One of the paradoxes of securities regulation is that those in greatest need of protection, the retail investors, are often in the worst position to know what needs to be done. This puts regulators in the tricky spot of having to make decisions for them. So, the regulators are coming up with new ways to stay in touch with retail inves-tors’ needs.

The Ontario Securities Commission, industry self-regulators Investment Dealers Association of Canada and Mutual Fund Dealers Association of Canada, and the Ombudsman for Banking Services and Investments are establishing a joint standing committee on retail inves-tor issues. The idea is to create a permanent forum in which the four organizations can discuss the problems that afflict retail inves-tors — and to work together on possible solutions.

The committee is being staffed by top-level executives from each of the four groups. Led by Larry Ritchie, vice chairman of the OSC, the committee also includes the presidents and CEOs of both the IDA and the MFDA — Susan Wolburgh-Jenah and Larry Waite, respectively — and industry ombudsman David Agnew. They plan to meet quarterly and to hold meetings with interested parties — investors, consumer advocates and academics — on an ongoing basis to inform them of the committee’s deliberations.

Effectively, the creation of the new committee formalizes and aims to institutionalize what has already been taking place among the regulators. Following the OSC’s Investor Town Hall in 2005, an ad hoc committee of executives from each of the organizations was created to follow up on some of the issues raised at that meeting. The four organizations also put together the second such public meeting with investors, held this past October.

Following the October event, Ritchie says, “It became apparent to us that an ongoing forum for the exchange of information, the exchange of ideas and problem-solving should be established.”

The primary purposes of this new group, he says, will be to: inform regulatory policy by providing input on proposed rules; identify possible regulatory gaps for which new rules may be required; assess the retail impact of technical proposals that aren’t necessarily aimed at retail investors; and keep the various regulators up to speed on one another’s efforts in the retail arena.

Waite says that the MFDA is pleased to be part of this standing committee, which has its roots in the first town hall meeting, and the new-found sense of co-operation that came out of that event.

Although there may well be more town hall-type meetings in the future, the committee aims to take a more focused approach by seeking input on specific issues through focus groups, round–table events and other avenues. And rather than simply concentrating on these issues once every two years in preparation for a town hall, Ritchie says, the committee’s deliberations will ensure that retail investor issues remain an ongoing priority among the regulators.

Of course, the challenge for any initiative that has to do with retail investors is finding people who can make meaningful contributions to the policy debate.

The open forums have been useful in rousing regulators from their dogmatic slumber, but it’s a large leap from that to detailed policy initiatives.

The problem for investors —and for regulators — is that there is no one championing a regulatory agenda from the retail inves-tors’ perspective.

Yet, retail investor protection is arguably the primary justification for regulation. In general, large, sophisticated market players can fend for themselves. They typically don’t need or want a lot of regulatory interference. The primary beneficiaries of regulation are retail investors, who are at a great disadvantage in terms of both expertise and market power relative to the financial services industry firms with which they do business.

The same circumstances that make small investors vulnerable — an imbalance in market knowledge and resources — also leaves them at a disadvantage in terms of crafting rules.

They don’t have lobbyists to promote their interests to policy-makers. Nor do they have teams of lawyers to pick apart regulatory proposals and craft arguments that can swing the details in their favour.

Instead, regulators try to divine the retail investors’ best interests. Inevitably, that effort falls short. One reason is that retail inves-tors are an extremely diverse group with a wide spectrum of regulatory needs and priorities.

@page_break@Take disclosure, for example. What is hopelessly complex to one retail client may well appear juvenile and simplistic to another. Similarly, when it comes to resolving a problem, there will be investors who don’t have the first clue about where to start, while there are others who know how to work the system.

Coming up with rules that work for investors of all stripes is a tremendous challenge. Not least when all the ideas on how best to protect this vast, diverse population come from a relatively homogenous group — the lawyers and other professionals who work in downtown Toronto within a three-block radius of one another at the securities regulators.

Moreover, those regulators are naturally susceptible to having their agenda shaped by the industry, which is in constant contact with them, shares an understanding of the way the process operates and speaks their language.

Retail investors remain, for the most part, a vague, amorphous concept.

The regulators first got a taste of just how far they’ve been missing the mark with retail investors at public hearings before a provincial legislative committee in Ontario in August 2004.

