Proposed securities legislation and draft rules to create a new, semi-national regulator aren’t just a step toward a new regulatory structure. In fact, they also lay the groundwork for everything from the introduction of fiduciary duty for financial advice to allowing financial advisors to use personal corporations.
In late August, the governments participating in the effort to create a new co-operative capital markets regulator (CCMR) released a revised version of their proposed joint provincial securities law. The draft legislation, first published for comment last autumn, is expected to be adopted by all of the provinces that join the CCMR, giving them a common underlying securities law. This latest edition of the proposed law is out for comment until Dec. 23, along with a draft set of common securities rules that are being published for the first time.
Taken together, the revised proposals are intended to create a novel regulatory framework for Canada that, its supporters believe, will be more efficient and effective than the current, purely provincial system. However, comments on the initial set of proposals released last year raised a series of significant concerns with the entire enterprise.
At this point, it’s too soon to say whether those concerns have been addressed fully. Given the huge volume of information that the proposals and comments cover, the number of moving parts and the uncertainty that remains in several areas, many in the investment industry haven’t had time to analyze the latest version of the proposals.
The Investment Industry Association of Canada (IIAC) reports that it has done a “preliminary review” of the proposals and is “generally pleased” with the draft law and rules. The IIAC comment notes that the existing national rules are largely being preserved and that any proposed changes generally aim to achieve greater harmonization in order to establish a single set of rules.
That said, the IIAC comment also notes the association will be conducting a more detailed review of the proposals. The IIAC has established an industry steering committee to provide comments on the draft legislation and will be setting up working groups to address major components of the proposed rules, focusing on topics such as prospectus requirements, registration, derivatives rules and civil liability.
In the meantime, the latest proposals reveal that policy-makers have dismissed some of the initial concerns with their first set of proposals; however, they also acknowledge certain other issues and are incorporating changes as a result.
For example, several comments expressed concerns about the basic approach that the CCMR model takes. It would introduce a so-called “platform” structure, in which the fundamental aspects of securities regulation are contained in the law, but most of the detailed requirements reside in the accompanying regulations.
Although some comments on the initial proposals questioned whether this is the right way to go, policy-makers remain committed to the idea, maintaining that it will provide the CCMR with greater flexibility, given that changing rules is easier than reforming legislation.
However, in certain other areas, the CCMR-participating provinces are proposing changes to their initial draft. Some of these changes would have particular impact for the retail advisory business. For example, the revised draft would give the new regulator the authority to make rules authorizing advisors to utilize personal corporations.
Investment dealer representatives have long sought approval from the regulators that would allow advisors to establish personal corporations, primarily so they can flow their revenue through the corporation and benefit from being taxed at corporate rates rather than at personal rates. Yet, regulators have been reluctant to allow this structure amid concerns it could make it harder to hold reps liable for regulatory violations if a corporation is allowed to sit between the dealer and the rep.
Nevertheless, the revised proposals would enable the CCMR to allow reps to adopt these structures; it also would give regulators the authority to set rules governing the use of personal corporations.
At the same time, the provision requiring reps to deal “fairly, honestly and in good faith” with their clients has been broadened to require that they meet other conduct standards that may be adopted. This change would enable the CCMR to introduce a fiduciary duty, or a “best interests” standard, for financial advice. This is an idea that existing regulators have been studying for several years now and has long been sought by investor advocates.
To be clear, the revised proposals don’t mean that reps will be able to use personal corporations or that fiduciary duty necessarily will be introduced along with the CCMR. Rather, the proposals would give the new regulator the authority to adopt these measures.
The participating governments also have made some changes to the provisions designed to provide protection for whistleblowers under the proposed law. The anti-reprisal measures contained in the law now would extend to employees who report misconduct to their employers, as well as to regulators or law enforcement; and whistleblowers would be allowed to report violations to a self-regulatory organization (SRO) and to report potential violations of SRO rules.
In addition, policy-makers have added a new evidence-gathering power to the draft law, which would allow investigators to seek a court order requiring the preservation of information that could be helpful to an investigation.
Policy-makers report they still are considering whether to include a provision in the law that would establish an investor advisory panel as a statutory requirement. This issue will be referred to the new regulator’s board so it can have input on the design of this mechanism. If an investor advisory group is to be enshrined in the legislation, then this may be added before the law is finalized.
Before that call can be made, however, the new regulator’s board must be created – and that is just one of many items of unfinished business before the CCMR will be ready to launch. (See sidebar at left.)
Still much missing for the CCMR
Although the release of revised legislation and the proposed rules for the new co-operative capital markets regulator (CCMR) is a step in the right direction for the new regime, there’s still much that’s missing.
For one thing, proposed rules for the exempt market under the new regime are not included. Policy-makers plan to publish a set of prospectus exemptions in the coming months that will include: exemptions that are already harmonized, such as the “accredited investor” exemption; exemptions that are expected to be harmonized soon, including an offering memorandum exemption; and two new crowdfunding exemptions (one modelled on the exemption adopted in several provinces earlier this year; the other based on an exemption that Ontario is expected to introduce later this year).
Another critical component of the CCMR project – a mechanism for the CCMR to interact with the provinces that aren’t participating in the joint regulator – has yet to be proposed. Policy-makers say they expect to agree on an interface with the other provinces and that CCMR rules will be amended to reflect that agreement.
The proposed rules also do not include a mechanism for setting the fees to fund the CCMR, nor do they include a revised edition of the required federal legislation or accompanying federal rules.
Despite this unfinished business, policy-makers still aim to have the necessary legislation passed by June 30, 2016, and to launch the new regulator in the autumn of that year.
© 2015 Investment Executive. All rights reserved.