Amid division across the Canadian securities regulators, the Ontario Securities Commission appears determined to move forward with a best interest standard. In a recent emailed statement, Vice-Chair of the Ontario Securities Commission, Grant Vingoe, outlined the OSC’s position that they are “prepared to demonstrate leadership” in this area, and remain supportive of a best-interest standard, in spite of opposition from provincial regulators across the country.
This would have far-reaching implications for financial advisory firms, many of whom are headquartered in Ontario, and could potentially cause confusion and legal and regulatory uncertainty among both investors and advisers. In addition, financial advisory firms could face practical challenges in trying to adapt their practices to what may ultimately be varying provincial standards. In spite of these concerns, according to Vingoe, the OSC’s position is about “doing the right thing – and fulfilling one of our greatest responsibilities as a regulator: delivering effective investor protection to the public we serve”.
CSA Staff Notice 33-319
On May 11, 2017, the Canadian Securities Administrators (the “CSA”) released Staff Notice 33-319, which is a status report on an earlier CSA Consultation Paper (which we have previously written on) regarding the “best interest standard” and “targeted reform” proposals to enhance the obligations of advisers, dealers and representatives toward their clients. The purpose of the Staff Notice was to provide a high-level summary of the consultation process to date, and to identify key themes that have emerged.
In Staff Notice 33-319, the CSA has indicated that the majority of provinces have decided to abandon a “best interest standard”, with only Ontario and New Brunswick carrying on further consultation in that area. Over the 2017 – 2018 fiscal year, the CSA will prioritize work on targeted reforms which will ultimately culminate in rule proposals that will be published for comment.
Targeted reforms full steam ahead
The CSA has indicated that it intends to proceed with a refined set of targeted reforms, however, it will reconsider certain proposed targeted reforms (such as: (i) the mandatory collection of basic tax information, (ii) the element of the know your product proposal that would require market investigation of a reasonable universe of products, and the differentiation of know your product requirements based on whether a firm is proprietary or mixed/non-proprietary in terms of its product offerings, (iii) possibly adding an element of reasonableness or other modification to the requirement for representatives to understand and consider the structure, product strategy, features, costs and risks of each security on their firm’s product list, and (iv) the default requirement to perform a suitability assessment at least once every 12 months absent a triggering event, and the requirement to perform a suitability assessment if there is a significant market event affecting capital markets to which the client is exposed).
The CSA has indicated that it will also reconsider certain wording expressed in some of the proposed targeted reforms in light of comments received. Ultimately, the CSA hopes to address concerns about a “one-size-fits-all” approach by incorporating scalability into the reforms, where appropriate. The CSA has indicated that it will give higher priority to certain reforms in their next phase of work, including conflicts of interest, suitability, know your client, know your product, relationship disclosure, and titles and designations.
The CSA remains firmly committed to developing targeted forms which will raise the bar and strengthen the standard of conduct amongst advisers, dealers and representatives toward their clients. Only Ontario and New Brunswick expressed continued support for a regulatory best interest standard, with British Columbia, Alberta, Manitoba and Quebec expressing strong concerns about the benefits of such a standard over targeted reforms.
As stated above, Ontario and New Brunswick will work to carry out further consultation with stakeholders, and the remaining provinces, including British Columbia, Alberta, Manitoba and Quebec, will either no longer consider it at all, or, in the case of Nova Scotia and Saskatchewan, wait and see pending the results of Ontario and New Brunswick’s work in this area.
The situation across the border
Across the border, the US Fiduciary Conflict of Interest Rule introduced by the US Department of Labour in April 2016 (which we have previously written on) has an applicability date of June 9, 2017, with full implementation set for January 2018. In advance of that, on June 1, 2017, the US Securities Exchange and Commission Chair, Jay Clayton, issued a public statement stating the SEC’s intention to work constructively with the US Department of Labour as the SEC moves forward with its own examination of the standards of conduct applicable to investment advisers and broker-dealers.
As noted by Clayton, the range of potential action previously suggested to the Commission is broad, from maintaining the existing regulatory structure, to enhanced disclosures, to the development of a best interest standard. Given market developments and the pending applicability of the US Department of Labour Rule, Clayton stated that an updated assessment of the currently regulatory framework would be important to the SEC’s ability to evaluate the range of potential regulatory actions. To facilitate that assessment, Clayton established web and email channels for public commentary in advance of any SEC action.
As we have previously written, certain business groups like the US Chamber of Commerce have challenged the introduction of the US Fiduciary Conflict of Interest Rule, asserting that the US Department of Labour has overstepped into matters more appropriately under the purview of the SEC.
Implications and the path ahead
The regulatory landscape on both sides of the border continues to evolve. Different perspectives amongst the CSA members, as well as political influences in the United States, add layers of uncertainty about regulators’ expectations, and demand that market participants, their officers and their boards of directors, pay close attention to developments. Please check back on this blog for updates.