The hearings gave ordinary investors a chance to vent — and, more important, to bring their concerns to the politicians that are supposed to be overseeing the regulators.

That event precipitated the first Investor Town Hall the following year, when regulators found themselves in front of several hundred investors, some of them quite angry and harbouring a wide range of complaints about the regulatory system.

These investors didn’t necessarily reveal any regulatory gaps that hadn’t been documented years earlier in the seminal reports of then-OSC commissioner Glorianne Stromberg. But the meeting did showcase the depth of investors’ frustration in a visceral way. And it seemingly did sensitize regulators to the fact that even the most basic elements of the regulatory system — such as simply finding the right place to have a complaint heard — were proving to be terribly difficult for many investors.

So far, the co-operation among the OSC and the SROs since the first town hall has resulted in some modest progress for investors, leading the regulators to try to integrate their intake processes better so that aggrieved clients are directed to the right group to make complaints. Perhaps more important, these efforts have also driven the proposed adoption of new complaint-handling standards by the SROs.

Indeed, the IDA’s Wolburgh-Jenah believes that these new standards will represent a meaningful improvement in investors’ lives. She reports that the IDA is currently considering the comments it received on its proposals. It will be finalizing and, ultimately, implementing the standards shortly.

Although this initiative may well improve investors’ experiences with the regulatory system, the regulators’ efforts still haven’t resulted in the one thing that most aggrieved investors seem to want: a better way to get their money back. Wolburgh-Jenah suggests that this remains the biggest outstanding issue on the retail regulation agenda.

One element of the restitution system, OBSI, could yet be improved; it is considering changes to its mandate that would beef up its ability to help investors with complaints against the industry.

Yet, the blame for the lack of a new system of investor restitution arguably lies mainly with the politicians. Ontario’s government did promise to work with the OSC on a better system for investor restitution, but, to date, nothing has been done.

The provincial government has also failed to honour its pledges to review the system of self-regulation and to spin off the adjudicative function of the OSC into an independent body. Both of these moves would affect more than just retail investors, but they are ideas that seemed to find favour with the injured investors who appeared before the legislative committee that recommended these reforms in late 2004.

Nevertheless, the two public meetings and the legislative hearings have at least been catalysts for regulators to make a greater effort to understand, and work on, retail investor issues.

Following the first town hall, not only did the regulators endeavour to improve certain elements of the system, but they also established the investor advisory committee, which was supposed to provide them with further insight into the problems of the ordinary investor.

That committee has now been abandoned. It was appointed to a two-year term, which ended this past December, and is not being continued. Unlike the various other regulatory advisory committees, which are largely stocked with lawyers and industry professionals, the IAC was unusual in that it included ordinary investors. That element is not part of the new joint standing committee, which comprises only of regulators.

Ritchie says that the IAC was “extremely useful” but that it had “run its course.” Regulators have decided to try something new and, hopefully, better.

He believes that this new approach will represent progress because it brings together the four primary organizations with responsibility for retail investor protection; it will also aim to generate investor input from a broader array of voices than a formal investor committee can produce.

This new initiative is not an effort to shut anyone out, Ritchie maintains. Instead, he hopes that it will get a wider range of input by canvassing a variety of sources for the perspective of the retail investor, rather than trying to anoint one or two people to speak for all investors.

“There is no one voice for retail investors. We are all retail inves-tors,” Ritchie points out. “It’s very hard to get effective, meaningful input all the time from one forum. You have to be creative in getting your input, and that’s what we’re trying to do.”

The other element that’s arguably missing from this initiative is participation from other securities commissions. In the face of efforts to improve harmonization among the provinces, innovative rule proposals that have their origin in just one jurisdiction often end up dying on the vine because regulators are reluctant to adopt — and the industry vehemently opposes — policies that introduce different requirements for firms in different provinces.

The other securities commissions will be invited to contribute to the effort but, for now, it’s an Ontario-only initiative, Ritchie says. Moreover, the participating SROs can implement any policy proposals that may emerge from this effort among their members on a national basis.

Crafting regulation that meets the needs of the retail investor population is inevitably a tricky task. But, given that retail clients are really regulators’ raison d’être, it’s a challenge regulators must rise to meet. IE