priority / Nuthawut Somsuk

This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Ordinarily, the Ontario Securities Commission’s (OSC) annual regulatory agenda-setting is a benign exercise establishing the regulator’s long to-do list. This year, however, the scant attention to retail investors, proprietary products and a recent audit is drawing criticism.

“Absent from the statement of priorities are success measures or data-gathering related to one of the most significant regulatory initiatives of the last decade: the ongoing implementation and impact on investors of the client-focused reforms [CFRs],” noted the OSC’s Investor Advisory Panel (IAP) in its submission to the consultation.

“In particular, we would be interested in understanding whether the OSC is aware of any negative consequences of the CFRs, particularly when dealers limit their offerings to their proprietary products only, potentially reducing market confidence and choice for investors.”

Last year, at the behest of the provincial government, the OSC carried out a review of potentially “anti-competitive” industry practices, including bank dealers curbing shelf space for independent investment products in response to the CFRs. However, the results of that review haven’t been made public, and the lack of a reference to it — or any followup on the results of the CFRs — is raising red flags.

The Canadian Advocacy Council of CFA Societies Canada’s (CAC) submission called for “further direction and transparency” on the status of the regulator’s review, along with a look at whether the CFRs are actually improving investor outcomes.

At the same time, the CAC indicated that it’s “disappointed at the lack of new, specific investor protection initiatives” in the OSC’s agenda for the coming year, along with “the seeming lack of progress” on existing initiatives, such as the regulator’s long-standing promise to beef up the dispute-resolution service.

The slow progress of rulemaking, particularly concerning policies that aim to protect investors, isn’t just a perennial complaint of investor advocates; it was addressed in the auditor general’s (AG) “value for money” audit of the OSC released in December 2021.

That review found that “projects that involved investor protection took on average 3.9 years to complete compared with two years for projects that did not include an investor protection component.”

The audit also noted that some of the investor protection reforms adopted by the OSC are less stringent than in other countries, and recommended the regulator “guard against perceptions that its rule-making is influenced by industry interests or swayed by political interference.”

Submissions from investor advocates complained that the OSC’s draft priorities make no mention of the AG’s recommendations and don’t set targets that can be used to measure performance.

By failing to mention the auditor’s report in its statement of priorities, the OSC missed an opportunity to tell stakeholders how it plans to implement the report’s recommendations, FAIR Canada’s submission stated.

Harvey Naglie, formerly a policy advisor to the Ontario government and member of the IAP (now a director on FAIR Canada’s board), echoed that concern. He noted in his submission that the audit pointed to numerous areas for improvements, but that the draft priorities are “silent on virtually all of them.”

The statement of priorities “ignored the AG’s recommendations to improve and accelerate the rule-making process, to request additional powers to better protect investors and to pay out more from the fines and penalties it collects to harmed investors,” Naglie stated. Instead, the priorities focused on initiatives designed to bolster competition and capital formation, and to reduce compliance costs.

While the OSC’s list of priorities is long, the IAP noted that only a handful target retail investors. The lack of focus on investor protection comes as “investors are particularly vulnerable in the face of rapid development of new products and delivery mechanisms, rising interest rates and higher inflation,” the IAP’s submission stated.

Certain industry players also are concerned about the regulator’s plans. For example, the “total cost reporting” project — a joint initiative of securities and insurance regulators planned for the spring that aims to improve the amount of information investors get about the costs of investing in segregated funds and investment funds — has raised concerns that regulators are rushing ahead on an ambitious effort that will prove costly to implement.

Meanwhile, others are worried that regulators are going too slow on issues such as climate disclosure.

The University Pension Plan Ontario’s submission stated that delaying action on climate disclosure “will hamper fair and efficient capital allocation, weaken investor confidence in Ontario and Canadian capital markets, and exacerbate the systemic risk that climate change poses to the financial system.”

While some investor advocates were concerned about too much focus on fostering industry innovation, other submissions stated the opposite.

For example, Fidelity Investments Canada ULC said the access-based disclosure delivery model that regulators are developing for certain filings should be extended to other disclosures, and that efforts to reduce what it views as needless disclosure (such as scrapping interim fund performance reports) should be accelerated.

Canada Life called on the OSC to address the disparity between fund dealer reps and investment dealer reps regarding the ability to flow commissions through to corporations now that the self-regulatory organizations are a single authority.

Wealthsimple Inc. argued that the OSC should be rethinking its prohibition of online dealers from providing “recommendations” to their clients while allowing unregistered firms and individuals to provide investors with resources and tools that would be considered recommendations if they originated at an online dealer.

“Regulators must embrace a role for [order execution only] dealers to provide helpful tools to clients without adding a suitability requirement,” Wealthsimple’s submission stated.

Investor advocates also are worried about the growing role of social media and the use of technology to drive investor behaviour.

“The rise in do-it-yourself trading platforms and the reliance on social media applications as a source of investment information are raising significant investor protection concerns,” FAIR Canada’s submission stated. “These include undisclosed promotional activity on social media and gamification techniques designed to encourage poor investment decisions.”

FAIR also noted that the British Columbia Securities Commission recently proposed new disclosure requirements that target this sort of activity, and suggested the OSC do the same.