The OSC recently released its Statement of Priorities for 2014-15. Here are the highlights.
Best interest duty
OSC gives top billing to the best interest duty, which would impose on advisors a fiduciary standard similar to what portfolio managers adhere to.
The OSC, MFDA and IIROC will mystery shop dealers and advisors in part to gauge whether a best interest standard is necessary. It’s a tactic borrowed from jurisdictions such as the U.K., notes Rebecca Cowdery, a partner at Borden Ladner Gervais (BLG) in Toronto.
While it’s too early for specifics, Susan Han, a lawyer at Miller Thomson in Toronto, says “a higher standard is coming for [dealing] with clients. The [regulatory] trend towards more enforcement, higher standards of behaviour and documentation isn’t changing.”
Embedded mutual fund fees
OSC will continue investigating possible conflicts of interest stemming from embedded commissions. This year it’s commissioning third-party research with two main objectives in mind:
- quantify the degree to which various forms of compensation affect fund sales; and
- assess whether the use of fee-based compensation materially changes the advice given to the client and has potential to enhance long-term investment outcomes relative to the use of commission compensation.
OSC wants the study completed by early next year, and expects that the research will help it decide whether to cap or ban embedded commissions.
Point of Sale
OSC and CSA are pressing on with phase three of the Point of Sale initiative, publishing the amendments for a second comment period.
The proposal would require advisors to provide Fund Facts prior to sale.
“There was a lot of industry pushback,” notes Han. “But the battle is lost. So, to the extent advisors haven’t invested in compliance systems, they need to do so now.”
Susan Silma, co-founder of CRM2 Navigator in Toronto, notes that while the initiative’s focus so far has been mutual funds, regulators are looking to apply similar requirements to ETFs. Expect a proposal by December 2014.
Regulation of fixed-income securities
Fixed-income trading in Canada is opaque, and OSC wants to do something about it.
“The great thing about equity markets is pre-trade transparency,” notes Han. “You can see what people are willing to sell their securities for or what they’re willing to pay.”
Less so with bonds. “The bond market’s less transparent and it’s inefficient, which creates a pronounced information asymmetry. This gives big players a clear edge over smaller investors.”
The problem is especially acute in the corporate bond market, where the regulator will focus. The priority statement notes a lack of post-trade transparency as well, which “limits the OSC’s ability to determine whether retail investors and small institutional investors are obtaining best execution.”
A proposal addressing the issue should be out in March 2015.
Reduce regulatory burden
OSC says it will try to trim down the compliance burden. For instance, the regulator will review filing requirements and “cease collection of data that is not used, lightly used or readily available elsewhere.”
Silma applauds this step, but suggests OSC should consider the regulatory burden more holistically. That means looking at the impact not only of securities regulation, but also of rules from other sources.
“I know a CEO of a dealer firm who said more than 70 regulatory initiatives affect the firm.” Not all are securities initiatives; he includes the new anti-spam rules.
“My impression from talking to firms is they are struggling to stay on top of it all. Even for the best firms, there’s only so much change they can support effectively. It will undoubtedly impact their operations and clients.”
She notes complying with CRM II and Fund Facts alone is complex and time-consuming. “Dealers and advisors are absolutely overwhelmed, and they may feel discouraged when they read this Statement of Priorities and see that there are likely more changes coming.”
Silma says OSC can help. Dealers and advisors have a lot of questions, and the regulator would do well to consider assisting them in less formal ways than the FAQ or comment process.
“For instance, it could broaden its existing outreach programs to include a more real-time outlet for industry questions arising during implementation of regulatory initiatives.”
02 IIROC issues guidance on business titles
IIROC recently released guidance on the proper use of business titles and financial designations.
“For years there’s been a concern about title inflation,” notes Marsha Gerhart, a securities lawyer at BLG in Toronto. Regulators are worried people are sporting titles that suggest qualifications and positions of authority they don’t have.
This can “create an unfounded feeling of trust, comfort or prestige,” the guidance says.
Gerhart says, in some cases, sales representatives fresh out of university became vice-presidents after a year. If the firm’s a corporation, the law says having that title means you’ve been appointed by the board of directors. (That was not happening).
The practice also runs afoul of IIROC rule 29.1, which requires registrants to deal fairly, honestly and in good faith with clients.
The regulator’s especially concerned about elderly investors, who may not see through a phony title: “Particular scrutiny should be given to the use of business titles that convey an expertise in seniors’ issues or retirement planning to ensure any individual using such a business title is appropriately qualified and competent in that area.”
IIROC suggests firms deciding on titles consider:
- the role and function people are approved by IIROC to undertake;
- services and/or products they are approved to sell and/or advise on;
- qualifications, including education and experience; and
- the actual role, function and office of the advisor.
“If you’re going to call yourself an expert, then you better be able to prove it,” says Gerhart.
She adds dealers should be ready to share their policies for assigning titles during compliance reviews.
IIROC joins name and hame game
IIROC has revealed in its 2013 enforcement report that few reps are paying fines.
“In 2013, IIROC collected 98.1% of the penalties assessed against firms, while only 10.5% of the penalties assessed against individual registrants were collected.”
Beginning in May, the SRO will publicize the reps who’ve failed to pay fines, disgorgement or costs imposed as a result of disciplinary action.
The list will be on IIROC’s website, and will be updated each quarter.
IIROC’s also proposing a new approach in cases of serious wrongdoing. “[W]here misconduct is sufficiently egregious to warrant a suspension of five years or greater, Enforcement will seek a permanent bar.”
Originally published in Advisor's Edge Report
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