Improvements are critical for dealer satisfaction

So, this year, IE has launched the Report Card season by surveying senior executives — primarily chief compliance officers but also presidents, CEOs and chief financial officers — at about 100 dealers across the country. The executives were asked to grade both the self-regulatory organizations with which they deal and their primary provincial regulator on a scale of one to 10 (with 10 being the highest) in 15 categories, ranging from the fairness of the regulators’ decisions and the quality of their communications to transparency and the value they provide.

Not surprising, the dealers were somewhat tougher on their regulators than the industry tends to be on itself. The scores they gave their overseers are notably lower than the scores typically seen in IE‘s other Report Cards. But it should be noted that these are quite different exercises. A low score from an advisor for his or her own firm in any given category is unambiguously bad, which is not necessarily the case when dealers score their regulators.

For one thing, firms and their advisors share the same basic goals — serving clients and making money. Regulators, on the other hand, have competing interests to serve: dealers, issuers, investors, governments, the markets overall and the public in general. A regulator that earns a very high score from one of those constituencies may well be neglecting another segment.

Moreover, from the dealers’ perspective, the regulators’ central function is to restrict their businesses and impose costs. On a day-to-day basis, regulators limit what dealers can sell and to whom, and how they operate. Regulators are also a source of paperwork and embody the threat of disciplinary action.

In the big picture, strict regulation gives a market credibility and inspires confidence from prospective participants, thereby bolstering liquidity. But it’s the rare dealer that can see this side of things amidst the time, money and resources that regulators drain from dealers’ businesses.

With these caveats in mind, IE‘s survey found that, overall, dealers give the highest rating to theInvestment Industry Regulatory Organization of Canada. IIROC received the highest scores in nine of the 15 categories and the highest overall score (an equally weighted average of the ratings in each of the 15 categories) in the survey.

Notably, IIROC scored far ahead of both the Mutual Fund Dealers Association of Canada and the various members of the Canadian Securities Administrators in categories such as its process for soliciting dealer input on proposed new rules; the representation of dealers on its board; and the competitiveness of its policies within the context of global markets. On many other elements, IIROC ranked somewhat higher than either the MFDA or the CSA.

Although IIROC outscored the MFDA for the most part, ratings for the two regulators come from two distinct constituencies. The vast majority of respondents to the survey rated one of the SROs and their primary provincial regulator; just three firms rated both IIROC and the MFDA. As a result the SROs’ scores may not be as directly comparable as scores between the SROs and the provincial regulators are. In fact, of the three firms that rated both SROs, two of them gave higher overall scores to the MFDA.

Of those rating both IIROC and their provincial regulator, the SRO received slightly higher marks on average; 65% gave it higher overall scores. One executive at an Ontario-based firm rated IIROC very highly for the timeliness of its responses to dealer inquiries, noting that it is “very good.” In contrast, he complained about the provincial regulator, saying, “I never get a call back.”

“IIROC does have an appreciation for who we are and our business,” says a dealer based in the West. However, she also laments that IIROC is dominated by the big, bank-owned investment dealers.

@page_break@Indeed, although IIROC did receive the highest overall score in the survey, dealers still had complaints about it. Some suggested that the regulator needs more consistency in the interpretation of rules — especially among regions. Others say that IIROC needs to be more sensitive to the concerns of smaller firms.

The most popular piece of advice for IIROC is that its staff needs more industry experience. “Generally, the biggest concern is that they don’t have a whole lot of industry expertise,” says an executive at a Western Canada-based dealer, noting that issues are often more complex than the regulator thinks; what seems straightforward to the regulator is typically trickier when viewed from the other side of the table.

Dealers agree that better-educated regulators would improve the relationship. The paradox is that although dealers want their regulators to have more industry experience, they probably aren’t willing to pay for it. It is hard to imagine the regulators luring industry professionals over to the supervisory side without the ability to pay competitive compensation. Yet, dealers aren’t pleased with the fees they are already paying.

Survey respondents rated the fairness of regulatory fees among the lowest of all categories — ranging from 4.3 for the MFDA to 5.3 for the CSA. (See “The cost of regulation…” page 22). The only categories that were rated lower were the regulators’ sensitivity to the regulatory burden and to small dealer issues. (See story, page 20.)

Many of the same complaints levelled at IIROC were also cited by member firms of the MFDA, although, in this segment, the chief concern is less a lack of industry experience among MFDA staff and more a lack of dealer involvement. For example, a dealer with an Ontario-based firm says: “The MFDA needs to be more of a resource [to dealers].”

Another dealer complains that the MFDA too often takes the side of investors over its members. “It should truly be a body for dealers,” comments one dealer, “not one that pretends to be.”

The perceived lack of dealer involvement is also a common complaint about the CSA. One chief compliance officer at an IIROC firm says that the provincial regulators need more industry people on board, as they are currently staffed by “a bunch of lawyers who never made it over to this side.”

Another fund dealer suggests that the overpopulation of lawyers at the CSA presents another argument for a single regulator — the lack of which was another common complaint. “The sooner a national regulator takes over, the better,” says one dealer.

But dealers aren’t just concerned about differences among the provinces; they also worry about a lack of harmony between the provinces and the SROs. One dealer complains that the result is “a game of hot potato, in which the provincial regulator indicates an issue should be addressed by IIROC, and IIROC points back to the provincial regulator as the cause of its inability to address the issue.”

However, provincial regulators also aren’t created equal, as far as dealers are concerned. Their clear favourite is the B.C. Securities Commission.

Although the sample size wasn’t large enough to break out responses by province, a very limited sample rated the BCSC well ahead of its counterparts in many categories. Moreover, a couple of dealers singled out the BCSC positively and the Alberta Securities Commission negatively.

“The ASC is an absolute nightmare; dealing with the New Brunswick Securities Commission and the BCSC is a pleasure,” says an executive at one fund dealer.

Overall, dealers aren’t handing out glowing marks to their regulators. But, given the regulators’ multifaceted responsibilities, that’s probably not a bad thing. IE