Friday September 13, 2019

Maureen Jensen Chair and CEO
Ontario Securities Commission 20 Queen Street West
22nd Floor, Box 55 Toronto, Ontario M5H 3S8

Jim Sinclair General Counsel
Ontario Securities Commission 20 Queen Street West
22nd Floor, Box 55 Toronto, Ontario M5H 3S8

Naizam Kanji,
Director, Office of Mergers & Acquisitions Ontario Securities Commission
20 Queen Street West 22nd Floor, Box 55 Toronto, Ontario M5H 3S8

OSC Regulatory Burden Reduction Comments

FAIR Canada has reviewed many comments submitted to the Ontario Securities Commission (OSC) in response to its consultation on reducing the regulatory burden. We are writing to provide input on this initiative and to comment on issues raised by other commenters that we consider to be important from the standpoint of investors, in particular retail investors. We believe the issues listed below should be priorities for OSC action.

In addition, please see our op-ed article in annex A to this letter, which recommends that governments and the Canadian Securities Administrators (CSA) collaborate to introduce a National Securities Portal and related databases to serve as a single central interface for all filings and submissions to the regulators, and to provide a platform to host all databases of filed

information, both for public and internal use. Such a consolidated system would replace a large
number of existing national and provincial systems and interfaces, with multiple benefits for regulators, regulated persons, investors and the public. We are in the process of arranging for publication of this article.

1. General Comments

Better Regulation

FAIR Canada submits that reducing the regulatory burden is a worthwhile exercise, provided that actions taken do not compromise investor protection and market integrity. We endorse the concept of “better regulation”. It refers to ongoing efforts by a regulator to improve the way it regulates and delivers regulatory services. It means ensuring regulation is proportionate to the need or objective, which includes regulating less or streamlining regulation where possible, if it will not affect the quality and standard of regulation. Under that concept, reducing the regulatory burden is a sound goal provided that the central purpose of the
organization’s regulatory program continues to be met effectively. Better regulation also means regulating more or strengthening regulation when that is needed to regulate effectively.

The objectives of reducing regulatory burdens and providing sound standards of regulation that protect investors can be compatible objectives, especially to the extent that burdens arise from inadequate service levels, outdated IT systems and platforms, or overly bureaucratic administrative and regulatory processes that do not improve standards of regulation. Reforms and initiatives in these kinds of areas can improve services to users, including investors as the most important beneficiaries of sound regulation.

Better regulation should improve ease of access to disclosure and other kinds of information made public by regulators for all users, in particular investors. Improved and faster access to information and data can significantly reduce users’ costs in terms of time invested in using IT platforms to both file and search information, including websites. If information is very difficult to find and search, users may give up and fail to obtain relevant information at all, which could be even more costly. Further, advanced and flexible IT systems support better regulation by making regulatory analysis and processes faster and more effective.

Approach to the OSC’s Initiative

Some commenters suggested that the OSC should approach the burden reduction project in phases based on broad themes, such as service issues, administrative issues, IT issues and so on. We do not agree: most initiatives will take a considerable period of time to implement, although the length of time required by a given initiative will not be predictable. To make significant progress, it is important to identify the priorities for action across the spectrum of OSC functions, and to pursue many initiatives in parallel.

We submit that issues should be prioritized and selected for action based on these factors:
• Impact on users in reducing regulatory burdens or improving services, without compromising standards of investor protection and market integrity.
• Viability – the practicality of achieving the desired result within a reasonable timeframe, including considerations such as the need to obtain national consensus within the CSA.
• Timeline – the estimated period of time required to implement the actions.
• Cost – the total costs of implementing the actions, including direct costs to the OSC/CSA and the costs to users and stakeholders of changes needed to accommodate changes to the regulatory system made by the OSC.

The OSC should keep in mind that some types of changes designed to reduce the regulatory burden could be expensive for users such as registrants and issuers to adapt to because of the degree of changes in policies, procedures, compliance programs and, above all, IT systems that are necessary to implement the changes. These implementation costs need to be weighed against the potential benefits of a specific proposal.

2. National Systems (NRD, SEDI, SEDAR)

Many commenters expressed concerns that these national filing systems and databases are difficult to use, navigate and search. It is difficult to filter and analyze information on the databases. Since one of the main purposes of these systems is to provide public access to disclosure about issuers, registrants and insiders, resolving them should be a major priority for the OSC and other CSA members, in FAIR Canada’s view. Regulators place a high degree of reliance and emphasis on full disclosure and transparency by issuers and in the markets. As such, the current state of these systems is unacceptable. While the problems have long been acknowledged by the OSC, solutions have not been found.

We have frequently commented that the NRD is very difficult to search and analyze data. There is no simple way for investors to search the disciplinary history or information on an investment advisor. Similarly, SEDAR is far from a user-friendly source of disclosures from publicly-traded companies and is also very difficult to search. Why is a code needed for investors to search a public database of corporate disclosures? Simply put, SEDAR is not fit for its purpose.

