What’s new with the CAC?

Like everyone else, spring and early summer 2020 were spent adjusting to the realities of the working-from-home life. While babies cried and dogs barked during our back-to-back Zoom calls, we counted ourselves lucky to be safe, healthy, and continuing to strive as we built upon our mission of advancing market integrity, transparency, and investor protection.

On the advocacy front, the CAC continued to hold insightful discussions regarding four outstanding regulatory consultations, and pursued a series of proactive advocacy initiatives. These involved meetings with the Canadian Securities Administrators (CSA) on the most recent version of Proposed NI 52-112 (the non-GAAP consultation), the upcoming Client Focused Reforms, and providing input on a submission to Ontario’s Capital Markets Modernization Taskforce.

Published comment letters

CAC Responds to OSC Statement of Priorities

On May 29, 2020, the CAC filed a letter to the OSC in response to OSC Notice 11-788—Statement of Priorities, outlining commentary on the most pressing issues for Canadian market integrity and investor protection.

The CAC supports risk and principles-based targeted regulation and legislation. Furthermore, OSC staff should aid the reduction of regulatory burden faced by smaller registrants by making it easier to share common compliance infrastructure and best practices. In addition to burden reduction, proposed rules and guidance that are unequal in their benefits to their costs of development and implementation should be further critiqued. Like many global counterparts, the OSC should consider further development and transparent publication of its service standards for registrants and issuers in matters such as exemption applications and prospectus receipt processes. We reiterate prior comments that we support any concrete measures that can be taken by the OSC to further strengthen the OBSI’s (Ombudsman for Banking Services and Investment) decision making authority. Finally, we are of the view that the OSC should continue an examination of the conflicts of embedded compensation as part of its continued work asthe client-focused reforms are phased in.

Read the full comment letter responding to OSC Notice 11-788 here.

Following the submission of our letter, the OSC published its version of their final priorities on June 25, 2020. Per the release, the feedback received was generally supportive of the OSC’s leadership and proposed direction, and with the OSC’s continued focus on investor protection and commitment to work with the Ontario government on modernizing Ontario’s capital markets. Specific comments highlighted in the release included discussion on the OSC’s ongoing work on embedded commissions, regulatory burden reduction, service standards, advisor titles and proficiency standards, and initiatives to improve investor protection.

CAC Responds to CSA Notice and Request for Comment—Proposed National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions

On June 23, 2020, the CAC filed a letter in response to this Notice and Request for Comment to the CSA outlining commentary and support on the proposed National Instrument and related guidance attempt to harmonize the framework for securities crowdfunding by start-ups and early stage issuers. The CAC is supportive of measures taken to assist small and emerging companies to finance growing operations while emphasizing investor protection. We also agree with steps to harmonize registration and exemptions across different regions for ease of use by issuers and investors. The letter highlighted views on the importance of imposing corresponding due diligence to protect investors from fraud or other unfair or improper practices, and additional disclosure obligations. These additional disclosure obligations included adding obligations for funding portals and clarifying disclosure requirements to investors by issuers.

Read the full comment letter responding to CSA Proposed NI 45-110 here.

CAC Responds to OSC Notice and Request for Comment—Proposed OSC Rule and Companion Policy 81-502 Restrictions on the Use of the Deferred Sales Charge Option for Mutual Funds

On June 30, 2020, the CAC filed a letter in response to the OSC’s proposed rule restricting the ability of dealers to sell mutual fund securities with a Deferred Sales Charge (“DSC”) option, to be enacted alongside the ban on the DSC option in all other jurisdictions in Canada.

The CAC views the current system of financial incentives associated with DSC products as driving sub-optimal behaviour and inherently containing irresolvable conflicts. The financial industry and investors would benefit from a structure of economic incentives that promotes transparent, simple fee structures, full attribution of all costs to the end investor related to their financial advice, and a structure that promotes competition in the distribution of investment fund products to investors on the basis of product quality and value-for-advice rather than compensation to advisors. However, barring the ability to ban DSCs in Ontario, we support the Proposed Rule and believe the suggested restrictions are steps in a positive direction for investors and the industry.

We highlighted the need to review substantively similar compensation arrangements in products similar to securities-regulated products regulated via other channels, and raised concerns that there may be a possibility that investors exceed the contemplated cap if they open more than one account at a dealer. To the extent the dealer has the relevant information to control and monitor this cap, the cap should be per investor and not per account.

Under the new client focused reforms, registrants will be obligated to consider alternative recommendations available to the registered individuals through the registered firm when providing advice. For larger firms, we expect that many dealers will be required to make investors aware of alternative products that may be less costly, suggesting that the DSC business model may be likely to be phased out over time. Where sales continue under the DSC option, investors must be informed and educated as to the conflicts inherent in these embedded fees, and the impact of these fees
on their investment performance.

Update on reducing regulatory burden, 2020 and beyond

In November 2019, the Ontario Securities Commission (OSC) published its decisions and recommendations in the Reducing Regulatory Burden in Ontario’s Capital Markets report. The report, undertaken with the Ministry of Finance, was created utilizing numerous market participant and investor consultations with the objective of reducing regulatory burden in capital markets. The report detailed 107 initiatives that the OSC would aim to complete through 2021.