The Investment Industry Association of Canada (IIAC) and the Portfolio Management Association of Canada (PMAC) have submitted supportive comments to policymakers on revised legislation that would create the co-operative capital markets regulator (CCMR) and the draft rules for the new regulator.
PMAC’s comment notes that “the CCMR, if properly constituted, can better protect investors, enhance Canada’s financial services sector and global reputation, support efficient capital markets and strengthen the management of systemic risk.”
But both groups have concerns about certain elements of the proposals. The IIAC, for example, has major concerns with issues such as how the transition to the new authority will work, to how it will interact with regulators in provinces that don’t participate. It also flags issues with the substance of the proposals, including its fear that they pave the way for the imposition of a fiduciary duty on advisors.
“The IIAC is concerned that the addition of such a broad, sweeping and vague provision creates uncertainty in respect of this long standing, and well understood basic principle of securities legislation. From the commentary, it appears that this change is meant to permit the authority to make regulations such as imposing a best interest standard,” says the IIAC in its submission.
The trade group argues that this should not be part of provisions to introduce the CCMR. “The best interest standard is a matter of complex debate among provincial regulators, market participants and the general public. While the best interest standard is currently being studied by the relevant securities commissions, the industry has raised a number of significant issues related to the implementation of such a standard,” it says. “We are concerned that a new provision with such significant implications has been included in the legislation simply as a placeholder for future rule-making.”
PMAC, on the other hand, “supports the adoption of a statutory best interest standard”; and says in its submission that the decision about whether to raise standards “does fall within the scope of the CMRA’s regulation-making authority”.
However, PMAC has its own concerns with the proposals, including the fact that elements of the plan that have not been published yet, such as the proposed interface mechanism between the new regulator and the provinces that don’t participate; and proposed new powers to guard against systemic risk, which will be spelled out in federal legislation and rules. It says that concerns about systemic risk powers, have “raised significant concerns” among PMAC members. “We also question the lack of due process contemplated in systemic risk provisions,” it adds.
It also has issues with the registration requirements for fund managers and derivatives advisers; civil liability provisions; and, the new authority’s investigation and search powers. “There remain significant operational challenges with the new CCMR,” PMAC says.
The IIAC also has its share of worries, apart from the prospect of a best interests standard. For instance, it is also concerned about the omission of an existing provision in Ontario securities law, which exempts banks from the dealer registration requirements. Although the proposals indicate that banks could use other registration exemptions, the IIAC says in its submission that it “does not find this proposed solution acceptable.”
It warns that this could lead to a costly reorganization of the banks’ operational structures, and could harm market liquidity. “Such a change we believe would be detrimental to the Canadian capital markets given the extent of securities trading activities conducted by Canadian banks that rely on the exemption. One of the primary activities impacted would include the liquidity of the corporate debt market in Canada,” it says, adding that it is particularly worried about the impact this approach could have on investor access to corporate debt products dealt by the banks, such as deposit notes and money market instruments.
The IIAC also has “serious concerns” with provisions that shift the burden of proof to defendants under certain elements of the proposals. It worries that this shift could “[unleash] frivolous claims and litigation, and may have a chilling effect on, for example, the willingness of experts to give fairness opinions. The decision to take such an unprecedented step in shifting the burden of proof is contrary to the underlying principle of the drafting exercise in connection with the harmonized legislation.”
The trade group says that it is also keen to review aspects of the proposals that have yet to be published, including measures dealing with prospectus exemptions, fees and the interface mechanism. And it suggests that a further comment period will be necessary, once the full set of proposals is available.
Despite all of these concerns, PMAC says that the effort to create the new regime will be worth it: “While we acknowledge that the co-operative nature of the new regulator poses some significant challenges and obstacles, we believe that these can be overcome so that the end result is a regulatory organization with true national character.”