compliance puzzle

This article appears in the Mid-November 2020 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

For the investment industry, one of the few positives to come out of Covid-19 may be increased compliance flexibility.

The regulators’ response to the pandemic features relief measures designed to facilitate the sudden shift to remote working. Most measures are intended to be temporary, but some changes may stick around.

For example, while in-person audits, compliance exams and enforcement hearings are likely to resume, other measures — such as allowing greater use of e-signatures and more flexible oversight arrangements — may remain long after the pandemic is finally subdued.

The industry’s efforts to adapt to the pandemic reveal “many new, more efficient and effective ways of doing business,” noted Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), in the organization’s annual report released in September.

Kriegler stated that abandoning these innovations would “condemn us to years more of inefficient, duplicative and overly burdensome practice.”

Efforts to reduce the regulatory burden were already in motion well before the industry was forced to operate via remote-working arrangements.

According to Investment Executive’s past Report Cards, the top priority for many in the industry was slimming down the regulatory burden through structural reform. Regulators appear to share that ambition.

Despite the pandemic disrupting and delaying a host of policy initiatives, the Canadian Securities Administrators (CSA) still launched its review of the self-regulatory framework in the summer.

Furthermore, as part of an effort to root out needless regulatory burdens, the Ontario Securities Commission (OSC) published a report last year that details 107 reform recommendations, including 30 initiatives that target problems facing the dealers and fund managers the OSC oversees.

Those initiatives include streamlining registration requirements, speeding up compliance reviews and eliminating duplicate requirements.

So far, the OSC reports that it has completed 21 of those 30 projects, while six are on track and three others should be finalized by next spring.

Regulators are embracing new approaches to chief compliance officer (CCO) arrangements that aim to give firms more latitude in designing their supervisory structures.

In July, the CSA published a proposal that would permit firms to share CCOs; broaden the experience requirements to allow for more specialized CCOs in certain niches (such as fintech); and enable large firms to use multiple CCOs for various business lines.

How well these measures will work in the real world remains to be seen. Feedback from the industry reveals that the added flexibility is welcome, but practical considerations may limit adoption.

For example, concerns about shared CCOs include ensuring that one person can handle the workload generated by serving more than one firm while also dealing with conflicts of interest and preserving confidentiality.

According to the Investment Industry Association of Canada (IIAC), most investment dealers question whether they could share a CCO with a rival firm.

The IIAC stated in a submission to the CSA that the approach could work among affiliated firms, and may work among exempt market dealers (EMDs) or portfolio managers.

However, small investment dealers don’t believe that sharing a CCO with a competitor is viable. The IIAC’s submission stated that dealers believe the position is “too crucial” and too demanding to enable a shared CCO for competing investment dealers.

For EMDs, the idea appears more feasible. The Private Capital Markets Association of Canada (PCMA) stated in its comment letter that it supports the concept of shared CCOs, noting that there is a shortage of qualified individuals. Enabling sharing may allow EMDs to attract better-quality CCOs than those dealers could on their own, the PCMA letter stated — thereby improving compliance and investor protection.

However, the PCMA letter added that having one person serving as both CCO and ultimate designated person of one firm as well as CCO of a rival firm could lead to “conflicts of interests and divided loyalties.”

For example, if both firms ran into compliance issues at the same time, the shared CCO might prioritize the firm where they have more extensive duties — at the expense of the secondary firm, the PCMA letter suggested. A firm could hold back certain information from the shared CCO due to competitive concerns.

Both the PCMA and the Association of Canadian Compliance Professionals suggested the CSA consider outsourcing to alleviate compliance costs for smaller firms without compromising investor protection.

The CSA’s initial approach didn’t include outsourcing, but as the industry adapts to today’s realities, the appetite for innovation is strong.