When Canada's securities agencies unveiled a new approach to regulating mutual fund companies two years ago, the effort was geared to providing more protection for investors.
But somewhere along the way from conception to reality, that spirit of reform got lost.
This January, the Canadian Securities Administrators (CSA) finally released their new rules for the mutual fund industry and their former "stand-up-for-investors" attitude was nowhere in sight.
Gone were several investor-friendly measures that had been included in the sweeping 2002 proposal -- measures that had been debated in Canada for the better part of four decades. The missing reforms included the requirement for an independent committee or board to oversee fund operations and mandatory registration for fund managers to ensure better protection for investors.
Instead of beefing up investors' rights, the new regulations talk of promoting investor protection "while fostering market efficiency" -- a nod to industry complaints that the original reform proposals were too costly and too cumbersome.
Plans to force funds to set up independent boards were abandoned. In their place, the rules call for independent committees to monitor conflicts of interest. But these new committees would have no power to stop a transaction. They could only require the manager to make its objections public.
In return for setting up these committees, the new rules envisage that existing regulations would be scrapped. Fund managers would be free to enter into transactions that are now off limits, such as trading securities between funds, even if their interests conflict with those of investors.
The changes are in stark contrast to the actions of U.S. regulators who are preparing to toughen governance standards for the industry in response to a string of abusive practices. The Securities and Exchange Commission is expected tomorrow to consider landmark new regulations that would require two-thirds of all fund boards to be independent from fund managers, including the chairperson.
Given the timing and the history of the debate, some observers say they were shocked to see proposals that so clearly favour the industry. Some fear the weak measures are the latest product of a fractured system of securities regulation where tradeoffs are made to please individual provinces. Others say the proposed regulations are the latest sign of the power of the mutual fund industry and its increasing sway over regulators.
Now, they wonder, who speaks for investors.
"One would have thought that was the role of the regulator," said Philip Anisman, a Toronto securities lawyer. "The investor perspective, the balance that reflects overall interests should be coming from the regulator, but that does not always happen."
Instead, Mr. Anisman said the history of attempts to develop regulations for mutual funds is a dramatic example of regulatory capture -- a theory that argues that as regulating organizations age, they increasingly adopt the viewpoint of the industry that they oversee.
"Investors aren't organized. What happens over time is that the regulator sees the problems presented by the industry without itself getting a countervailing view and ends up adopting rules that favour the industry," he said.
Mr. Anisman said several elements of the new rules seem to reflect industry views, such as the provision that certain fundamental changes to funds will no longer require an investor vote, but only advance notice to investors and committee approval.
"This seems to suggest that the regulators have accepted an industry position that mutual fund investors aren't interested in voting on anything and in any event are not capable of doing it, " he said.
Ken Kivenko, a representative with the Small Investor Protection Association, has seen the clout of the mutual fund industry first hand. "It's not a fair fight," he said of the consultation process.
Regulators say they are aware of the talk, but are not yet ready to respond. Wendy Dey, a spokeswoman for the OSC, the lead regulator on this matter, said Mr. Brown will address critic's comments once there is agreement among provincial regulators represented by the CSA about what should be done.
"Quite frankly, we will not be able to ignore the comments, no matter what side they are on," she said. "There is no question if [the proposed rules ] need to be tougher, they will be from our perspective . . . all aspects of the issue are under consideration."
