OSC priorities expose frustrations

On the retail side, investor advocates are pleased to see their issues on the table, particularly with the consultation papers published last year by the Canadian Securities Administrators (CSA) that examined the issues of fiduciary duty and the mutual fund industry’s fee structure. But there’s also irritation with the regulators for their failure to do much more than talk.

“Canadian investors cannot afford this slow pace of reform,” says the comment on the OSC’s agenda from the OSC’s independent Investor Advisory Panel (IAP). “Justice delayed is justice denied.”

The IAP wants to see concrete action on a variety of issues, including fiduciary duty and mutual fund fees, along with several other issues that seemingly have been dropped off the OSC’s docket, such as investor restitution, complaint-handling standards and the lack of regulation for professional titles.

“We need to move beyond talking, beyond advancing the discussion,” the IAP comment says. In terms of the fund fee issues, for example, the comment argues: “Identifying additional options to address the mutual fund fee structure is not necessary and simply delays the process. It is time to decide. It is time to choose an option and to turn our collective efforts to effective and fair implementation.”

Many of these issues have been kicked around for the better part of 20 years – certainly since Glorianne Stromberg, then an OSC commissioner, submitted her seminal report on the fund industry in 1995. Regulators have failed to deal with the basic issues raised in that report. They rehashed some of them again with the fair-dealing model proposed several years later, which ultimately morphed into the client relationship model (CRM), which is itself still three years away from full implementation. The CRM initiative continues to rely on the hope that disclosure can deliver adequate investor protection, despite much evidence to the contrary.

Now, the sense that Canadian regulators have failed to address these issues properly is supported by regulatory moves in the U.K. and Australia, where regulators have abandoned their blind faith in disclosure and are moving to outlaw conflict-inducing compensation models. Both these jurisdictions also are requiring advisors to act in the best interest of their clients.

These steps have moved from concept to reality without the decades of debate and delay that seem to characterize the Canadian regulatory system.

“Canadian regulators are lagging behind regulators in other jurisdictions where implementation, not study, of many of these new initiatives is now underway,” notes the IAP’s comment. “Canadian investors need and deserve high standards of investor protection.”

Retail investor advocates aren’t the only ones frustrated with the pace of reform, however; institutional investors also are increasingly irritated. However, the latter group’s issues haven’t been floating on and off the regulatory agenda for nearly as long. Nevertheless, comments on the OSC’s draft priorities from several major institutional investors and the Toronto-based Canadian Coalition for Good Governance lobby group indicate that they are miffed by the lack of progress on their shareholder democracy issues.

In particular, these groups are disappointed that promised reform of the proxy-voting system, which was featured as a regulatory priority last year, now has been dropped.

“Over the past year, the urgency of our ability as investors to be able to rely on the integrity of the proxy-voting system has escalated,” notes the comment from Victoria-based B.C. Investment Management Corp. (BCIMC), a sentiment echoed in a number of submissions from the buy side.

The BCIMC comment warns that a new problem with the proxy-voting system emerged in the past year amid the recent proxy battle at Calgary-based Agrium Inc. – which saw compensation being offered to retail brokers for encouraging clients to support company management. Says the BCIMC comment: “Such practices are not permitted in the United States and it is our opinion that it should also not be permitted in Canada.”

The comments from several institutional investors also call for the OSC to do more to address shareholder democracy issues, such as requiring mandatory majority voting.

Of course, much of the frustration with the slow pace of reform in Canada can be traced back to the fragmented provincial regulatory system, which results in competing agendas and conspires against progress. Ultimately, that frustration can be traced to the failure of the federal and provincial governments to take responsibility for – and ensure the accountability of – the securities regulatory system.

Despite the faint hope of any immediate resolution from government, the Toronto-based Portfolio Management Association of Canada nevertheless continues to call for the OSC to keep this basic issue on the agenda. According to its comment, “it is crucial” for the OSC to work toward regulatory harmonization within the CSA, and also to make “a national securities regulator a reality and priority for the coming year.”

With all of this frustration on the investor side of things, the dealer side has been rather quiet. The one notable exception is the Toronto-based Exempt Market Dealers Association (EMDA). The EMDA’s comment suggests that the OSC’s top priority should be facilitating more business in the exempt market by introducing a new offering memorandum (OM) exemption.

That comment notes that while the draft statement of priorities mentions the possibility of introducing a new, untested “crowdfunding” exemption, the OM exemption already exists in the rest of Canada and should be adopted in Ontario. The EMDA calls for regulators to avoid the temptation to deliberate endlessly.

But delay and disappointment seem to be the only things that regulators in Canada can be relied on to deliver.

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