Regulatory reforms may be sweeping swiftly through the retail investment business in much of the rest of the world, but retail investors in Canada still face an agonizing wait for reforms.

About 10 years ago, the Ontario Securities Commission first kicked off its deliberations about how to reform the regulation of the retail investment business, a process that resulted in the proposal of its so-called “fair-dealing model.” Today, investors are still waiting for the remnants of that proposal to be adopted.

The FDM itself died, although some of its concepts made their way into an overhaul of the registration system (which has since been completed by the securities commissions across the country) and the development of the “client relationship model” reforms by the self-regulatory organizations. To investors, these CRM proposals are more important than the registration reforms, as the former will impact fund dealers and investment dealers, the two primary parts of the retail investment business. Yet their introduction has dragged on for several years now.

In early December, investors got some good news when the Mutual Fund Dealers Association of Canada announced that its members had approved its CRM proposals and that most of the reforms will be taking effect in the months ahead.

In a bulletin to members, the MFDA has established various deadlines for firms to meet these new requirements. For example, new relationship disclosure requirements will have to be in place for new clients by Sept. 28, 2011. However, firms will have until Dec. 3, 2013, to provide this information to existing clients. The extended implementation period for existing clients is to give firms time to deal with the logistical issues that this sort of disclosure will create, the MFDA says.

In addition, firms will have a year to comply with new requirements concerning account suitability triggers and know-your-client information updates. And firms will have 18 months (to June 3, 2012) to comply with changes to performance reporting requirements and rate-of-return disclosure requirements.

Separately, the mutual fund dealers also have approved a rule imposing new transaction-cost disclosure requirements, which aim to ensure that investors are making more informed trading decisions and, hopefully, avoid client complaints about surprise transaction costs. That measure still requires approval from the securities commissions before it applies to firms, so it’s not yet clear when it may actually take effect.

Although this is all good news for clients of the fund dealers, investment dealers’ clients are not as lucky. Regulators on that side of the business have yet to finalize their CRM proposals. As Investment Executive was going to press, the Investment Industry Regulatory Organization of Canada was preparing to put its proposals back out for another 75-day comment period. (It was expected they’d be released in mid-December 2010.)

Connie Craddock, IIROC’s vice president of public affairs, says that in response to comments received on the previous go-round of these proposals (which were published in April 2009), IIROC has made further material changes to the policy — including revisions to the proposals dealing with relationship disclosure requirements, the management and disclosure of conflicts of interest, and changes in suitability assessment obligations — which will require another cycle of public comments. The latest proposals will also include a draft notice giving dealers guidance on complying with the proposals and setting out implementation deadlines.@page_break@Originally, the idea was that the implementation of IIROC’s and the MFDA’s CRM proposals would be harmonized. It remains to be seen if that can be achieved, with IIROC still soliciting comments on its proposals.

For now, dealer firms have a 12-month exemption from the added relationship disclosure requirements that would have kicked in under provincial securities rules back on Sept. 28, 2010, on the understanding that they will have to comply with the IIROC CRM requirements soon enough; making dealer firms comply with the provincial regulators’ requirements in the meantime would be unduly burdensome. (That exemption expires on Sept. 28, 2011, when the MFDA requirements are slated to take effect.)

Regardless, it seems that when CRM reforms are finally implemented, they will represent progress for investors. The reforms should have the effect of beefing up disclosure to clients when they are opening an account; enhancing advisor compensation disclosure; toughening suitability requirements (so that suitability determinations apply to the overall portfolio, not just a specific transaction); improving firms’ handling of conflict-of-interest issues; and bolstering performance reporting.

That said, these reforms also now look a bit stale. What may have seemed somewhat innovative several years ago, as the FDM was taking shape, has now been far surpassed, both by events and the policy responses in other jurisdictions — most notably, the recent moves to ban transaction commissions in Australia and Britain; to limit embedded compensation in the U.S.; and the decision to impose fiduciary duties on advisors in Australia and maybe in the U.S., too.

Although the CRM reforms proposed in Canada aim to address some of the same concerns that policy-makers in other jurisdictions have, The Canadian proposals do so largely through the mechanism of enhanced disclosure, which regulators in other jurisdictions are starting to believe often doesn’t adequately protect retail investors.

The OSC’s original FDM concept paper, which was released in 2004 (having been in the works for several years at that point), had contemplated more intrusive measures, such as possibly eliminating embedded compensation, capping it or making mutual fund manufacturers accountable for the advisors they compensate. However, these ideas fell by the wayside as the model was abandoned and some of its concepts were turned over to the registration reform effort and the SROs.

Now, in light of the reforms taking place in other countries, those issues are front and centre once again. The Canadian Foundation for Advancement of Investor Rights, an investor advocacy group, has been pushing policy-makers to require that advisors act in the clients’ best interests (not merely that their recommendations are “suitable”) for some time now.

Recently, the OSC’s new inves-tor advisory panel also suggested that it would take up some of these issues. The IAP, which is charged with representing investors’ views to the OSC, takes the position that investors in Ontario should be as well protected as investors in other markets. The IAP plans to look at the reforms being undertaken in Britain, the U.S., Australia and elsewhere to determine whether something similar should be adopted here. In particular, the IAP is specifically planning to study the question of whether advisors should owe a fiduciary duty to their clients.

Ten years ago, Canadian regulators might have been at the forefront of these debates. Today, however, they’re still toiling away on yesterday’s rules.
IE