SECURITIES LAWYER LAURA PAGLIA recently published a report on the interpretation and application of standards of conduct for registrants in foreign jurisdictions. It challenges the Canadian Securities Administrators’ (CSA) assertion that the standards in these jurisdictions are “higher” than in Canada and therefore give greater protection to investors.

While “greater protection,” like apple pie and parks, undoubtedly is desirable, each in excess can result in both negative consequences and significant costs. The CSA’s suggestion that the industry should bear the additional costs of increasing investor protection and not pass them on to investors leaves only one viable alternative: restrict the availability of services to only those investors who can be serviced in a cost-effective (or, if you prefer, profit-effective) way.

Putting aside any debate as to whether the CSA’s or Paglia’s analysis is correct or more correct, there can be no question that recent regulatory developments will enhance the ability of investors to protect their own interests. The second phase of the client relationship model (CRM2) will ensure that investors who take a reasonable level of responsibility for their own financial well-being will be well informed about the nature of the services and responsibilities that registrants owe to those investors, as well as the costs and performance of their investments.

Despite these changes, the adoption of a statutory “best interests” or “fiduciary” standard is said by the CSA and others to be needed, in part, to address the asymmetry of knowledge between investors and registrants.

But this asymmetry is common in other industries as well. With the increasing complexity of everyday life, many products and services are purchased by consumers who have varying, often limited levels of knowledge of what they are getting or are supposed to be getting.

In response, with regard to many other products and services, governments, regulators, trade and professional associations have taken effective steps, including mandating disclosure, which are intended to ensure that consumers have the basic knowledge needed to understand what services and products they are to receive so that they can decide whether they are getting “value.” Is this not the purpose of the Fund Facts point-of-sale initiative and the client relationship model?

A fiduciary is required to act in the interests of another party in preference to the fiduciary’s own interests. Traditionally, a fiduciary duty has arisen in situations in which an individual is totally (or almost totally) reliant on another to protect their interests and arises either: out of contract (e.g., a declaration of trust); a statute, under which the very nature of the role assumed is based on assuming the responsibility and authority to act in the best interest of another party (e.g., a trust company); or the specific facts that establish a fiduciary relationship.

The obligations of a fiduciary to another person or entity are the most demanding of all legal relationships, as it should be where a party is unable to protect his or her own interests or the fiduciary, by the very nature of the services provided, has accepted responsibility for the welfare of another.

The initiatives of the CSA noted above can only be seen as enabling the majority of investors, perhaps the vast majority, to protect their own interests. If this is correct, should not sufficient time be given to assess the effectiveness of these initiatives and make any needed tweaks prior to adopting a statutory best interests or fiduciary standard given the concerns and issues raised by Paglia?

If all relationships between registrants and their clients are to become fiduciary relationships, one must wonder what unintended consequences may arise. The CSA and others have called for a greater level of financial literacy for many years. If all registrants are to be fiduciaries, arguably an individual’s decision to spend time and resources to become knowledgeable serves no useful purpose – as one can abandon any notion of responsibility for one’s own financial well-being to his or her registrant cum fiduciary.

In addition, the current obligation to “deal fairly, honestly and in good faith with clients” is sufficiently broad to permit effective enforcement if a registrant puts its own interests ahead of those of a client. An additional best interests or fiduciary standard is not necessary.

In describing a recent case involving an exempt market dealer (EMD), whose clients are expected to be better able to protect their own interests than retail investors, Ontario Securities Commission staff concluded in Notice 33-742 that where “the interests of the EMD and its related or connected issuers take precedence over those of investors… the EMD is not dealing fairly, honestly and in good faith with its clients as required by Section 2.1 of OSC Rule 31-505.”

With this statement in mind, it is difficult to conclude that a statutory best interests or fiduciary standard is needed to establish a punishable breach of securities laws where a registrant puts its interests ahead of a client’s.

Richard Austin is a lawyer in Toronto who specializes in compliance issues. He can be contacted at

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