Various industry bodies, self-regulatory organizations (SROs) and other groups have recently issued reports and proposals focusing on improving regulatory oversight of dealers, gaining efficiencies and reducing regulatory burden. A dominant theme in these papers is that a new, larger SRO would be the means to secure these improvements.
Two of the more contentious proposals come from the Capital Markets Modernization Taskforce and the Mutual Fund Dealers Association (MFDA). Both contemplate the creation of a single SRO that covers all advisory firms, including portfolio managers (PMs), exempt market dealers and scholarship plan dealers.
However, the Portfolio Management Association of Canada (PMAC) believes this would be the wrong course. The interests of pension plans, foundations and private clients that have entrusted trillions of dollars in assets to PMs are better protected under the current system of regulatory oversight by the Canadian Securities Administrators (CSA), rather than under a system in which the CSA delegates its oversight role to a new SRO.
We strongly believe that the public interest is better served by PMs being directly regulated by the CSA and, long term, through a co-operative (national) securities regulator. Efforts have been ongoing for some time to establish such a regulator, known as the Cooperative Capital Markets Regulatory System.
CSA staff have the experience and expertise to understand the unique features of the PM business. They have proven to be tough but effective regulators with a strong regional presence across Canada, and have been consistent in approach to registrants regardless of firm size, whether they serve institutional or private clients, or whether they operate traditionally or online.
PMAC views PMs as fundamentally different from investment and mutual fund dealers. Registered PMs are in a singular relationship with their clients: they have discretionary authority over investments they manage for their clients and, more importantly, have a fiduciary duty.
This fiduciary duty permeates the entire firm culture, guiding every decision affecting a client, because the entire firm bears responsibility for decisions made on behalf of the client. This fiduciary duty is of utmost importance to investors, and PMAC believes that there is a serious risk of this standard of care being lowered in the event of a shift to SRO oversight.
In contrast, the SROs’ regulatory structures were developed to work well with the investment dealer model, where client relationships are based primarily on specific asset transactions. The rules that govern dealers are necessarily more prescriptive, as they are aimed at ensuring that individual trades are conducted in a fair and efficient manner, and at maintaining the integrity of the capital markets. These rules are inappropriate for and incompatible with the variety of business models and client types served by PM firms.
Regulatory reform discussions often focus solely on retail clients and overlook the vast assets managed on behalf of pension plans, foundations, First Nations’ funds and other institutional clients. PMs are often hired by international firms to manage a specific asset class on behalf of institutional investors. Over time, CSA regulation has come more in line with international regulation, which is critical for maintaining Canada’s competitiveness.
It’s also worth noting that many PMs are also investment fund managers (IFMs). About 65% of PMAC membership is registered as both PMs and IFMs, and many are part of international firms. Reform proposals have been conspicuously silent on the fate of IFMs. PMs and IFMs are intertwined; dividing their regulation between a new SRO and the CSA would increase costs and regulatory burden, which is not in the best interests of investors and runs counter to the overall objective of any of the proposals.
We leave it to other industry participants to opine on whether a merger of the two existing SROs makes sense. While the SRO structure is not appropriate in PMAC’s view for the regulation of PMs, SROs in general suffer from other issues, such as declining numbers of registrants, duplicative costs, conflicts of interest and governance challenges. The SRO model has been slowly disappearing internationally with Canada and the U.S. being among the few jurisdictions to continue to utilize SROs in this industry.
SRO reform may be a worthy goal, but let’s not fool ourselves into thinking the new, super-SRO is the “magic bullet.” It would not be empowered to deal with systemic issues facing Canada’s markets, as a national securities regulator would be.
Canada remains the only developed country in the world without a national regulator, which puts us at a significant disadvantage competing in global capital markets. Nine participating governments have signed on to the national regulator initiative and we are as close as we ever have been to the goal, but we need the provinces to make it a priority.
The national regulator is a better first step towards improving the regulatory system, rather than the creation of a new all-encompassing SRO. Direct regulation is stronger regulation and better serves the public interest.
Katie Walmsley is president of the Portfolio Management Association of Canada (PMAC), which represents close to 300 investment management firms from across Canada that collectively manage over $2.8 trillion of assets for institutional and private clients.