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Commentary Why targeted reforms will raise investment advisers’ standards

Louis Morisset is president and CEO, Autorité des marchés financiers, and chair, Canadian Securities Administrators; Brenda Leong is chair and CEO, B.C. Securities Commission; Stan Magidson is chair and CEO, Alberta Securities Commission; Donald Murray is chair and CEO, Manitoba Securities Commission.

For every job, there is an expectation that you do your best work. There is an expectation that you work hard, behave honestly, act in good faith to your employer and do what is best for the people who rely on you, whether they are your bosses, your colleagues, or your clients.

The Canadian Securities Administrators (CSA) expects the same thing of securities advisers. All CSA jurisdictions want and expect those registered as dealers, advisers and representatives to act in the best interest of their clients, and all want to see positive outcomes for investors. We also agree that it is critical that investors have the best protection available, as well as access to reliable, professional advice.

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But we disagree on how to achieve those positive outcomes.

In April, 2016, the CSA released Consultation Paper 33-404 (CP 33-404). The paper proposed targeted reforms to existing rules. The key objective of these reforms is to enhance the existing standards of conduct (that already require all securities advisers to deal fairly, honestly and in good faith with clients) in areas where we have identified problems, and ensure that advisers' interests are aligned with those of their clients. All members of the CSA fundamentally agree on the substance of the proposed reforms.

Last month, after thorough consideration of all comments received during consultation on CP 33-404, securities regulators in Alberta, Quebec and Manitoba announced we would focus our efforts on making meaningful improvements to the investor-adviser relationship by developing and implementing the targeted reforms (B.C. has been focused on the targeted reforms since 2016).

We believe the package of targeted reforms offers a more practical, meaningful and effective way to raise the standards of adviser conduct and ultimately improve investor outcomes, over the best-interest standard contemplated by the Ontario Securities Commission's (OSC) regulatory proposal.

Recent media coverage has improperly characterized the contemplated best-interest standard as the only way to improve the investor-adviser relationship, and it has branded the regulators who disagree as irresponsible.

The proposed best-interest standard might seem great in a sound bite. But those who favour it need to understand what, in our view, the proposed standard really means.

The proposed best-interest standard contemplated by the OSC and the Financial and Consumer Services Commission of New Brunswick is not a fiduciary duty. It does not mean the end of embedded or conflicted commissions. It does not mean the end of conflicted sales practices. It does not mean investors will be safe from any and all potential harms, and it does not mean increased or guaranteed expected returns or better service. The question at the centre of this debate is whether the words "acting in the best interest of the client" do anything to protect investors over and above the existing standards and proposed targeted reforms.

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The securities regulators for Alberta, British Columbia, Quebec and Manitoba say no. This is not, as has been suggested, because we are ignoring the best interests of investors. To the contrary – we do not support the introduction of a new standard because we believe that, in the end, it will not benefit investors and will have significant unintended consequences. We have a responsibility to take leadership on this issue and ensure investors and industry alike know what is really at stake.

After a year of consultation, there is still no understanding on what the proposed best-interest standard really means or what it does. If sophisticated financial proponents who have read the contemplated best-interest standard do not appreciate its limitations, what chance do investors have? Under the contemplated best-interest standard, clients will expect all advisers to have an unqualified duty to act in their best interests, not understanding that the standard would have many exceptions. The "best-interest" standard could even be used as a marketing tool that deceives unwary investors.

We believe the targeted reforms offer the most effective path toward improving investor outcomes because they will meaningfully deal with some of the most important issues in the investor-adviser relationship and significantly advance the best interest of all investors.

Those who favour a best-interest standard should first pay attention to the targeted reforms and then define what real benefit they expect from a best-interest standard beyond those reforms. Consideration could then be given to additional reforms.

We are in favour of the targeted reforms because they are meaningful and enforceable, and taken together prescribe a code of conduct that is in the best interests of all investors. That is the path we intend to pursue.

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