New committee will seek input on issues of importance to clients

By James Langton | May 2008

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.