Canadian reforms pale next to U.S.

By Steven Lamb | June 6, 2008 | Last updated on June 6, 2008
4 min read

Those struggling to keep on top of Canada’s various regulatory reform initiatives can take heart: at least they are not facing the American experience. While Canadian regulators work out the details of registration reform and advisor disclosure, the U.S. is taking things several steps further.

The Securities and Exchange Commission has proposed a “plain English” brochure that would disclose not only the firm’s code of ethics and brokerage practices, but details about the advisor’s compensation and disciplinary history. In total, there would be 19 separate items on the list.

The comment period for the proposed rule closed in May, and the rule is expected to be finalized by August 2008, and implemented in early 2009.

Meanwhile, there is some question about the future of the SEC itself. A decade ago, most participants in the U.S. markets believed that the SEC was the world’s most effective and efficient financial regulator. Indeed, it was generally considered to be the model for the world.

Since 2000, however, the U.S. has been rocked by several major scandals: equity analysts pumping stocks of their firm’s clients; mutual fund market timing; and accounting irregularities. Each scandal resulted in a new regulatory structure, but now the business community is pushing back, according to Richard Marshall, partner at law firm Ropes & Gray.

The SEC is widely seen to have dropped the ball on all these issues, as each scandal was initially pursued by a state attorney general — most frequently, New York’s Eliot Spitzer.

“We have a big debate about fixing everything, and much of it does touch on Canada, because one of the issues is globalization,” Marshall says. “The EU is pushing to make itself a giant global market with absolutely uniform standards so that a product can be offered anywhere.”

It remains to be seen whether the U.S. regulatory reform initiative will follow the European model of transnational harmonization, which would require American and Canadian co-operation, or if the growing anti-globalization movement will lead to a “wall” between our two countries.

“People in America are mad: they’ve had a huge decline in the value of their assets; we have prices rising; there is a perception of chaos — usually that results in more regulation,” says Marshall. “There is an anti-free trade, anti-international sentiment that’s very strong in the United States. I think for the purposes of Canada, it’s important to weigh in on that debate in a constructive way.”

The idea of the U.S. as a rigid rules-based regulatory environment is only partly true, however. The Investment Advisers Act, 1940, is very much a principles-based piece of legislation, according to David Tittsworth, executive director of Investment Counsel Association of America, and until recently its requirements had been minimal.

In 1997, firms were required only one written policy, on how the firm manages insider trading. But within the past decade the list of required written policies has expanded to include cover topics such as best execution, privacy, proxy voting, compliance, business continuity and a code of ethics.

At the end of March of this year, the U.S. Treasury Department released a blueprint recommending that advisors be subject to a self-regulatory organization in the same way that brokers are under the Financial Industry Regulatory Authority (FINRA).

The blueprint goes even further, recommending harmonization of the regulations governing broker-dealers and investment advisors.

“Our view is that this is a horrible, horrible, horrible idea,” says Tittsworth. “We think it just creates an additional, unnecessary and costly layer of bureaucracy and regulation.”

The good news for Tittsworth is that creation of such an SRO would require an act of Congress, which is extremely unlikely before the election in November.

Tittsworth says Canada’s slow progress toward harmonized regulation is generally regarded as a good thing, and he hopes progress continues. Marshall says most U.S. academics look beyond Canada’s own limited harmonization goals, to the U.K.’s Financial Services Authority, which oversees virtually all forms of investment, banking and insurance.

While many look to America’s Securities and Exchange Commission as a model of regulatory streamlining, he points out that each state has its own regulators, on top of several SROs and trade associations.

“The system is widely viewed as inefficient and the question is, in what ways can it be harmonized without doing harm?” says Marshall.

He recounts how one client firm was bringing a new investment product to market across the country. By the time the product was approved for sale, 200 different regulators had signed off on it.

“The United States is characterized by very harsh enforcement,” says Marshall. “We can bankrupt firms with fines, we can bar people for life, and we do it. The question is, have we gone too far? Are we over-deterring?”

Filed by Steven Lamb,,


Steven Lamb