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What’s new with the CAC?
Through the end of 2020 and into 2021, the CAC team examined internal feedback to determine how best to remain engaged and fulfill our mandate while continually improving the quality of our advocacy. While the CAC team remains engaged on many advocacy initiatives, the current health crisis, combined with seemingly endless Zoom meetings, has made the hours available for volunteering ever scarcer than before.
Having considered what appears to be the permanent nature of our work-from-home lives, in partnership with CFA Societies Canada, we’ve determined that our advocacy is best measured by the quality of the work (measured via impact) and less about the quantity of comment letters. Our team’s focus over the next several quarters will be exploring approaches to improve the operational aspects of our mandate, with the end goal of fostering effective advocacy efforts that will make our team, and the wider community of members, proud.
Published comment letters
CSA Consultation Paper 25-402 Consultation on the Self-Regulatory Organization Framework
The CAC agrees with many concerns raised by stakeholders in the CSA’s informal consultation process. We provided a statement on our first principles in consideration of this subject matter, including regulatory efficiency. We noted that the case has been soundly made for SRO (self-regulatory organization) consolidation, particularly if it serves as an opportunity to reflect on and define the public interest and other design principles moving forward. The confidence and trust of the public is critical to the effective functioning of our markets, and a credible and transparent SRO framework is essential. We supported the general premise of a merger between the existing SROs but noted additional analysis and evidence is required to support consolidation beyond the registration categories currently under SRO oversight.
The CAC questions more and more the appropriateness of product-based regulation, and advocates instead for a model where regulation is based on scope and quality of advice, and corresponding business models.
Investors are best served when they have confidence their needs are being served with generally consistent regulatory expectations, regardless of the product or service recommended, provided, or sold. Additionally, we cited concern with specific instances of regulatory inconsistency as we understand rules relating to borrowing funds to invest in securities may be interpreted and implemented differently under SRO and CSA rules. Consistent regulation would result in regulatory efficiencies, cost savings, and consistently fair treatment of clients, and would negate regulatory arbitrage opportunities.
We view the current market surveillance system as functioning well, and wholesale change could be disruptive without clear investor or public benefits.
FSRA Financial Professionals Title Protection Rule and Guidance
The CAC agrees with the sentiments of many commentators surrounding marketplace confusion on the use of titles and credentials by persons providing financial advice and financial planning services. The importance of the design and enforcement of rigorous uniform minimum standards for the use of both the FP (financial planner) and FA (financial advisor) titles in the context of a title protection framework cannot be overstated. We are concerned there is not enough guidance on examples of reasonably confusing titles to help industry identify those that would not be permissible, and to clarify the scope of application to titles for consumer and investor advocates. We agree with many of the stated FP and FA baseline competencies and have suggested amendments (i.e., that a client’s risk profile includes both the client’s risk tolerance and their risk capacity). With respect to disclosure, FP and FA title users should be required to disclose to their clients the recognized credential(s) they hold, and direct questions to a FSRA-operated website with an FAQ and a public registry of acceptable (and if applicable, exempted) credentials, the corresponding credentialing bodies, and individuals who hold one or more of these. FSRA should be responsible for any such educational initiatives to avoid potentially misleading, confusing, or inconsistent messaging if direct-to-consumer or direct-to-industry information were to be provided by the credentialing bodies themselves.
FCNB Proposed Repeal and Replacement of Local Rule 45-509 Community Economic Development Corporations and Cooperatives (CEDCs)
The CAC are supportive of measures to try to assist small and emerging companies with additional opportunities to finance their growing operations without compromising investor protection, and strongly support harmonizing Canada’s registration and prospectus exemptions across provincial jurisdictions for ease of use and common understanding by issuers and investors. We support the proposition that the same disclosure requirements for various offerings (such as syndicated mortgages or CEDCs) should be utilized and then modified as needed to reflect the unique nature of the offering. The CAC has some concerns about the potential lack of audited disclosure on the financial condition of the issuers utilizing these exemptions, and it is important that the annual financial statements provided to the Commission and to investors be audited.
FSRA Proposed Guidance on High-Risk Offerings issued under the Co-operative Corporations Act
The CAC supports FSRA’s objectives to promote high standards of business conduct for co-ops and to help investors make informed investment decisions. Given the breadth of the proposed definition of a “high-risk offering,” other persons who participate economically in a co-op and buy its products and services may benefit from enhanced disclosure found in the offering statement, we query why the proposed enhanced disclosures cannot be made a requirement for all co-op securities offerings. Given the high-risk nature of these securities, it would also be beneficial if prospective purchasers were required to sign a risk acknowledgement statement prior to purchase, like Form 45-106F4 Risk Acknowledgement. Going forward, it might be possible to form a working group involving other regulators to discuss some of these issues, and a harmonized approach to securities offerings where the legislative framework permits distributions of securities outside the scope of securities legislation and related regulatory requirements.
