For years, investor advocates have been pleading for a bigger say in the formulation of regulatory policy. Now that they have a credible voice calling for some dramatic changes to investor protection, will regulators listen?

When the Ontario Securities Commission created its new investor advisory panel last autumn, it wasn’t clear whether this panel would be any more effective than the OSC’s first stab at an advisory committee for inves-tors, which wasn’t really heard from during its two-year tenure from 2005-07 — and disappeared without a trace at the end of its inaugural term.

The new IAP has been created with a different mandate, however: to comment on policy proposals put forth by the OSC. To some industry-watchers, the mandate is too limiting, as it restricts the IAP to dealing with rules that are already being brought forth by the regulator; the IAP’s mandate doesn’t provide for a way to motivate the creation of new rules or to steer policy in new directions.

However, the OSC’s obligation to deliver a statement of priorities to the finance minister each year does present an opportunity for a higher-level discussion of the regulator’s policy objectives. And the IAP has seized on that chance to call for some fundamental changes to investor protection.

The IAP’s submission on the OSC’s priorities calls for the creation of a statutory fiduciary duty for financial advi-sors and firms. It argues that the existing suitability standards and know-your-client rules “are insufficient to protect inves-tors adequately.”

In addition, the IAP recommends that the OSC: introduce a mechanism to provide inves-tor restitution; consider adopting some of the reforms taking place in other jurisdictions, such as the move to create an Office of the Investor Advocate and to introduce a new whistleblower program at the U.S. Securities and Exchange Commission; and undertake reforms to improve the disclosure provided by the new Fund Facts documents that have been introduced for mutual funds.

Most of these recommendations are echoed by several long-serving investor advocates. The Small Investor Protection Association, for example, stresses that restitution remains the top priority for aggrieved inves-tors, and improved disclosure is the leading issue for the rest of investors.

The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) will be publishing a consultation paper by the end of the year that calls on the OSC to examine the idea of imposing a requirement on market intermediaries to act in the best interests of their clients (a sort of fiduciary duty).@page_break@FAIR Canada also has a list of new policy prescriptions for the OSC. It wants the OSC to explore the idea of requiring all securities firms to be backed by a contingency fund, either by joining an existing self-regulatory organization or by starting a new fund to cover investors in the event a firm fails. The advocacy group also says the OSC should examine reforms designed to improve fee competition in the mutual fund industry. And, among other things, it wants the OSC to improve communication with investors, either by holding another investor town hall (as in 2005) or by expanding the IAP’s mandate and funding.

However, the IAP, through its submission on the OSC’s statement of priorities, appears to be doing a good job of transcending the apparent limits to its mandate. Not only is the IAP calling for some bold, fundamental reforms on behalf of inves-tors, it is doing so from a sound, intellectual foundation.

The IAP had canvassed investors for input into its submission, convening four focus groups with about 40 inves-tors and a couple of round-table meetings with other inves-tor advocates and securities law experts. As well, the IAP had leaned on a pair of law students for further research. All of which suggests that there is some real substance to the panel’s recommendations. So, it will be interesting to see how the OSC responds in the final statement it delivers to the finance minister by June 30.

In the draft statement, the OSC has set demonstrating a commitment to investor protection as its first priority, pointing to improving disclosure and enhancing investor education as some of the specific ways it will do that. Yet, these traditional tactics haven’t been sufficient to protect investors. It remains to be seen if the IAP’s recommendations are finally enough to push the OSC to adopt some of the policy priorities that investors have harboured for years.

“The OSC appreciates the work conducted by the IAP on behalf of investors,” says Wendy Dey, the OSC’s director of communications and public affairs, “and will look to incorporate the input provided by them into the final version of the statement of priorities.”

Whether or not this translates into regulatory policy, it appears investors at least have the momentum in driving the agenda. Submissions from the financial services industry in response to the OSC’s draft statement suggest the industry is on the defensive, largely asking the OSC to maintain existing regulation. Although there are calls to resolve the advisor incorporation issue and pleas to rationalize the disclosure regime for all investment funds, a couple of submissions also seek a greater voice for the industry at the OSC — a sure sign investors’ new voice is being heard. IE