“Never doubt that a small group of thoughtful committed people can change the world – it’s the only thing that ever has.” – Margaret Mead

Over the past year, numerous comment letters have been issued by the Canadian Advocacy Council (CAC), the body that represents the professional interests of the Canadian CFA Institute societies, in response to an array of regulatory proposals from various securities regulatory bodies. Many of the topics addressed involve potentially sweeping changes to the ways securities and financial products are sold in Canada, the structure of commissions paid on mutual funds sold to the investing public, and standards of disclosure in the capital markets. Some highlights from the CAC’s comments are presented below.

Need for a Statutory Best Interest (Fiduciary) Duty on Advice Provided to Retail Clients

In February 2013, the CAC commented on Canadian Securities Administrators (CSA) Consultation Paper 33-403 on The Standard of Conduct for Advisers and Dealers, agreeing that (1) there is an inadequately principled foundation for the standard of conduct owed to clients; (2) the current standard does not fully account for the asymmetry in information and financial literacy between advisers/dealers and retail clients; (3) an expectation gap exists, as investors already assume their adviser/dealer must always give advice that is in their best interests; (4) advisers/dealers currently must recommend suitable investments but not necessarily investments that are in the client’s best interests; and (5) the application of the current set of conflict of interest rules is less effective than intended.

The CAC also cited the lack of full disclosure regarding the services provided by dealers and advisers to investors of (1) relative and absolute performance; and (2) all aspects of remuneration, including its allocation to all parties involved. The CAC stated that it believed that applying a statutory best interest duty, coupled with the aforementioned additional disclosures, would be the most effective way of addressing current concerns.

The position of the CAC and CFA Institute has long been that only those in the industry who are bound by a fiduciary duty (not those providing limited information pertaining only to products they are paid to sell) should be permitted to call themselves “advisers.”

Crowdfunding: Considerations for New Capital Raising Prospectus Exemptions

In regard to the radically new type of exemption under consideration by the CSA for crowdfunding, the CAC stated in March 2013 that it would be helpful to both issuers and investors to first harmonize the existing prospectus exemptions and then determine, after an appropriate period of time, whether a new prospectus exemption was still required. If it was then decided to proceed, the crowdfunding exemption should only go forward on a harmonized basis.

The CAC stated that crowdfunding is inconsistent with many principles and procedures used in the current securities regime in Canada, but given the growing popularity of the idea in the U.S. for small- and medium-sized enterprises, it could become popular in Canada as well, including for distribution of securities, and thus must be addressed by the regulators.

The CAC has a number of investor protection concerns. Regulation and close monitoring of the crowdfunding portals would be of paramount importance. A funding portal should be required to confirm the bona fides of the offerings and the principals behind the offeror, fulfil requirements for controlling money laundering, and act as a repository of financial information and risk factors about the issuer. Portals could also be used to assist issuers in communicating with their shareholders.

The CAC noted that timely and effective enforcement would be key to mitigating the risk of abuse and fraud. The risk acknowledgement statement should emphasize the lack of continuous disclosure materials.

Mutual Fund Fee Structures

In April, the CAC stated that current mutual fund fee structures raise concerns over investor protection and require additional regulatory action. It said that investors should understand the services they are compensating their advisors for, and that in order to fully protect investors and ensure cost transparency, the payment of trailing commissions should not be made from the manager to the dealer but must instead be made directly from the ultimate client. Distribution costs should not form part of the management fees of an investment fund.

The CAC stated that trailing commissions should be disaggregated from the management fee and negotiated directly between an advisor and a client. It is essential that investors be provided with timely, accurate, and easy-to-understand information about investment charges to help them assess the performance of their advisor and their investments. As a result, costs should be kept at a competitive level.

Debt Securities Reporting, Shareholder Rights Plans

In May 2013, the CAC supported accelerated adoption of an Investment Industry Regulatory Organization of Canada (IIROC) proposal on debt securities transaction reporting that would increase the amount of information available to investors on debt markets and represent progress in improving the transparency of debt markets.

In July, the CAC commented on CSA-proposed policies and amendments to security holder rights plans in Canada, endorsing the initiative as a first step in improving shareholder democracy in the context of hostile takeover bids.