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Summer 2018
FAIR Focus
Hot Topics for a Hot Summer

The summer heat is on in many parts of Canada. We hope that you are able to get out and enjoy what summer offers this July and August.
 
We are looking at hot topics such as the CSA's Proposed Reforms to Enhance the Client-Registrant Relationship, how to improve cost and performance reporting and how to ensure that firms and their representatives can play a positive role in their dealing with vulnerable clients. This includes inquiries such as:
  • Did the CSA miss a key opportunity to let the industry know that certain compensation arrangements will not be permitted given the investor harms they create - such as sales targets, embedded commissions and other incentives?
  • How will the Proposed Reforms counter the fact that compensation drives behaviour?
  • Will they be effective in reducing the systemic conflicts that harm market efficiency and investors?
  • While firms cannot rely solely on disclosure to address conflicts, is there still too much reliance on it?
  • What are the likely benefits to investors of these Proposed Reforms versus a statutory best interest standard that FAIR Canada proposed and still prefers?
  • Will the MFDA take a leadership role in requiring mandatory training and education on elder financial abuse and diminished mental capacity in its CE requirements?
  • What is the best way to optimize the reporting of costs for clients?
 
We hope you enjoy the summer. Let us know your thoughts on these issues and stay tuned for FAIR Canada's comments this fall.


The Team at FAIR Canada

FAIR Canada Comments on MFDA CE Consultation 

FAIR Canada has offered 
comments in response to the MFDA's consultation on proposed MFDA Rules regarding Continuous Education ("CE"). FAIR Canada believes that requiring CE is a step in the right direction but securities commissions and SROs need to conduct a comprehensive proficiency standard review.

FAIR Canada also recommends that the MFDA accredit CE activity rather than permit third parties or MFDA Members to do so, in order to maintain the quality and standard of CE being provided. In the alternative, third parties should only be permitted to accredit CE activity in the absence of any conflicts of interest.

Finally, FAIR Canada recommends that the MFDA's CE include competency-based training in the areas of elder abuse, undue influence, mental capacity issues, enduring powers of attorney and ageism.  Our consultations for the joint FAIR Canada/Canadian Centre for Elder Law 
Report on Vulnerable Investors: Elder Abuse, Financial Exploitation, Undue Influence and Diminished Mental Capacity found overwhelming support for mandatory training and education.

FAIR Canada Comments on CSA Client Reforms

Frank Allen, Executive Director, comments on the CSA's Client Focused Reforms:

"FAIR Canada welcomes today's releases by the CSA concerning two critically important investor protection initiatives - the client-registrant relationship and mutual fund embedded commissions. Canadians expect and deserve to receive professional, objective financial advice that is free from compensation related and other conflicts that result in the firm and their representatives placing their own interests above those of their clients.

While FAIR Canada continues to believe in an overarching regulatory best interest standard governing the client-registrant relationship, we commend the CSA for developing a harmonized proposal for client focused reforms and look forward to better understanding the extensive and nuanced set of provisions proposed by the CSA, particularly the more robust conflict of interest regime and the broadened mandate for the client's interest coming first .

We will review with interest and assess the CSA's proposal to infuse the client's best interest into conflict of interest reforms, require registrant's to put the client's interest first when making a suitability determination and require clarification of what the client should expect from their registrant. FAIR Canada's consideration and comments on these provisions, coupled with the proposed strengthening of the suitability obligation and the know your client/know your product processes, will focus on their overall adequacy in ensuring that the client's interest is paramount and comes first in the client-registrant relationship. We are encouraged that the CSA's proposal is clear that disclosure will not in itself satisfy the obligation to address conflicts of interest (including compensation conflicts) in the best interest of the client. We view the requirements contained in the CSA proposal for accessible and non-misleading disclosure by registrants of titles, qualifications, available product offerings and costs of entering into an arrangement with a firm as an important step in the right direction for the benefit of investors.

FAIR Canada continues to believe that eliminating embedded commissions is the preferable regulatory course of action given the comprehensive, independent research findings (and our view that the market would be able to innovate and adapt), but we are pleased with the CSA's proposed policy changes to prohibit DSCs, eliminate trailing commissions for online brokerage accounts (discount brokerages) and require all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of third-party compensation (including embedded commissions), to be either addressed in the client's best interest or avoided. We look forward to better understanding how compensation conflicts will actually in practice be addressed in the client's best interest so that dealers and their representatives will not act on their conflicts of interest to the detriment of their clients.

FAIR Canada looks forward to working with the CSA and other stakeholders to implement reforms that put into practice available research and behavioural insights so that investors are better protected, receive advice in their best interest and are in a position to achieve better financial outcomes."

FAIR Canada Comments on CSA Request for Comment re Soliciting Dealer Arrangements

FAIR Canada has submitted comments regarding Canadian Securities Administrators (CSA) Staff Notice 61-303 and Request for Comment - Soliciting Dealer Arrangements. We agree with staff of the CSA that soliciting dealer arrangements raise a number of securities regulatory issues. We trust that the information and feedback sought by CSA staff in this Notice and Request for Comment will be of assistance in determining the appropriate additional rules and guidance for these types of arrangements. 

However, we do not believe further consultation is required with respect to the use of success only "VOTE FOR" soliciting dealer fee arrangements by boards of directors of reporting issuers in proxy solicitations. The "vote buying" practices used in these proxy solicitations by boards of directors run afoul of dealer conflict of interest rules, raise concerns under proxy solicitation requirements, undermine the integrity of the securityholder voting process and require immediate remedial action by the CSA to prohibit their use.

To read the submission, please click  here.

FAIR Canada Comments on CSA Proposed Amendements for Syndicated Mortgages 

FAIR Canada welcomes the Proposed Amendments as a step in the right direction. The removal of prospectus and registration exemptions for securities that are syndicated mortgages is necessary given the lack of effective oversight and enforcement. These investments should be regulated like any other securities investment. 

We also call for risks to investors from real estate investments more broadly to be a focus of securities regulators. We are concerned about the regulatory framework for mortgage investment corporations ("MICs") and the investor losses and risks associated with MICs that have been highlighted in media and independent reports and call for the mortgage investment regulatory framework to be examined and strengthened.

FAIR Canada's recommendations to securities regulators with respect to the regulation of syndicated mortgage investments include requesting securities regulators to:
  • Review a certain percentage of OMs to improve the woeful compliance rate and to deter fraud
  • Review the efficacy of the risk acknowledgement form
  • Prohibit disclosure of projected future market values in the sale of syndicated mortgage investments
  • Restrict the volume of business any one appraiser's firm can provide to a given issuer group and/or mortgage broker so as to maintain independence
  • Provide a statutory right of action against issuers, promoters, and mortgage brokers for misrepresentations in an OM (including marketing, promotional or advertising material which is incorporated by reference therein) and
  • Require registration of mortgage brokers as securities registrants if in the business of distributing syndicated mortgages.
Click  here to read our full submission.

Media FAIR in the Media

Investment Executive -  Split reactions to CSA proposals

Investment Executive -  OSC sets sights on new targets

The Insurance & Investment Journal -  Regulators' proposed reforms draw mixed reactions
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Investment industry slams OSC over 'disproportionately small' RBC fine
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