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opinion

Ken Kivenko is an investor advocate, chair of the advisory committee of the Small Investor Protection Association and president of Kenmar Associates

The current pandemic has shown that when pressed, government can indeed be bold and act quickly to protect Canadians. We have seen significant social safety-net programs implemented by federal and provincial governments at breakneck speed and the Canadian Securities Administrators (CSA) have also moved quickly to grant emergency regulatory exemptions and relief to the companies they regulate.

Such responsive action by the CSA is to be lauded, but this leads me to ask: Where is the swift and decisive action in the name of investor protection and the public interest?

I would suggest one important area where the CSA can focus their newly found regulatory agility and determination is on their coming review of Canada’s self-regulatory organizations (SROs). This review is highly relevant for the future of investor protection and should be keenly watched by Canadians from Bay Street to Main Street.

Why is this review so important? Public trust and confidence is the bedrock of every effective regulatory system. In Canada, regulation of most investment advisers is not directly performed by the CSA, but rather by two industry-funded SROs – the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC). While both are charged with protecting retail investors, the SROs have inherent conflicts between the interests of investors and the interests of their members.

After years of putting up with the fox guarding the hen house, the level of public trust and confidence in the SROs has been severely eroded. If the CSA wants to continue to rely on SROs to help them fulfill their public interest mandate to protect Canadian investors and promote confidence in Canada’s capital markets, they need to recognize that their review of the SRO framework is of enormous consequence to both of these objectives – and they need to get it right.

IIROC is proposing a quick fix and believes that this can be achieved through a simple merger of the two existing SROs, citing purported regulatory efficiencies and cost savings. Here is the problem – it is doubtful whether any such efficiencies or cost savings would benefit anyone other than the industry itself, and most importantly, it does nothing to restore public confidence and trust in the SROs and remedy the conflicts concerns. A merger does nothing in the public interest other than provide the appearance of taking some action with respect to SROs.

Trying to merge existing entities with existing cultures and processes is not the way forward. For meaningful change, change that is innovative and bold, a clean slate is needed to develop global best practices and world-class investor protection. The CSA must fully embrace this unique opportunity with a view toward real and enduring reform through a strategic analysis of the future SRO structure in Canada. The goal must be a system that is truly in the best interest of the investing public and not just the industry. What Canada needs is a modern and effective SRO that is in keeping with international regulatory best practices.

To achieve this goal we need a fresh approach to SROs, and no ideas should be off the table. Back in February the MFDA released a Special Report on Securities Industry Self-Regulation, which contains new ideas and perspectives for what a true public interest SRO could look like for Canada. In its report, the MFDA proposes abolishing itself and IIROC and creating a new SRO that, among other things, begins to address the issues of conflicts and lack of public confidence and trust in SROs through a new SRO governance structure. This new structure would continue to include industry, but would also include investors and representatives of the CSA. This makes a lot of sense. Investors and representatives from the CSA need a meaningful seat at the SRO governance table.

Leadership, vision, strategic thinking and resolve. The CSA needs to demonstrate all four of these traits if the results of their SRO review are to be investor-focused and in the interest of the public. I was heartened to see this type of leadership on full display at an OSC conference I attended a few years ago where the clear message from the OSC executive was that leadership means doing the right things. In the context of the SRO review that means standing up to the predictable resistance from the wealth-management industry to new approaches that are truly investor-focused. The coming SRO review is a defining moment for the CSA to redeem itself and display true leadership, informed by a clearly articulated vision that is backed up by a determined resolve to achieve a modernized SRO framework that truly benefits Canadian investors.

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