Investor advocates who have been pushing for a louder voice with the provincial securities commissions would perhaps be better off seeking an audience with the industry’s self-regulatory organizations.

For years, investor advocates have complained that they need a greater role in the regulatory process. And, recently, they’ve been making some headway. The Ontario Securities Commission is putting together a new investor advisory committee that should give investors a formal mechanism to provide input on policy-making. And the proposed national regulator that is being developed also imagines including an investor committee as part of its structure.

But it remains to be seen whether these mechanisms will be effective in giving investors a bigger role in regulation, much of which is designed to protect their interests. The OSC indicates that it hopes to have its committee named by the middle of August. The national regulator, for its part, remains a couple of years off at best. (It aims to be up and running by July 2012.)

In the meantime, it’s the SROs that are actually making many of the rules that directly affect inves-tors. In recent months, both the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada have been behind a slew of investor-friendly initiatives.

For example, IIROC has proposed draft guidance notes on suitability and know-your-client obligations, and on best practices for dealing in proprietary products. IIROC has also proposed new rules concerning the fair pricing of over-the-counter securities and personal financial dealing. These are all measures that would effectively bolster investor protection.

Similarly, the MFDA has proposed a new rule to require up-front fee disclosure by fund dealers. The SRO is also seeking to strengthen the industry’s contingency fund, the MFDA Investor Protection Corp., so that it is better equipped to handle dealer insolvencies. Additionally, the MFDA has announced that it has received final regulatory approval for a series of rule changes comprising the bulk of its work to implement its client-relationship model (a long-running initiative that aims to improve disclosure regarding the client/advisor relationship, account supervision and performance reporting).

The CRM rule amendments still have to be ratified by the MFDA’s members at its annual meeting in December and will then be subject to a transition period, notes Karen McGuinness, vice president of compliance at the MFDA.

IIROC is also continuing to work on its own CRM rules. Connie Craddock, vice president of public affairs at the SRO, says IIROC is revising its proposals in response to the comments it had received on the last edition of its CRM proposal — and expects to issue an updated version soon.

Interestingly, at a time during which the SROs appear to be doing so much to enhance investor protection, the provincial securities commissions are seemingly tilting in the opposite direction.

In mid-June, the Canadian Securities Administrators indicated that there is really no end in sight to their long-running efforts to improve point-of-sale disclosure in the mutual fund industry and to harmonize disclosure among mutual funds and segregated funds.

The CSA says that it will produce the final requirements for a new two-page disclosure document for mutual funds by the end of this year, but that the document will have to be made available only on fund firms’ websites or by investor request.

Requiring delivery of the new document at or before the point of sale is not imminent. The CSA promises, however, that POS delivery will eventually be required, although there needs to be yet more deliberation about those delivery requirements and whether the CSA wants to consider extending the disclosure requirements to similar products, such as hedge funds and exchange-traded funds.

Moreover, the CSA says, it plans to publish a proposal next year to allow fund firms to use the new two-pager, instead of a full prospectus, to satisfy disclosure obligations to investors.
@page_break@As well, at the end of June, the CSA released a proposal to amend certain other mutual fund product rules in an effort to reduce regulatory costs. And, earlier this year, several regulators (but not the entire CSA) issued a consultation paper proposing the introduction of a new regime of regulation for venture issuers, which would essentially subject them to less stringent requirements than for senior issuers, in an effort to reduce the regulatory burden on these sorts of smaller companies.

Of course, there’s nothing wrong with trying to slash needless regulatory costs. And, to the extent that the benefit of lower regulatory costs trickles down, this could ultimately benefit investors, too. But given the basic trade-off between inves-tor protection and regulatory costs, it appears the SROs and the provincial regulators have been leaning in opposite directions lately.

The distinction is more striking because it’s the SROs that seem to be favouring investor protection, which runs counter to their image as the fox guarding the henhouse.

It makes sense that IIROC is very concerned about investor issues, says Susan Wolburgh Jenah, president and CEO of IIROC, as the SRO’s focus on is the investment-dealer firms and their relationship with clients. And, she says, that focus has only intensified over the past couple of years — the spinoff of its trade association function — now the Investment Industry Association of Canada — has made IIROC a pure regulator.

“I think there [has] been a real evolution at this organization that has sharpened our focus on all aspects of our mandate — investor protection, market integrity, and so forth,” she says. “And we still spend a lot of time and effort and resources on working with the firms in a collaborative, SRO-type way, working on compliance issues.”

Moreover, an SRO’s close relationship with the industry naturally lends itself to greater awareness of investor issues, she says: “You’re only effective rolling out a lot of these things if you have that kind of front-row seat on the action.”

And by spending a lot of time working on investor issues, SROs also come to understand areas in which the rules may not be clear enough or stringent enough, she adds, which leads to further policy action to rectify those issues.

Attention to investor issues isn’t a new phenomenon at the MFDA, either, McGuinness says: “We are constantly looking at how to address issues that have a negative impact to investors and how to promote initiatives with positive impact.

“The problem is that not all of these efforts are obvious to inves-tors,” she adds, pointing out that it takes time for the effects of policy changes to materialize. And, even then, it’s hard to measure the harm that didn’t occur because of a new rule or initiative.

Given the SROs’ professed focus on retail investors — and the demands for greater investor representation in policy-making — there would seem to be an argument for creating investor advisory mechanisms at the SRO level, too.

As it stands, investors can participate in SRO rule-making through the normal public-comment process. However, SRO rule-making initiatives often don’t get the same level of public attention that CSA efforts do; and investors are at a big disadvantage when it comes to producing useful comments. As well, the public-comment process typically occurs when a new rule is fairly well advanced, which doesn’t provide much opportunity to raise novel concerns.

Getting greater investor input at the SRO level could be productive, given that the SROs cover the majority of the financial services sector that involves retail investors. The SROs’ mandates are more limited than those of the securities commissions, but, for the majority of investors, they are more relevant.

In recognition of the importance of the SROs to retail inves-tors, a joint committee comprising the OSC, IIROC, the MFDA and the Ombudsman for Banking Services and Investments has been formed to continue studying retail investor issues in the wake of the OSC’s investor town-hall meetings in 2005 and 2007. Although that committee is a forum for the regulators themselves, it doesn’t include investors — and it hasn’t produced much so far.

Another advantage of seeking greater investor input at the SRO level is the fact the SROs are national groups, which means there would be a bigger pool of potential candidates to serve on an investor committee. And investor concerns in smaller jurisdictions might have a better chance of being heard.

The idea of such a committee has been discussed internally at IIROC, Wolburgh Jenah says. She’s not opposed to the idea, but she indicates that it’s not something the SRO is currently pursuing. IIROC does have a designated retail investor member on its market rules advisory committee — although it is largely concerned with trading rules rather than the broader issues that affect most retail investors.

Instead, she notes, IIROC has held a couple of roundtables on specific issues — a process that, she says, has been effective in seeking greater investor input.

IE