Long-standing advocates of national securities regulation are now turning against the proposed co-operative capital markets regulator (CCMR) amid fears that it will not enhance investor protection.
The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and seniors advocacy group CARP announced on Thursday that they have dropped their support for the proposed CCMR as they no longer believe that the new authority would be in the interests of retail investors.
FAIR Canada initially signalled its turn against the CCMR on Fri. May 12, following the Canadian Securities Administrators (CSA) revelation that only provincial regulators in Ontario and New Brunswick intend to continue working on a best interest standard for advisors.
Provincial regulators in Alberta, Quebec and Manitoba, which are not participating in the CCMR, declared that they now agree with the B.C. Securities Commission, which has opposed a best interest standard from the start (B.C. is the other major province participating in the CCMR).
The initiative also hit another legal roadblock last week as a Quebec court ruled that the proposed CCMR model is unconstitutional because of its planned governance structure.
The initiative is now losing the support of investor advocates, which have traditionally favoured a shift to national regulation in the hope that this would lead to improved enforcement and enhanced investor protection.
"The onus is on those proposing to repeal the existing regulatory system to demonstrate the benefits of the proposed CCMR to Canadians. To date, we remain unconvinced that the change will benefit Canadians," says Ermanno Pascutto, chairman of FAIR Canada, in a statement.
In particular, FAIR Canada and CARP are worried that the Ontario Securities Commission (OSC), which has emerged as the leading advocate of investor protection among regulators in Canada, would be subsumed into the CCMR if it takes flight as planned in June 2018.
FAIR Canada and CARP are concerned about the planned elimination of the OSC not only because of its investor-friendly stance on policy issues, such as a possible best interest standard and banning embedded commissions, but also because it has "also been at the forefront of establishing structures that ensure investor representation in policy making." This includes the development of its Investor Advisory Panel (IAP), the Investor Office, and its whistleblower program that provides financial incentives for high-quality tips.
"No other securities regulator in Canada has taken these steps," the two groups note in a statement.
At the same time, FAIR Canada also released a white paper that details concerns with the CCMR's model.
"In both its governance structure and substance, the CCMR is not in the interests of investors," conclude the paper, which was written by University of Toronto law professor, Anita Anand.
The white paper notes that the CCMR does not build in any investor representation, nor does it contemplate critical investor protections such as a best interest standard, or a ban on embedded commissions.
"From the perspective of Ontario investors, it makes little sense to exchange an investor-focused securities regulator for one that institutionalizes a governance structure in which investor representation is effectively nil," the white paper says.
As a result, FAIR Canada and CARP have concluded that the CCMR "is not capable of fulfilling its purpose to ‘provide increased protection for investors' as set out in the Memorandum of Agreements signed by the participating provinces that led to its creation."
As such, FAIR Canada and CARP are calling on government policymakers to reform the governance structure of the CCMR and its planned regulatory regime. Absent that, they now recommend Canada "should retain the current model of provincial securities regulation."
"I have long been in favour of a reformed model of securities regulation in Canada," Anand notes in the white paper. "But given the fundamental mandate of investor protection, any proposed model must have at least the same level, if not more, protections in place for investors. The CCMR is not there yet, which is the key message of the white paper."
The Public Interest Advocacy Centre (PIAC), another longtime supporter of national regulation, indicates that it is also rethinking its support for the CCMR.
"Although [the] PIAC historically has as well supported the national securities regulator, we are actively reconsidering that position in light of the developments outlined in Professor Anand's paper," says John Lawford, executive director and general counsel of the PIAC, in a statement.
"For capital markets to function effectively, investors need complete transparency, competitive fees and confidence that their interests will be protected," adds Wanda Morris, vice president of advocacy and chief operating officer at CARP. "These elements are not in place now and the proposals put forward for the new regulator do not address these concerns. CARP urges provincial regulators to go back to the table."
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