The Ontario Securities Commission (OSC) has published its 2011-2012 Statement of Priorities (Statement of Priorities) revising the draft Statement of Priorities published for comment earlier this year. The revisions include a number of specific initiatives that have been added in order to address public comments they received. These initiatives include:
FAIR Canada is encouraged to see the addition of these specific initiatives to the Statement of Priorities. While the Statement of Priorities does not fully meet recommendations made by FAIR Canada, the OSC’s Investor Advisory Panel, the Small Investor Protection Association and other investor advocates, it does constitute a significant improvement over previous years’ statements of priorities.
The Statement of Priorities signals Chair Howard Wetston’s vision for the OSC as a more investor–focused regulator.
FAIR Canada has been advocating for a fiduciary duty or best interests of the client standard for some time. FAIR Canada strongly believes that the framework within which registrants operate needs to shift from “suitability” and “know your client” rules to one where a client’s best interests are put first, so that registered firms and individuals that provide investment advice are required, when providing that advice, to put their client’s best interests first. The suitability requirements currently in place in Canada are insufficient to adequately protect individual investors. FAIR Canada believes that such a change is key to remedying the imbalance and misalignment of interests in current registrant-client relationships.
These misalignments may occur for a number of reasons. First, under the existing framework, registrants are often compensated and incentivized to sell products that may be “suitable” for a client, but not necessarily in the client’s best interests. Second, there is no specific requirement that a client’s best interests be put first in the provision of investment advice.
The OSC’s Investor Advisory Panel also supports the implementation of a fiduciary duty. The Investor Advisory Panel commented in its submission on the OSC’s Statement of Priorities that a fiduciary duty would eliminate the need to prove the existence of a fiduciary duty on the facts of a specific case and would greatly enhance the access of retail investors to rights of action against financial service professionals.
FAIR Canada believes that obligations arising out of the relationship between clients and advisors should be built around a duty to act in the best interests of clients. FAIR Canada suggests that the best interest of the client or fiduciary standard be tailored to the different types of investment services provided by intermediaries to investors. Regulators need to set out the expectations under such a standard. The Investor Advisory Panel similarly believes that the imposition of a fiduciary duty, on its own, is not sufficient and that the Commission should also specify the types of behavior that would run contrary to the standard by issuing a companion policy or other guidance.
We hope to see a draft rule or policy document for comment from the OSC prior to the end of 2011.
Compensation for Victims
FAIR Canada issued a report on financial fraud earlier this year and recommended in its comments to the OSC that all registrants be required to be backed by a compensation fund through mandatory SRO membership in order to protect investors in the event of the insolvency of a registrant, particularly insolvency brought on by a major fraud. The OSC should consider mandatory SRO membership while also working on a mechanism to allow the OSC to award restitution in the event of violations of the Securities Act. Both of these steps would help protect investors in instances of securities fraud and other wrongdoing.
FAIR Canada is pleased to see that cost disclosure and performance reporting to investors will be improved as this will improve the transparency of the relationship between an investor and their financial advisor and will help improve the transparency of the products that investors are sold. FAIR Canada sees this as a step in the right direction and encourages the OSC to go further and not allow investors to be sold a product unless the intermediary is satisfied that the investor understands the product, its risks and its costs. We would like to see further reforms which would improve price competition in the mutual fund industry, rather than simply monitoring the POS’s impact on price competition.
Specific and Measurable Priorities
We are supportive of the initiatives that have been added, including the addition of town hall meetings and investor round tables. FAIR Canada would also like to see the OSC set out more specific and measurable priorities and provide an annual account of stewardship to a Committee of the Ontario Legislature in order to review its performance achieved as against the objectives and targets set out in its Statement of Priorities.
Click here for FAIR Canada’s submission on the draft OSC Statement of Priorities.