November 2004

Fair-dealing model placed on a faster track

Regulators plan to speed up the implementation process by delivering rule changes through self-regulatory organizations

By James Langton

The fair-dealing model has a new look and focus and, as a result, regulators expect the “guts” of the fair-dealing model to be implemented across Canada by the end of 2005. And it’s not going to be nearly as painful as some in the industry fear.

The FDM is now the responsibility of a steering committee comprising the Canadian Securities Administrators, the self-regulatory organizations and the industry. Under its aggressive new timetable, fair-dealing principles will begin showing up as rule changes delivered through the SROs, the Investment Dealers Association of Canada and the Mutual Fund Dealers Association.

This strategy offers a couple of major benefits: rules can be implemented nationally; and because they will be shaped by the self-regulators, which have industry expertise, the rules won’t become overly burdensome or inappropriate to the marketplace.

Both issues were stumbling blocks as regulators tried to move the FDM from concept to implementation. Funnelling the changes through the SROs is a tidy way to defeat both obstacles. First, because the SROs operate nationally, rule changes can be implemented across all jurisdictions.

One of the chief concerns about the FDM as it was originally conceived was that it was an Ontario Securities Commission project. Some in the industry worried that if Ontario alone adopted the FDM’s proposed reforms, the already fragmented provincial regulatory system would become even more fractured.

The OSC always hoped the FDM would be adopted nationally. However, in an environment in which the provinces are all highly protective of their turf, the likelihood of the other provinces following the OSC to carry off a sweeping overhaul of regulation seemed slim. As recently as mid-September, the Alberta Securities Commission sent a letter to the OSC detailing the findings of its consultation with industry players. One of the chief complaints that emerged from that exercise was that the initiative would exacerbate differences in the regulatory regimes among different jurisdictions.

“Most participants expressed grave concern about the OSC proposing the new approach to registrant regulation without consultation with — and the support of — the other securities regulatory authorities. They expressed concern that a move to an FDM by the OSC alone would undermine all of the harmonization advances made by the CSA over the past several years,” Steve Sibold, chairman of both the ASC and the CSA, wrote in the letter. He added that almost every industry player the ASC surveyed said significant changes to the regulatory system should be made in co-operation with all the provincial regulators and the SROs.

The CSA has adopted that stance, by making the FDM the responsibility of a joint industry/CSA/SRO steering committee. The committee is headed by OSC executive director Charlie Macfarlane and staffed by representatives of the provincial regulators from British Columbia, Alberta and Quebec, the IDA and MFDA, as well as two industry reps.

The committee aims to create greater transparency between clients and advisors in three areas: account opening; compensation, costs and conflicts of interest; and performance reporting. It will be responsible for shepherding the FDM principles into rules and will oversee the adoption of some of the fair-dealing principles that affect registration via the CSA registration project, the goal of which is to harmonize and streamline registration categories and filing requirements across the country.

Macfarlane reports that the national registration system — which will provide one-stop shopping for reps who wish to be registered in multiple jurisdictions — will be up and running in the first quarter of 2005.

Quebec’s decision to join the national registration database in January 2005 and B.C.’s decision to drop its plans for firm-only registration have cleared the way for the database to follow a mutual-reliance approach. The various securities commissions will rely on one another’s judgment to determine whether an individual is suitable for registration; a rep accepted for registration in one jurisdiction can easily be registered in others.

The move does not go quite as far as the legal delegation that the CSA would like to see on such issues, but it is heading in the right direction. Nevertheless, Macfarlane says, the new system will essentially deliver on the registration front what the passport model (to be adopted by the major jurisdictions except Ontario) hopes to achieve.

The changes that the new steering committee hopes to bring to the registration area — including harmonizing proficiency requirements, registration categories, capital requirements and dealing with personal corporations — will be a long-running project. Finding answers to some of the issues could take years.

However, by using SRO rule-making, the committee expects to move quickly to deliver results in the three areas that deal with improving transparency. Working groups headed by members of the steering committee will focus on coming up with concrete rule proposals. Paul Bourque, senior vice president of member regulation at the IDA, is leading the group looking at account-opening transparency. Ross Sherwood, president and CEO of Vancouver’s Odlum Brown Ltd., is in charge of the performance-reporting area. And Ken Parker, director, capital markets, at the ASC, is responsible for the big area of costs, conflicts and compensation.

The groups will get their marching orders within days and, Macfarlane says, they will be asked to produce concrete recommendations by mid-January. The rules will then be drafted by the SROs (led by another joint IDA/MFDA/CSA committee), published for comment, refined and adopted by the end of 2005, he hopes. The goal of the new strategy is to generate some concrete results from the FDM project by simplifying and speeding up the process, he says.

Glorianne Stromberg, former OSC commissioner, applauds the new approach — particularly the decision to move the project to the national level and bring in some senior people to drive implementation. She says the project should not be viewed with fear by the industry: “Remember, what we’re talking about is simply fair and clear account agreements, KYC forms, account statements, etc.” She has been advocating these reforms for years, most clearly in her influential industry reports.

Although her reports and some early FDM deliberations have generated fear in some industry players, the hope is that by moving away from some of the more fanciful talk and images from the FDM concept paper and Web site and toward practical changes delivered by the SROs, the project will result in genuine, productive reforms. Macfarlane says the committee does not intend to get into issues such as regulating compensation or eliminating trailer fees.
The focus will be on greater transparency. Nor will it push reps into delivering copious investor education.

But reforms that emerge from the project in the near future will not be the end of things. CSA staff will research the efforts of other jurisdictions to improve transparency and regulation around advice. Macfarlane says regulators want not only to harmonize and streamline rules but also to modernize them. “We recognize there are areas in which we’re not necessarily on the leading edge,” he says.

One complaint about the FDM on the Street is that costly regulation could price many smaller investors out of the market as firms couldn’t afford to serve them and meet regulatory obligations. The new approach recognizes that and scraps some of the more radical possibilities to win implementation. IE