In addition, more flexible systems that employ document formats that can easily be searched, filtered and analyzed using the latest analytics tools would be far more useful to staff at the OSC and other CSA members in their regulatory activities, which would lead to more effective and efficient regulation.

FAIR Canada believes that the state of these national systems and other IT systems provided by regulators in Canada underlines the imperative to create a National Securities Portal as described in our op-ed noted above. The current approach to developing and maintaining national systems, and regulators’ IT systems generally, is not working effectively.

3. OSC Website

The OSC website has been difficult to navigate and search for years and is badly in need of an overhaul to bring it into line with current standards for such platforms. It is not a user-friendly site, and in many respects worse than the websites of some other CSA members.

The search mechanism produces many irrelevant and tangential results, making it very difficult to even find the current version of a rule. The time required to use the site imposes significant costs on investors and the public, as well as other users like issuers and registrants. Investors likely have the worst experience in using the site because they are not as well equipped to navigate it due to their limited knowledge base and lack of familiarity with the site.

The state of the website imposes burdens on all users. The problems can obviously be fixed, and the investment required should be a top priority. The website can be overhauled without the need to reach a consensus with other CSA members.

4. Electronic access to and delivery of documents

Many commenters support moving to electronic delivery as a default for documents, provided investors retain an option to receive a paper copy. Others propose adoption of “access equals delivery” in various forms, and other ways to modernize delivering documents and information. FAIR Canada supports moving to electronic delivery as the default option for investors who provide an email address, if the option to continue to receive paper copies is retained. Current requirements are outdated. Electronic delivery is more efficient and a large majority of investors would be better served by electronic delivery, because it is faster, more flexible to view and easier to file and track e-documents. It is also more efficient and less costly for issuers and firms that must deliver documents to shareholders and clients, and reduces the waste of resources implicit in mailings.

We do not support adoption of “access equals delivery” if it means that as long as a person has access to a document online then he/she is deemed to have received delivery. People must be notified that a document is available and how it can be viewed. Delivery should require an email to be sent that notifies the individual that a document has been issued and can be viewed on a specific web page, with a link to that page provided. This is the same way that notice of availability of an account statement or bank statement is generally provided today. Of course, that may require signing into one’s account if the information being distributed is not public.

A transition plan for moving from the present system to electronic delivery as a default needs to be developed, which should ensure that instructions are obtained from each investor/client. As noted, that would require providing an email address to move to electronic delivery.

5. Improved technology for reporting and disclosure

We support the recommendation made by TMX Group that the OSC revise reporting and disclosure processes using modern technology. They suggest that the OSC implement secure, technology-based solutions such as a secure file sharing portal for all regulated entities to upload reporting documents and conduct communications with OSC staff. This is an obvious way to improve service delivery, regulate more efficiently and reduce the burden on filers and other regulated persons. However, implementing the necessary IT infrastructure could be expensive and take several years. Ideally such new systems would be national, or at least made available to all CSA members on a shared cost basis.

6. NI 51-102 Continuous Disclosure

FAIR Canada strongly supports streamlining of disclosure filings and documents because that would reduce burdens on issuers as well as investors and other users of disclosures.
Consolidating the content of disclosures into one document or form makes a lot of sense. Not only would it eliminate the burdens and costs involved in meeting duplicative requirements, it also would make it easier for investors and others to access and obtain information by reducing the number of documents involved and overlapping content in them.

The need for issuers to focus disclosures on substantive information about the particular company, and to emphasize key points and significant changes, to make disclosure more useful and relevant to investors is particularly important. Investors need information that is useful and relevant to making investment decisions about the specific security in question. Currently the approach to creating disclosure documents is excessively legalistic, leading to production of documents using “boilerplate” statements that all seem to make similar disclosures. For example, generic statements about the risks faced by a company and the risk controls used to mitigate them make the disclosure of limited value to investors. Often such statements vary little from one period to the next, regardless of substantive changes in the business and financial results.

Investors and the market would be better served if issuers are instructed to use plain language in disclosures, to make the information more understandable and readable. This would require elimination of a lot of legalistic boilerplate language that has become commonplace in such documents, which we would consider to be a significant improvement.

On continuous disclosure for investment funds, commenters suggested that duplication of information across a range of filings could be eliminated, including simplified prospectuses, Annual Information Forms, Fund Facts and MD&As. Again, we agree because that would reduce burdens on issuers, as well as investors and other consumers of those disclosures.

7. Personal Information Forms / 8. Exempt Distribution Reports

FAIR Canada’s proposal for a National Securities Portal would fulfill the need to eliminate duplication in filings and attendant extra costs in both of these areas.

