Can securities regulators be trusted to judge the adequacy of transparency when they fail to be transparent themselves?
One of the central articles of faith in Canadian securities regulation is that disclosure must form the foundation of interactions between the public (retail investors) and the investment industry. According to the regulators, all fundamental threats to investor protection can be managed through the wonders of “full, plain, and true disclosure.”
Yet, the regulators don’t practise what they preach. Take, for example, the Canadian Securities Administrators’ (CSA) forthcoming research into whether existing mutual fund fee structures influence sales and impact investor outcomes.
Last month, the CSA announced it had awarded two research contracts – one to a finance professor; the other to a market research firm – to carry out research that will help the CSA decide whether regulatory action is necessary to address investor-protection issues that arise in the current structure. The CSA is trying to decide whether disclosure of fund fees is good enough or if regulators need to intervene more directly. This has been a critical issue in the retail investment business for the past 20 years.
And yet, the regulators refuse to disclose anything about the research itself. When the CSA was asked by Investment Executive for insight into the data that will be collected from the industry and the methodology to be used, regulators refused to answer. This is troubling.
For one thing, cloaking a critical research project in secrecy risks throwing doubt on the outcome. Regardless of the results, it may be difficult to trust research conducted in secret. Although the research is likely to be released publicly once it’s complete, that’s not the same thing as disclosing its approach up front, before the project gets underway.
Second, when regulators resist transparency, that calls into question their ability to make a sound decision about a policy based on the adequacy of disclosure. If the CSA can’t be candid about research that’s going to inform critical policy, does it understand what genuine transparency is? Thus, can the CSA effectively require transparency from our industry?
© 2014 Investment Executive. All rights reserved.