The securities industry appears to have accepted defeat in the battle against the client relationship model (CRM), yet the war over the prospect of further regulatory reforms still is far from over.

Since the Canadian Securities Administrators (CSA) finalized its revised CRM rules (known as CRM 2) last year, and the Investment Industry Regulatory Organization of Canada (IIROC) proposed its own version of those requirements last December, the industry reaction to these new regulatory requirements – which include enhanced investment-cost disclosure and performance reporting – seemingly has shifted from opposition to acceptance. The industry has moved from seeking clemency from the regulators to demanding clarity from them

Indeed, although IIROC provided an unusually long, 120-day comment period for its proposals on the elements of the CRM 2 rules that are slated to take effect in 2015 and 2016, the industry mustered just two submissions by the end of the comment period on April 10. (There were a couple of other industry submissions during the 60-day comment period that apply to requirements that take effect later this year.) In general, the industry seems to be turning its attention to the chore of implementing the CRM 2 reforms rather than resisting them.

As a result, what was once a philosophical debate now has become an operational challenge, as firms accept the CRM 2 requirements as a reality and look to implement them as efficiently as possible.

The Investment Industry Association of Canada (IIAC) is leading the way with a series of committees that it has launched to grapple with the array of details that need to be sorted out in order for investment dealers to comply with the CRM 2 requirements.

The overriding implementation issue remains the question of whether the CSA will exempt IIROC dealers from needing to comply with both versions of these requirement, the provincial commissions’ version and IIROC’s version. All along, firms have been expecting that will be the case, but they have yet to receive a guarantee – without which, the IIAC warns, firms will be reluctant to expend the time and money required to implement the systems and processes needed to support the new disclosure obligations for fear that the investment could be wasted.

The IIAC’s comment letter to IIROC in February included a plea to the regulators for greater certainty, and the association reiterates this concern in its most recent submission. In this latest letter, the IIAC asked for both a meeting with the CSA and IIROC in early May to confirm that dealers will have to comply with only one set of CRM 2 rules and that the CSA expedite the rule-approval process.

So far, though, these pleas have gone unheeded. The CSA has said that it will exempt SRO dealers from its rules if the SRO rules are “materially equivalent.” But the CSA has yet to give the industry the certainty that it seeks.

Although CRM 2 has evolved into largely an operational concern for the industry, the war over regulatory reform in the retail investment business looks likely to rage on. Investor advocates are keeping up the pressure for reforms that go beyond the disclosure enhancements promised by CRM 2. For example, the comment on IIROC’s CRM 2 proposals from the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) suggests that, while FAIR Canada supports the objectives of the CRM 2 rules, the new disclosure requirements won’t do anything to solve what the investor advocate sees as the real issues plaguing retail investors.

FAIR Canada’s comment has some specific questions regarding the details of IIROC’s proposed CRM 2 rules – including their application to discount brokerage accounts – and also questions some of the guidance that has been issued by the CSA regarding implementation by exempt-market dealers.

However, FAIR Canada’s overriding position is that CRM 2 in itself isn’t enough to ensure adequate investor protection: “The CRM 2 proposals do not address the serious conflicts of interest that impede the development of a healthy, competitive marketplace.

The CRM 2 proposals also do not impose a high enough standard to fit the relationship that consumers expect (the full trust and reliance consumers place in and on their advisors) and that the industry professes in much of its marketing and advertising materials. Disclosure in and of itself will not address the serious, systemic issues that have been identified.”

FAIR Canada’s comment insists that, notwithstanding any investor-protection benefits that may be gained through the implementation of CRM 2, more intrusive measures are needed – such as banning embedded commissions and requiring advisors to act in their clients’ best interest – and that these measures are required sooner rather than later.

Says the FAIR Canada comment: “Waiting for the CRM 2 proposals to be implemented and further waiting to monitor and assess the effects of the CRM 2 proposals before moving on with other needed reforms would be unjustified and will pose real costs on Canadian consumers.”

Despite this, members of the industry maintain that CRM 2 will be enough to adequately enhance investor protection. Moreover, the industry collectively argues that the effort required to implement the CRM 2 requirements is vast, and that introducing additional reforms on top of the CRM 2 changes would be unfair.

Although immediate action appears unlikely, the CSA still is considering further reforms as part of its consultations on mutual fund fee structures and standards of conduct for advisors that were launched in late 2012. However, the CSA’s position is that it needs additional research to decide whether any additional intervention is necessary.

To that end, the regulators are in the midst of commissioning some independent research into how advisor-compensation structures influence mutual fund sales and investors’ portfolio performance in order to help the regulators decide whether to do away with or limit trailer commissions for advisors.

There’s no similar research underway specifically on the issue of statutory fiduciary duty. However, a report on the results of a mystery-shopping exercise commissioned by the Ontario Securities Commission, along with IIROC and the Mutual Fund Dealers Association of Canada, that was designed to assess the suitability of advice currently being provided to investors is expected to be published this year. That report should help to illuminate the question of whether higher standards of conduct are required.

The securities industry may have lost the battle over CRM 2, but there’s still a war to be fought over more drastic reforms.

Several key deadlines for CRM 2 loom

> CSA CRM 2 RULES FINALIZED, March 31, 2013

> IIROC CRM 2 RULES PROPOSED, (not yet final) Dec. 10, 2013




Sources: Canadian Securities Administrators; Investment Industry Regulatory Organization of Canada

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