Compliance officers (cos) and company executives surveyed for Investment Executive’s 2014 Regulators’ Report Card are encouraged that the regulators are making a concerted effort to engage with the small dealer community by shifting their approach toward a more collaborative compliance regime.
The ratings for all the regulators in “the regulator’s sensitivity to the concerns and issues of small firms” category were among the lowest in the Report Card. However, registrants believe that regulators are recognizing the challenges that small firms face and, as a result, are taking steps to address the recent spate of firm closures and consolidation within the industry.
In particular, the ratings for both Toronto-based self-regulatory organizations (SROs), the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) increased significantly in the small firms category this year. In fact, the MFDA’s rating rose by a substantial 0.8 of a point for the second year in a row. The SRO received a 5.8 rating in the category this year, up from 5.0 in 2013 and 4.2 in 2012.
What stood out for survey participants in this year’s Report Card was the considerable progress the MFDA has made on this issue since Mark Gordon took over as president and CEO in late 2012.
“In the past, they never asked how regulation affected small dealers but now they do,” says an executive with an Ontario-based mutual fund dealer. “In fact, they recently held meetings with smaller firms to ask about our concerns.”
This attitude, Gordon says, reflects the maturation in the MFDA’s approach to regulation, from one based on application and enforcement of the rules to one in which education and co-operation are paramount.
“When the MFDA first started out, the goal was to get a regulatory structure around the [mutual fund] industry,” he says. “We believe the state of regulatory compliance has increased significantly so that we needed to evolve along with our members and, hence, we embraced industry collaboration, education and providing assistance and guidance.”
This approach is appreciated, says a chief compliance officer (CCO) with an Ontario-based mutual fund dealer: “We are able to give feedback at their small-dealer conferences. And I know they are listening because I have seen the MFDA implement some of the ideas I brought up during those meetings.”
Another important factor that COs noted is the MFDA’s increased awareness that regulatory policies impact smaller firms in a different ways than the same policies impact their larger counterparts; thus, there’s more than one way of being fully compliant.
“There’s a realization that smaller firms can reach compliance goals in different ways than larger firms,” says a CCO with an Ontario-based mutual fund dealer.
Gordon stresses that there’s a need to apply MFDA policy “in a way that makes sense for the nature of the business operation by using common sense. We apply our rules differently for smaller dealers than we do for larger dealers.”
The MFDA wasn’t the only SRO to be recognized for its efforts in this category. IIROC saw its rating bounce back to 5.4, which it had received in 2012, before dipping to 5.0 in 2013. In part, this improvement is because survey participants appreciate the SRO’s increased commitment to community outreach and communication with its members.
“[IIROC staff is] reaching out to us more than ever before,” says a CO with an IIROC-licensed firm in Ontario. “I attend their breakfast seminars regularly, during which they really get the dealers involved in dialogue on important issues.”
“People want a mixture of ways to interact with regulators,” says Susan Wolburgh Jenah, IIROC’s president and CEO. “Formal requests for comment aren’t always the best way. It’s important; but people appreciate when it’s supplemented by the opportunity to just sit down and understand [each other’s] strategic priorities. There are so many misconceptions that can that can be cleared up when you have that sort of dialogue.”
Next: More collaboration
One reason why regulators are being far more collaborative with smaller dealers is that there’s greater awareness among the SROs that ever-increasing compliance costs are squeezing out smaller dealers. Some have either closed up shop or been sold to a larger competitor.
“[The SROs are] worried about declining membership as small firms shut down,” says a CCO with an Ontario-based investment dealer.
Adds a CCO with an MFDA-licensed dealer in the same province: “[The MFDA] has gone from more than 200 members down to about 100, so they must know that they need to be more responsive to the needs of small firms.”
Gordon emphasizes the importance of having small dealers in the Canadian marketplace: “Small dealers play a valuable role in the financial and advisory framework. Often, they are part of small communities, where they represent smaller clients and offer more holistic advice, including financial planning and insurance services.”
But, regardless of the efforts that the SROs are making to make things easier for small dealers, this category’s low ratings, when compared with those of other categories, reveal that there’s still much dissatisfaction among those surveyed for this year’s Report Card.
“[The SROs] say they consider the needs of small firms, but there is no action,” says an executive with a small Ontario-based investment dealer. “I haven’t seen a single rule change to address the concerns of small firms.”
The provincial regulators included in the survey also drew the ire of survey participants on small-dealer issues. For example, the Alberta Securities Commission, which was included separately for the first time in the Report Card this year, received a rating of 5.5 in the category while the rating of the B.C. Securities Commission (BCSC) plummeted to 5.2 from 6.7 in 2013.
Survey participants who deal directly with the BCSC argued that regulatory changes are happening too quickly for small dealers to adapt. Says a CCO with a British Columbia-based investment-counselling firm: “Small firms don’t have the time to submit comments and there are simply too many new rules to keep up with.”
The Ontario Securities Commission (OSC) received the lowest rating in the category (4.4) this year. Much like last year, survey participants complained about the regulator’s high fees, the result of a change in its fee structure in 2012. Says a CCO with an Ontario-based investment dealer: “The change in their calculations for their fees cost us big this past year. We had a 100% increase in the fees we paid. The fees are way too high for what they provide.”
It appears that the OSC is listening, though. In February, just as the research for this Report Card was wrapped up, the regulator announced a one-time fee cut for small dealers and issuers, based on their 2013 revenue.
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