The CAC supports this progressive proficiency framework, focusing on minimum standards that are responsive to innovation, build professionalism, and ensure skills development while encouraging the delivery of high-quality and ethically centered investment advice. We agree with several of the stated knowledge and skills competencies for registered representatives (RRs) and investment representatives (IRs), and have made a few specific additional suggestions. In addition to regulatory, relationship, and technical skills, there are also personal skills applicable to all registration categories, including collaboration, communication, curiosity, and leadership, which also could be considered for part of IIROC’s relationship competency framework. In general, the knowledge competencies required for RRs and IRs for both KYC (know your customer) and KYP (know your product) obligations should align prospectively with those expected of dealers under the client-focused reforms, and additional updating of the profiles is necessary in these areas. Given the sweeping changes being made via the Client Focused Reforms with respect to conflicts of interest, additional consideration and expansion of this category is necessary. There should also be a technical skill requirement involving conflicts and ethics, including considerations for vulnerable clients, ethical decision making, conflict management, and critical evaluation. There should also be a specific knowledge requirement for familiarity with basic ESG terminology.
The CAC provided thorough commentary on the proposed exemption. While there is a departure from the usual burden placed on issuers to ensure that an exemption from the prospectus requirement is available, a statutory declaration could suffice for the time being. However, to the extent that a registrant is involved in the distribution, it is important that it be clearly stated that the statutory declaration does not evade the registrant’s KYC, KYP, or suitability obligations. Presumably, part of the dealer’s responsibility is to ensure the individual qualifies for the exemption under the stated criteria as part of their suitability obligations. Self-certification should not become a “check the box” exercise on the part of proposed investors, and dealers should bear some responsibility for ensuring the accuracy of the self-certification. We anticipate the proposed exemption would be used by start-ups and emerging businesses in Alberta and Saskatchewan to sell securities to investors including professional colleagues, friends and acquaintances of promoters, and officers/directors of the issuer who are unable (at least as yet) to purchase securities under an existing prospectus exemption. Many of these investors might be just shy of the requisite income or financial asset thresholds to qualify as accredited investors. We have some concerns with respect to interpreting the “not the public” prong of the private issuer exemption such that it would automatically include a vehicle that is predominantly owned by accredited investors, and concerns with potentially expanding the scope of this exemption in future.
The CAC supports standardized disclosure across issuers and with industry-specific information in schedules providing specific comments related to the proposed amendments. We urge the CSA to continue considering emphasis on clear and prominent fee and conflict disclosures up front on the face pages of the offering memorandum (OM) as an important investor protection mechanism, as well as imposing a plain language requirement for specific portions of the OM. We have concerns about issuers utilizing overly promotional marketing materials not consistent with the disclosure in the corresponding OM. Stricter rules on the composition of marketing materials are required to ensure they are balanced. To help fulfil the stated purpose of providing more certainty to issuers on the disclosure expectations, it would be helpful to follow the adoption of the proposed amendments with regulatory guidance identifying any issues to be corrected and avoided in a timely manner.
The CAC strongly supports several priorities set out in the draft statement with a view to meeting the OSC’s stated goals and strategic plans. An organizational goal of reducing regulatory burden while balancing the need to avoid any negative impact on investor protection is important and should continue to permeate and be considered in conjunction with any new regulatory initiatives. The CAC is deeply supportive of the new Key Priority 4.3 (to foster inclusion and diversity in the OSC community), including by promoting opportunities for learning and dialogue and specific steps to end systemic racism. We look forward to continuing to work with all relevant stakeholders as the recommendations from the Capital Markets Modernization Taskforce are finalized and the OSC’s priorities are correspondingly updated.
Have your say
If you would like to participate regarding these letters, provide comments to ongoing initiatives, or are interested in learning more either about volunteer opportunities in advocacy or as a part of the CAC, please contact cac@cfacanada.org.
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What is the Canadian Advocacy Council?
The Canadian Advocacy Council (CAC) is a volunteer advocacy council for CFA Societies Canada, representing the 12 Canadian CFA Institute Member Societies and, ultimately, Canadian CFA charterholders. The council includes investment professionals from across the country who review regulatory, legislative, and standard-setting developments affecting investors, investment professionals, and Canadian capital markets. The CAC strives to advance market integrity, transparency, and investor protection, and actively engages Canada’s securities regulators, self-regulatory organizations, industry associations, legislators, and other stakeholders through thoughtful leadership, direct engagement, and the publication of comment letters.
