2008 year in review, part 2 of 8.

In a year that was dominated by an unprecedented financial crisis, there was relatively little regulatory action in direct response to the market meltdown. Instead, securities regulators continued to plug away at a variety of long-running policy projects, many of which focus on providing better protection for retail investors.

That’s not to say that regulators completely ignored the credit crunch, and the resulting fallout. Indeed, at the height of the crisis, they followed the Securities and Exchange Commission in the U.S. and other regulators around the world in adopting a temporary ban on short sales in selected financial stocks.

They also examined the uniquely-Canadian aspect of the crisis — the failure of the market for non-bank asset-backed commercial paper. That initiative resulted in a proposal for the provincial securities commissions to take jurisdiction over credit rating agencies, and a plan for possible reforms in the exempt market (the comment period on these ideas is to close in February). And it led to additional guidance on issues surrounding suitability from the self-regulatory organizations.

Apart from the headline-dominating financial crisis, probably the most significant development in the Canadian regulatory world in 2008 was not a policy initiative, but an organizational change. The long-awaited merger of the Investment Dealers Association of Canada and Market Regulation Services Inc. was finally consummated, creating the Investment Industry Regulatory Organization of Canada, which took flight at the start of June.

The new IIROC was seemingly launched without incident, but it has hardly been given an easy ride in its first six months of operation. It has dealt with the fallout from the financial crisis (including the ABCP market collapse, the emergency short sale ban, and a firm failure),major change in the trading arena (with the merger of the TSX Group Inc. and the Bourse de Montreal Inc. and the introduction of multiple competitive marketplaces) and a series of ongoing initiatives targeted at the retail investor.

In the spring, the IIROC proposed new client complaint handling rules that set standards and establish deadlines for firms in responding to client complaints. It also proposed a rule that would implement the core principles of the so-called client relationship model — an initiative that aims to improve transparency in the client-advisor relationship, including clearly setting out the terms of these engagements, detailing account costs, disclosing possible conflicts of interest and improving account performance reporting (similar rules were also proposed by the Mutual Fund Dealers Association of Canada).

Both of these initiatives have been sent to the securities commissions for approval, and released for public comment. They are awaiting further action.

On top of that, the IIROC is also attempting to open the can of worms that is financial planning regulation. It has proposed a rule that would set minimum proficiency standards for reps that provide financial planning, and impose minimum supervisory standards on firms for their reps’ planning activities. This has also been sent to the commissions for approval, and published for comment, sparking a predictable outcry from certain factions of the planning industry that have long-resisted any regulatory interference in their businesses. This effort is also still pending.

The resistance to the imposition of standards on financial planning last year was only rivaled by the opposition voiced in response to another long-running regulatory project — the adoption of common point-of-sale disclosure rules for mutual funds and segregated funds. The biggest issue for the industry has been the proposed rules’ delivery requirements — with firms seeking latitude to provide access to disclosure rather than strict requirements that they ensure pre-trade delivery of the new, simplified disclosure document. The comment period on the latest version of this contentious rule closes Dec. 23.

The other notable point of controversy during the year was a proposed change in the terms of reference guiding the industry’s dispute resolution service, the Ombudsman for Banking Services and Investments. OBSI ultimately went ahead with the planned reform that gives it the ability to flag possible systemic issues uncovered in the course of its work. However, the changes were watered down in response to industry comments.

These various, ongoing reforms aimed at retail investors all come against the background of the regulators’ major registration reform project. That initiative, which would streamline and harmonize the various registration categories that exist across the country, change the form and basis of registration, as well as impose new obligations on certain firms (most notably fund managers), also continued to work its way through the regulatory pipeline in 2008.

@page_break@However, one of the components missing from the registration reform proposals — a resolution to the issue of whether reps should be allowed to funnel their commissions through personal corporations — has been left out of this project, and foisted upon the MFDA. It will have until May 31, 2009 to develop proposals to deal with that issue (and in provinces that still allow personal corporations, reps currently have until March 31, 2010 to continue with this structure).

In the meantime, the rest of the registration reform initiative is expected to go ahead some time in 2009. Initially targeted for implementation at the end of 2007, the regulators now say they won’t have a timetable for the new regime until the spring of 2009 for this sweeping change to take effect. The delay appears to a result of the legislative schedules of the various provinces, which must also make changes to their securities laws for the registration reform to be complete.