’t been embraced by Ontario, the country’s biggest securities market. Both Ontario and the federal government remain committed to the concept of a national regulator, and such provincial discord remains a speed bump in the path of any attempted national reform.

Indeed, RBC argues that the inability of the authorities to agree on the passport system represents a “serious impediment to the effective operation” of the proposed new regime.

It calls on regulators and their respective government overseers to resolve the issues with the passport system before attempting to implement registration reform. Even then, RBC maintains, a national regulator is necessary: “While worthwhile, we do not view the national passport system as an alternative to or substitute for a single national securities commission.”

Absent a national commission answering to a single government authority, many of those commenting are concerned about the smooth implementation of a rule that requires legislative changes as well as rule changes by the various regulators.

The Investment Funds Institute of Canada, for example, says that its members “are concerned about the lack of clarity on the status of the amendments to securities legislation required to implement the new registration categories and the business trigger.” IFIC adds: “A complete analysis of the proposal is possible only when the legislative approach and the specific wording of the draft legislation in each jurisdiction are known.”

All the moving parts in the vast machine of proposed change have more than a few commentators miffed about how it’s all going to work.

Along with the various commissions and provincial legislatures, the proposal also involves the SROs — the MFDA and the Investment Dealers Association of Canada, which are working on a new “relationship disclosure document.” Additionally, an umbrella group known as the Joint Forum of Financial Market Regulators recently published proposals for a new disclosure regime that would cover both mutual funds and segregated funds.

Several groups suggest that the efforts should be co-ordinated to avoid duplication or inconsistencies. “We think that further consideration of this document alongside existing disclosures, as well as the Joint Forum’s [proposed disclosure regime] is imperative before moving forward with this requirement,” offers the Federation of Mutual Fund Dealers.

Borden Ladner Gervais calls for the regulators to provide more clarity on the contributions that are expected from the IDA and MFDA: “The lack of common understanding of what else is being worked on, other than the proposals, has led to misunderstanding and confusion on the part of our clients, as well as our lawyers, as we work to comment on the proposals.”

Apart from the confusion and apprehension surrounding the complexity of implementing such a sweeping change in the context of the byzantine Canadian regulatory system, some details of the proposals themselves have sparked some fairly serious concerns.

A U.S. lobby group, the Securities Industry and Financial Markets Association, worries that efforts to rationalize international dealer registration will have the effect of creating an unnecessary barrier to foreign dealers, at a time when both the industry and the federal government are pursuing more cross-border access for securities markets. It says the new rule “represents a significant reversal of recent positive developments in the Canadian capital markets.”

The IIAC echoes those concerns, noting that the proposed reforms to international dealer registration requirements could have unintended negative consequences: “It is important for the CSA to be mindful of the movement to more free trade in securities, particularly in the institutional market.”

The proposed approach to regulating the exempt market is also a concern for many. The IIAC, for example, worries about the possibility that British Columbia may not participate: “Non-registrants can sell exempt securities to clients with no particular training or education and without the potential for enforcement action should the transaction end badly for the client. Registrants selling the same securities to the same investor are subject to a wide range of rules, including those governing client interaction, conduct, education and capital requirements.”

The IIAC argues that such different treatment for different players in the same market is illogical, and it calls for the BCSC to undertake a comprehensive cost/benefit analysis before it decides not to adopt the exempt market dealer proposals.

Conversely, the securities law subcommittee of the business law section of the Ontario Bar Association argues that the creation of the new category “could have an adverse impact on the ability of venture issuers to raise capital in the exempt market.”

Moreover, it warns, the new category could create an administrative headache for regulators: “When universal registration was introduced in Ontario, a huge registration backlog was created that took years to clear. A similar outcome may occur in other jurisdictions under the proposed new regime.”

Also, the bar association wonders whether members of the CSA will be adequately able to oversee the exempt market dealers.

The Limited Market Dealers Association of Canada echoes concerns about the creation of the new exempt market dealer category, warning that the step could end up putting many firms out of business. “The LMDA respectfully submits that the risks associated with the various business models employed by LMD/EMDs have not been adequately evaluated by the CSA,” it says, adding that the costs of compliance will mean that “many LMD/EMDs may have to exit the marketplace.”

Additionally, a number of organizations complain that the regulators have failed to resolve the issue of personal incorporation by advi-sors. They question the wisdom of the restrictive exemption for reps dealing with out-of-province clients, wonder about the purpose of capital and insurance requirements for firms that don’t hold client assets, and voice numerous other complaints with the devilish details of the sweeping reform effort.

Many of the complaints about the impact of the proposed reforms are purely self-serving, and others highlight genuine gaps or unintended consequences. The underlying subtext to it all, however, is that reforming Canada’s regulatory system is an increasingly monumental challenge. IE