Reforming the system for filing PIFs would significantly reduce burdens on the large number of persons who must file PIFs, as well as improve regulatory efficiency. We agree that current filing requirements for PIFs needs to be streamlined significantly. It does not make sense to file duplicative information with different regulators and exchanges, or to keep filing new documents annually. A single national system or portal should be used for such filings, and authorized regulators and exchanges should have access to a single secure database.

Many commenters stress the need to harmonize the reporting requirements and provide a single point of data entry for reporting exempt distributions, to replace the several existing reporting systems. The OSC maintains a different system and reporting requirements, while SEDAR can be used for filing reports with most CSA regulators. We support adoption of a national reporting system using a single portal to eliminate duplication and reduce costs.
Fragmentation in information available to regulators also reduces the effectiveness of oversight of exempt offers.

9. Policy Making Process

FAIR Canada agrees that cost-benefit analyses currently included in published proposals are not sufficient and may not address the significant costs of implementing a proposal to the industry. One of the reasons that the regulatory burden has reached current levels is that cost-benefit analyses have not been carried out when new regulations are proposed. The
requirement is given lip service, with vague generalizations about potential costs and benefits. To support the adoption of a regulatory change, regulators should be required to provide a concrete and substantive cost-benefit analysis, including a reasonable estimate of the costs to regulated persons and others of implementing the necessary changes.

It would be helpful to develop a template for the content of cost-benefit analyses, which should be practical and not so onerous on regulators that it poses a major obstacle to moving reforms forward. Also, regulators should have the authority to adopt changes on an urgent basis without first completing the analysis, if it is considered to be vital to implement a change to meet an immediate threat to market integrity or the interests of investors.

10. Rule Drafting

The OSC, and the CSA overall, should commit to the principle of writing rules in plain language. Clear wording of rules and other documents such as notices and guidance notes would benefit all stakeholders, including both regulated persons and investors looking to see
what the rules are. However, the idea of overhauling the large body of existing rules, while

attractive in principle, is probably not practical. It would be a monumental task that would
take many years. The need to obtain agreement on drafts across the CSA would probably make it impossible. Plain language should be adopted as the standard for drafting rules and other regulatory documents going forward.

11. Know-Your-Client and Suitability Requirements

The know-your-client (KYC) and suitability rules and procedures have become too prescriptive and inflexible. The system has morphed from one designed to ensure clients are well-served and protected from abusive sales practices to one dominated by extensive, costly and burdensome procedures and compliance monitoring programs that are designed mainly to protect investment firms from compliance problems and potential regulatory violations.

The box-ticking approach to investment objectives and risk tolerance, as well as to the categorization of the risk level of the myriad of different securities and investment products on the market today – which vary widely in their nature and purpose – has produced a rigid, one-size-fits-all system of rules, standards and procedures. Often the risk categorization of products is questionable, or at least very difficult to fit into a simple “H/M/L” view of risk rankings.

The suitability rules also apply to certain types of investors when they should not, and KYC requirements for institutional and sophisticated individual investors should be tailored to their needs.

The costs of the administration of this system, and the compliance policies and procedures that are tied to it, far outweigh the benefits that clients obtain from the current system. For example, often clients have to change their investments or sign many new KYC forms just to bring their investments and their paperwork into line. If these changes are carried out with a full discussion of how their investments fit into their current needs and objectives that would be helpful, but often they are not.

The cost and time requirements of complying with the sales compliance policies and procedures (which vary by firm) and dealing with checks and reviews imposed by related internal compliance monitoring systems mean that it is increasingly uneconomic to provide personal investment advisory services to smaller clients or for small transactions. The system is too burdensome to justify the time and effort involved in providing those services unless the amounts involved are large. As a result, clients are increasingly being moved towards cookie-cutter model portfolios of liquid securities, mutual funds or ETFs that do not require much individual attention and have been pre-screened for compliance with risk standards.
Also, fee-based accounts are preferred by dealers for providing such services. Alternatively, investors have the option to go-it-alone using a discount broker without access to investment advice that addresses their individual circumstances and needs other than online research tools.

FAIR Canada is aware that the OSC’s Client Focused Reforms Committee is drafting proposed
changes to KYC requirements, so this is not an issue that needs to be resolved by the regulatory burden reduction initiative. In fact, given its complexity and importance to suitability requirements and the proposed best interest standard, we believe it should be considered a stand-alone area of regulatory review. The burdens imposed by the current system are an issue, but not simply because of a need to reconsider the burdens imposed on the industry. Of greater and broader significance are the real value to clients of the current system, and the potential implications of the current and any proposed new system for standards, and availability, of client services. We believe the OSC should consider all of these issues during their review, and we look forward to participating in the consultation process that results from release of the KYC proposals.

We thank you for the opportunity to provide our comments and views in this response. We welcome its public posting and would be pleased to discuss this letter with you at your convenience. Feel free to contact Ermanno Pascutto at 647-256-6693 / or Douglas Walker at 647-256-6690 / .


Ermanno Pascutto Executive Director
Canadian Foundation for Advancement of Investor Rights