Over the past months, the Canadian Securities Administrators (CSA) released the final version of the client-focused reforms (CFRs) and put forward specific measures related to the Ontario Securities Commission’s (OSC) Burden Reduction Task Force (BRTF).
These initiatives represent a serious and committed effort to relieve the regulatory burden and lower compliance and operating costs for dealers and other market participants. However, the benefits from these measures will depend on how effectively the rules are implemented, and the clarity of the guidelines to manage rule compliance.
The CFRs and BRTF measures focus on easing the burden for small and mid-sized dealers that have the disadvantage of limited business scale and operate in niche markets often dependent on other dealers and third-party providers for financial services, investment products and distributional access. These proposals also focus on alleviating the regulatory burden on small listed issuers, enabling more vibrant small cap public markets.
Industry engagement with the regulators is important not only to implement the new rules effectively, but to obtain guidance and direction on developing policies and procedures, to ensure that the scalability provisions are workable and effective, and that the flexibility of outsourcing arrangements are retained. Small dealers have increasingly embraced outsourcing to mitigate the squeeze on earnings and the escalating regulatory burden. The decision in the CFRs to remove restrictions on referrals — notably on the entities eligible to participate and the limitations on time and the duration of the referral — will benefit the business operations of small dealers.
The key proposals in the CFRs include allowing small dealers to tailor the detailed know-your-client (KYC) and know-your-product (KYP) requirements to particular business models; for example, adjusting KYC requirements for smaller client portfolios and limiting the breadth of the product shelf and related KYP obligations for small retail firms. Clear guidance will be important to seize the opportunity to streamline regulatory obligations.
Second, the BRTF has identified many measures to reduce costs and inconvenience, and improve efficiencies and services — measures that will provide significant benefits to small dealers. The burden reduction measures will also ease the regulatory load on small issuers, providing small companies with confidential prospectus review and guidance on the conduct of staff prospectus reviews to help reduce financing costs. The CFR proposals envision a collaborative approach with the provincial securities regulators to alleviate issuer cost, such as increased reliance on electronic dissemination of disclosure documents, as seen in the prospectus “access equals delivery” model, and other regulations related to the capital-raising process.
The views of small issuers and their dealer underwriters will be important to identify the barriers and excessive costs of financing in public markets. The Alberta Securities Commission’s consultation paper released last June provides a useful starting point. Reducing the burden for small company access to public markets is critical to reversing the dangerous drift to greater reliance on private-market financing, limiting access to retail investors.
The Investment Industry Regulatory Organization of Canada (IIROC) has an important role to play following the lead set by the CSA and the OSC. IIROC has already indicated it will permit part-time CFOs at member firms. Both IIROC and the CSA need to engage together with industry in consultations to better align existing rules and regulations and registration categories with the business of the registered dealer.
Many small and mid-sized dealers now limit operations to specialized businesses for retail firms into segmented client groups of the smaller affluent-mass market client, high net-worth clients or to discretionary portfolio management or for institutional boutiques to merchant banking and small-cap financing. The rulebook should be streamlined to relate specifically to these specialized businesses to reduce costs. Moreover, for retail firms, as the client base widens or portfolio size expands, the regulatory regime should accommodate these adjustments with minimal cost and disruption to the client.
The OSC and CSA envision active consultations with industry firms on the various proposals put forward to make headway lowering the regulatory burden. Some consultations, particularly those related to technical rues, can be done quickly to expedite implementation, while other discussions related to the CFR and national rules should be conducted over a longer time frame. Active industry participation in these discussions will deliver great benefits to dealers and improve the efficiency and competitiveness of their businesses and the capital markets.
Moreover, the prolonged focus on alleviating the regulatory burden will inculcate a culture of regulatory efficiency at the regulator, resulting in a better balance between efficiency and investor protection. This will instill industry confidence that regulators are balanced and fair in their approach, encouraging more support for principles-based regulation — the optimal direction for flexible and efficient regulation.