Ontario securities regulator denies public access to its review of bank fund selling

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A year after Ontario’s Finance Minister called for a review of several Canadian banks that had halted sales of third-party investment funds, investors remain in the dark about whether regulators plan to do anything to address the issue.

In response to a recent freedom-of-information request from The Globe and Mail, the Ontario Securities Commission (OSC) denied access to recommendations it sent to Finance Minister Peter Bethlenfalvy in February, 2022, after completing a three-month review of the issue at the minister’s request. The OSC said the recommendations were exempt from public release because they fall under the category of “advice to the government.”

While the regulator granted partial access to the six-page document – which also included advice to the minister on a separate issue, that of tied selling at the banks – it redacted all information pertaining to its recommendations that had “been accepted or rejected by the Ministry of Finance.”

“The OSC can only confirm that it sent recommendations, pursuant to Section 143.7 of the Securities Act, to the Minister for consideration,” OSC senior officer Dayna Murray said in an e-mail to The Globe. “As section 13 of the [Freedom of Information and Protection of Privacy Act] provides an exemption for policy recommendations or advice, this exemption was applied to the recommendations in the Report to the Minister.”

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Emily Hogeveen, a spokesperson for the Ontario Ministry of Finance, declined to comment on which recommendations were accepted by the minister but said in an e-mail that Mr. Bethlenfalvy has “asked the Ministry of Finance to assess the recommendations, with the goal of improving competition and investor protection.”

She provided no timeline for how long the government would take to assess the report.

The issue of banks removing third-party funds from their product shelves erupted in 2021 when Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce notified clients in their financial-planning businesses that advisers would no longer sell third-party funds for any investment portfolios. (The changes do not apply to any of the banks’ full-service brokerage accounts or do-it-yourself investing clients.)

At the time, the banks said they made the changes in response to new regulations – known as client-focused reforms (CFRs) – that, in part, require advisers to have a deeper knowledge of the investment funds they recommend to clients. That meant financial planners could only offer their banks’ proprietary products.

The introduction of CFR rules was intended to address conflict-of-interest concerns in certain situations – for instance, if an adviser’s compensation is linked to selling an institution’s proprietary products. But banks said the know-your-product (KYP) rule changes would require advisers to have more training for an array of third-party investment funds, so it was easier to limit sales of those products instead.

Shortly after The Globe reported the banks’ actions in September, 2021, Mr. Bethlenfalvy called on the OSC to undertake an analysis of the situation and report back by Feb. 28, 2022.

According to the OSC report provided to The Globe, more than 50 per cent of all mutual-fund assets are controlled by the country’s Big Six banks, as of June, 2021. Branch-based distribution channels – which include financial-planning divisions – account for 39 per cent of all mutual-fund assets in Canada, as of June, 2019.

The OSC said in its review that “product shelf restrictions and proprietary product shelves are not prohibited under securities law.” However, its advice to the government on that matter was redacted.

In 2021, the minister also asked the OSC to re-examine the issue of tied selling – a prohibited practice whereby banks will sometimes require corporate borrowers to also use the bank’s underwriting and advisory services.

In response to that review, Ms. Hogeveen said in an e-mail that tied selling is prohibited in Ontario and that the “investigation and enforcement of prohibited practices are within the jurisdiction of the OSC.”

While the regulator redacted its advice to the government on tied selling, it said in its report that commercial banks have largely withdrawn from backstopping underwriting commitments by independent dealers, thereby limiting the size of offerings that can be underwritten by such firms, which uniformly have smaller capital bases than bank-owned firms.

“It is risky for an independent firm to enter into firm commitment underwritings or bought deals with the risk that they may have to carry unsold positions,” the OSC wrote.

Last year, the investment industry’s new self-regulatory body, formed by the merger of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association, along with the Canadian Securities Administrators (CSA) and the OSC, conducted a broad review of the new CFR standards and how they were being implemented by investment firms, including banks. The review included examining conflicts associated with proprietary products and related restrictions to a firm’s product shelf.

OSC spokesperson JP Vecsi told The Globe in an e-mail that the commission, along with the CSA, plans to provide an update on the findings later this year.

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