Debra Foubert and Chantal Mainville

OSC staff explain investor protection initiatives

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Originally published: June 21, 2018

The Investor Office sat down with OSCOSC See Ontario Securities Commission.+ read full definition Staff to talk about the two recent Canadian Securities Administrators (CSA)Canadian Securities Administrators (CSA) The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets+ read full definition publications that together aim to improve the client-registrantRegistrant A person or company that is registered with the securities regulator in the province or territory where they do business. They must be registered before they can legally sell securities or offering investment advice.+ read full definition relationship.

Debra Foubert

Chantal Mainville

Debra Foubert is the Director of the Ontario Securities CommissionOntario Securities Commission An independent Crown corporation that is responsible for regulating the capital markets in Ontario. Its mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic…+ read full definition’s Compliance and Registrant Regulation Branch (CRR), the regulatory operations branch that led the work at the OSC and is leading the CSA project that proposed regulatory actions aimed at strengthening the obligations that securities advisers, dealers and representatives owe to their clients.

Chantal Mainville is Senior Legal Counsel in the Investment Funds & Structured Products Branch, the regulatory operations branch that led the CSA’s consultation on the option of discontinuing mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition embedded commission payments from investment fund managers to dealers to address the investor protection and market efficiency issues arising from those payments.


What was recently announced?

The Canadian Securities Administrators (CSA) published two separate notices on June 21, 2018. The first publication proposes amendments to the registrant conduct provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in order to better align the interests of securities advisers, dealers and representatives (registered firms and their representatives or registrants) with the interests of their clients, to improve outcomes for clients, and make clearer to clients the nature and the terms of their relationships with their firm and representative.

These Client Focused Reforms as they are referred to in the notice, provide for enhancements to the core obligations of registered firms and their representatives such as conflicts of interest, suitability, know your client, know your product and relationship disclosure. They represent a comprehensive way to improve the relationship registered firms and their representatives have with their clients.

What this means is that the changes at the core of the Client Focused Reforms require registered firms and their representatives to promote the best interests of clients and put clients’ interests first. This is a fundamental change that focuses on the client’s interests in the client-registrant relationship.

Chantal: The second publication, CSA Staff Notice 81-330 Status Report on Consultation on Embedded Commissions and Next Steps, provides an update on the CSA’s work regarding embedded commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition and announces the CSA’s policy decision and next steps. Specifically, we are proposing to eliminate all forms of the deferred sales chargeDeferred sales charge A sales fee that you pay when you sell an investment. Also called a “back-end load.” The fee often goes down the longer you hold onto the investment+ read full definition options, or DSCs, and their associated upfront commissions, and to eliminate the payment of trailing commissions to discount brokers. Further, through the Client Focused Reforms, the conflict of interest rules will be used to address the conflicts of interest that arise from the payment of embedded commissions. Registered firms and their representatives will be required to address conflicts of interests in the best interests of clients or avoid the conflict.

Debra: These proposals represent a harmonized approach to investor protection across Canada. We worked with other securities commissions across Canada, as well as with the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, in developing these proposals and, once implemented, the changes will apply to all registered firms and representatives.

In developing the proposals, we also consulted extensively with many stakeholders including investors, investor advocate organizations like the OSC’s Investor Advisory Panel (IAP) and FAIR Canada, industry and industry associations. Investor comment letters like the IAP’s and FAIR Canada’s helped us better understand the issues from the investor perspective. We believe these proposals achieve our goal to improve the relationship that clients have with their registered firm and representative. We want to specifically acknowledge the work on risk profiling that the IAP commissioned as it helped inform our work on the proposed amendments to the know-your-client rule.

What does this mean for investors?

The proposed amendments are really about improving how registered firms and their representatives conduct themselves with their clients, addressing conflicts of interests in the best interest of the client and putting the client’s interest first when making a suitability recommendation.

The changes that will be most visible to investors relate to the enhanced disclosure requirements that help investors understand what types of services and products they are going to get from a firm even before they choose to enter into a relationship with a registered firm. An investor can expect to see information including what the firm charges and whether there are minimum accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition sizes or other restrictions in the firm’s public information. Ready access to basic information about a registered firm’s products and services will make it easier for investors to comparison shop other firms’ offerings. Then, when a client opens an account with a registered firm, they will get clear information about important things which not all registered firms had been disclosing in the past, such as the impact that costs and risks can have on an investment portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition, and the extent of a registered firm and their representatives’ reliance on proprietary product sales.

In our view the new relationship disclosure requirements will ensure that clients know what they are getting before they enter into a relationship with a registered firm and therefore, are more likely to find the right relationship that meets their needs.

Investors are also going to see an enhanced know-your-client process, including more of a focus on risk profiling versus just slotting people into risk categories. That means that investors can expect their representatives to be asking more questions about their financial circumstances and we want to encourage investors to engage in these discussions with their representatives.

Chantal: We think the elimination of the DSC option and of trailing commission payments to discount brokers will compel dealers and their representatives to shift to more visible forms of compensation for mutual fund purchases, such as front-end commissions or other transactionTransaction The process where one person or party buys goods or services from another for money. Examples include taking money out of an account, buying something with a credit card or taking out a loan.+ read full definition fees charged directly to the client up front. This means better transparency when it comes to the costs of mutual fund investing. Investors should gain a better awareness of the fees they pay, how their firms and representatives are paid, and be better placed to consider whether those fees are in line with the services they are receiving. We further expect that these changes, together with the enhanced conflicts of interest rules Debra described, will drive dealers and their representatives to recommend better quality fund products that better meet the needs of investors and improve their investment outcomes.

How do these proposals change the relationship between investors and their representatives?

Debra: These proposals require the registered firm and representative to promote the best interest of clients by addressing conflicts of interest in the best interest of the client and by putting their client’s interest first when making a suitability determination.  Also, registered firms will be required to do more to clarify for clients what they should expect from their registered firm and representative. This is a fundamental change to the client-registrant relationship.

When making a suitability determination, representatives will be required to consider a list of factors including costs and their impact, not just the investment itself, when making a recommendation to their client. Also, there will be triggering events that will require representatives to review client accounts and the securities held in the accounts.

Chantal: As I stated earlier, we expect these proposals may lead to the use of more transparent direct fee arrangements between dealers and their representatives and mutual fund investors.  We would encourage mutual fund investors to question the appropriateness of these fees in light of the products and services offered and negotiate them in their favour, and also shop around for a better deal as other firms may offer similar services at a lower cost. We also encourage investors to question the ongoing costs of the mutual fund products recommended by their representative, including whether these costs include embedded commissions paid to the representative and their dealer firm, and whether there are lower-cost alternatives that may allow them to better achieve their investment goals and objectives.

How can investors provide feedback on these proposals?

Consultation on the proposed amendments to the registrant conduct provisions in National Instrument 31-103 RegistrationRegistration A requirement for any person or company trading investments or providing advice in Canada. Securities industry professionals are required to register with the securities regulator in each province or territory where they do business.+ read full definition Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) are open for a 120-day comment period and all stakeholders, including investors, are encouraged to provide feedback. Comments are due October 19, 2018.

Chantal: In September of this year, we anticipate publishing a CSA Notice and Request for Comment seeking feedback on rule proposals to implement our policy decision on the embedded commissions. The CSA Notice and Request for Comment will provide further opportunity for meaningful input from investors and other stakeholders, and we encourage investors to share their comments with us.

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