The current initiative for reform of Canada’s securities regulatory structure, the Cooperative Capital Markets Regulatory System or CCMR, is not in investors’ interests. This may seem strange because securities regulation is founded on the need to protect investors in the capital markets. Yet in both its governance structure and substance, the CCMR is less advantageous to investors than the current model of securities regulation and particularly initiatives led by the Ontario Securities Commission (OSC).

The CCMR was born after the Securities Reference case in 2011, in which the Supreme Court of Canada rejected an earlier federal proposal on securities regulation as unconstitutional. The Court also issued a challenge to the federal government to cooperate with the provinces to address the issues raised in the case. The CCMR thus began with the federal government, Ontario and British Columbia signing an initial agreement in principle in 2013, with additional provinces joining the effort to create a cooperative regulator thereafter.

Though the Quebec Court of Appeal ruled that aspects of the CCMR are unconstitutional, the reform is likely to continue to move ahead, at least for the participating provinces. The only roadblock would be a surprise ruling that the project is unconstitutional from the Supreme Court, which has heard arguments in an appeal of the Quebec ruling but has not yet released a decision.

There are numerous governance issues with the CCMR. At the heart of its governance structure will be the Capital Markets Regulatory Authority (CMRA). At present, the CMRA’s board of directors represents stakeholders in the financial industry but has no seats designated for people representing investors’ interests. To make investor protection a paramount objective, investor representation on the board is a necessity.

An investor panel is fundamental to the development of policy that consistently represents investors’ interests.

In 2010, the OSC created an investor advisory panel as a means to respond to investor concerns on an ongoing basis. An investor panel is fundamental to the development of policy that consistently represents investors’ interests. But the CCMR (unlike the previous version of the proposed national regulator) does not contemplate the creation of an investor advisory panel.

The current model proposes the creation of a Regulatory Policy Forum, which will participate in the consideration and development of the regulation of other market participants that the CMRA will administer. Yet there is no assurance that an investor perspective will be brought into the discussions in this forum because no investor representative sits on it or on the board of directors.

The creation of an Investor Office is an initiative that the OSC has implemented to further its mandate to protect investors. The CCMR does not propose the creation of an Investor Office. And yet without one, investors’ interests, such as those relating to financial literacy, may not be a priority for the new regulator.

The draft laws that would complete the implementation of the CCMR contain no statutory “best interests” duty. This duty, which would require investment advisers to act honestly and in good faith while providing advice in the best interests of their clients at all times, is necessary to manage the expectations gap that currently characterizes the investment relationship. Investors may well be better off under the current regime, where the move toward a statutory best interests duty has gathered steam, at least in Ontario and New Brunswick.

The Canadian Securities Administrators, an umbrella group of representatives from the securities regulators across the country, reported in early 2017 on its consultation about embedded commissions. Investors are often unaware of these commissions, which are paid to investment dealers and their representatives. The CSA concluded that investors are not making their investment decisions on the basis of transparent disclosure about fees that they themselves pay. Furthermore, embedded commissions raise conflict of interest questions, since they misalign the incentives of investment fund managers, dealers and representatives on the one hand and of the investors they serve on the other. The important work of the CSA in shining a light on hidden fees should be carried forward.

In 2016, the OSC established an Office of the Whistleblower which recognized that monetary awards are an integral component of an effective whistleblowing regime. But the legislation underpinning the CCMR contains no provision for financial compensation for whistleblowers. This initiative would therefore presumably be lost in the move to create the CCMR.

There is considerable uncertainty about how the applicable laws will be applied and enforced in transitioning to the CCMR. What is the likelihood that all issuers, self-regulatory organizations, investment advisers and investors will share a similar understanding of the new rules? What will be the overall effect of this uncertainty on the capital markets, especially given that Quebec, Alberta and three other provinces are not participating? The fact that the OSC’s regulation-making powers differ from those of the proposed CMRA creates even more uncertainty for investors.

There are many good reasons to support centralized decision-making in securities regulation. However, retail investors should be concerned about the CCMR initiative as it stands today. The CCMR should be reconceived to ensure that investors’ interests are adequately represented and protected on an ongoing basis. Next steps should include specific measures such as creating an investor advisory panel, establishing an office of the whistleblower and implementing a statutory best interests duty.

This is an updated and shortened version of a white paper prepared in 2017 for the Foundation for the Advancement of Investors’ Rights (FAIR Canada), a retail investor advocacy organization. Deep thanks to Adil Abdulla for research assistance.

This article is part of the Recalibrating Canada’s Consumer Rights Regime special feature.

Photo by Shutterstock/By Sapunkele

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Anita Anand
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto.

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