Kenmar Associates has commented extensively on the Canadian Investment Regulatory Organization’s (CIRO) proposed incorporation of representatives within the Canadian investment industry, generally expressing concerns about investor protection and registrant accountability.
The latest update of the proposal valiantly attempts to maintain investor protection and minimize administrative complexity. The Canada Revenue Agency has been contacted for a viewpoint since the tax implications need to be understood before concluding the final compensation model. CIRO should also assess the impact of labour codes and laws.
This tax-driven proposal is designed to reduce taxes payable by CIRO-registered representatives which could make incorporation attractive for them.
If a level playing field is deemed necessary and fair, the advisor’s ability to incorporate should be based on the nature of the dealer-advisor relationship.
Our major comments and concerns include:
- Regulatory priority: Kenmar believes the proposal is ill timed and a distraction given other critical regulatory priorities such as a review of client-focused reform compliance challenges, serious bank branch issues, harmonization of registration proficiency, client data accumulation and the modernization of dealer complaint resolution rules.
- Investor access/risk: While adopting an incorporated advisor compensation option might benefit investors by promoting greater investor access to regulated advice, it could also add risk as incorporated advisors could place the interests of their “business” ahead of client interests. The more “business-like” the arrangement, the stronger its transparency and accountability need to be. Regulators will need additional resources to oversee the proposed scheme.
- No material investor benefit: We see no material investor benefit by introducing tax-saving advisor incorporation with its added complexity and potential downsides.
- Accountability and liability: A major concern involves accountability and monetary sanction collection. Kenmar fears that incorporation could allow representatives to shield assets from enforcement or legal action (e.g., collection of fines, penalties, disgorgement or damages) unless accountability is explicitly spelled out and corporation monitoring is comprehensive.
- Outside business activities: Dealers will need to enhance their oversight of outside business activities to ensure conflicts of interest are identified and addressed, and to ensure investor service quality is maintained.
- Increased costs: The increased workload on dealers to assess and continuously monitor these corporations could increase operating costs, which would ultimately be passed on to clients. The added cost could further reduce retail investor access to personalized investment advice.
- Dealer supervision and liability: Kenmar understands that dealers would still be required to supervise incorporated advisors and remain liable and accountable for advisor acts, omissions and negligence. This would have to be integral to the final version of the proposal.
- Investor confusion: If the corporations are allowed to utilize brand names, this could, for example, confuse retail investors and lead to the sale of risky off-book transactions to unsuspecting clients.
- Complaint handling: We assume that existing complaint-handling rules will remain unchanged (hopefully modernized), that the incorporated individual will not be considered an Ombudsman for Banking Services and Investments participating firm and that the incorporated person carries errors and omissions insurance as appropriate.
- Privacy and security: Rules will be required to ensure that client-specific information will be under strict dealer control. Any new corporate information routing should preserve client access/portability and prevent the corporate layer from creating friction or delay.
Even if uniform adoption of advisor incorporation is achieved for the advisor incorporation approach, there would still be a non-harmonized playing field between CIRO registrants and registrants in all the other dealer categories in Canada, who are generally not permitted to utilize such a compensation model.
The proposal will increase regulatory burden at a time when governments are striving to streamline regulation. The proposal has not yet put forward sufficient evidence that the benefits will outweigh the costs and risks of the proposal.
There should be plain-language disclosure that investor rights and remedies are unaffected.
The proposal raises complex and interrelated elements that have broad policy implications and will require extensive policy consultation with multiple stakeholders, including provincial governments.
The bottom line — we need assurance that the proposed compensation scheme will provide at least as much investor protection as the employee-dealer relationship.
Ken Kivenko is president of Kenmar Associates, a privately-funded organization focused on investor education.