Chief compliance officers surveyed for this year’s Regulators’ Report Card say regulators are doing little to encourage inves-tor participation in the markets and, in some cases, are scaring clients away with paperwork.
That was the overarching theme in the responses to the “regulators’ effectiveness in making markets attractive to inves-tors (balancing fairness and safety without restricting business)” category, which Investment Executive asked CCOs to rate for the first time this year.
Sandy Jakab, director of capital markets regulation with the B.C. Securities Commission, notes that although the question is a fundamental one, she views it somewhat differently: “We are there to foster efficient capital markets, which means, of course, always considering ‘Is the burden that we are placing on a firm or an individual merited, given the benefits it will have on investors and on the market?'”
In responding to IE‘s survey question, CCOs assigned a failing grade to the Toronto-based Mutual Fund Dealers Association of Canada. The Investment Industry Regulatory Organization of Canada, also based in Toronto, and the provincial regulators didn’t fare much better.
In fact, many CCOs complained about long prospectuses and compliance forms. This is, by far, the biggest grievance.
When it comes down to regulator-specific complaints, a common one aimed at the MFDA, which was rated at 4.8 in the category, is that the self-regulatory organization doesn’t seem to have investor participation in mind whatsoever. “The MFDA is not helping to promote interest [in the markets] among inves-tors,” says an executive with an Alberta-based mutual fund dealer. “Its whole message is about how clients can complain.”
“I don’t think this is something [the MFDA is] looking at,” echoes an executive with an Ontario-based mutual fund dealer. “They don’t see it as their job.”
Indeed, Mark Gordon, executive vice president with the MFDA, wonders if the question is relevant: “The question should be ‘What are we doing to make markets safer for investors?'”
Gordon notes that about 25% of the complaints the MFDA receives concern product suitability, so the regulator concentrates on making compliance obligations clear to member dealers.
However, in the eyes of CCOs, communication with the public seems to go a long way in encouraging investor interest in the markets — and some Report Card respondents said the provincial securities commissions, which collectively were rated at 5.8 overall in the category, do that better than the SROs. Says an executive with an Ontario-based investment dealer: “The whole notion of transparency, building trust and providing information is highly positive for investor confidence.”@page_break@CCOs also said they sympathize with securities regulators in that regulators don’t have the necessary resources and can’t act in concert without a national system. “It’s challenging,” says an Ontario-based securities dealer. “They lose credibility.”
Meanwhile, IIROC, which had the highest rating in the category at 6.0, was praised for including an investor-focused area on its website. In addition, one executive with a British Columbia-based investment dealer says the SRO deserves some of the credit for how well Canadian markets are viewed internationally as being fair and transparent: “It’s a function of how well regulation works here.”
On the other hand, according to an Ontario-based investment dealer: “There’s not enough being done to protect and enforce rules for the investor.”
A colleague from the same province wants greater fines for those acting in violation of the rules.
The way in which the regulators responded was telling. For instance, IIROC president and CEO Susan Wolburgh Jenah noted that regulatory challenges often come with new technologies that provide quicker and more direct access to markets. Although the industry and clients might appreciate these tools, regulators ultimately need to consider consumer safety as a part of the equation. “You have to try to get out there ahead of the game,” she says, “to try to understand the consequences of permitting some of these innovations before they’re allowed to go forward.”
Wolburgh Jenah points to IIROC’s recent consultation paper on proposed rules for trading on so-called “dark pools,” which would set minimum sizes for trades that occur via “dark” orders. Basically, respondents have told regulators that such proposed rules are premature. “We’re trying to be more proactive in anticipating developments,” Wolburgh Jenah says. “We’re prepared to ask the tough questions.”
The Ontario Securities Com-mission also pointed to its role in developing trading rules that promote investor participation and confidence. In particular, Carolyn Shaw-Rimmington, the OSC’s manager of public affairs, cites the order protection rule, which came into effect on Feb. 1. In effect, this rule ensures that best-priced orders are executed first; it also promotes the price-discovery process by rewarding participants that display visible “limit” orders.
“Previously, dealers were subject to a best-price obligation that was set out in IIROC’s universal market integrity rules,” she says. “Some marketplaces enable trading by subscribers that are not dealers. [The new rule] levels the playing field, in that it applies to all market participants — including non-dealer subscribers.” IE