President of Kenmar Associates warns implementing new legislation could threaten OSC balance and investor protection
The consultation on the draft Capital Markets Act in Ontario was originally slated to end on January 21. But after considerable pushback, the deadline’s been pushed back to February 18. And in the eyes of one of Canada’s most active and tireless investor advocates, it’s all for the best.
“There was a clause in the act that almost wants to standardize consultations to a minimum 60-day period,” Ken Kivenko, president of Kenmar Associates, told Wealth Professional. “Big banks with teams of lawyers are equipped to handle that, but for organizations like us, sometimes meeting 60 days is very difficult.”
Kivenko said because his group is focused on the investor-protection aspects of the act, they were able to meet the original deadline. The group’s overarching concern, as indicated in their comment letter dated January 5, 2022, was that even without considering the act, a lot of changes are already impacting the office of the Ontario Securities Commission (OSC).
“We've got the client focused reforms now, and we're starting a new single self-regulatory organization,” Kivenko said. “In the last budget, they introduced an imperative for fostering capital formation. They announced a new executive director for the OSC just recently, so there will be two of them … I’d argue that anyone who studies organizational change and dynamics [would recognize] this is tremendous change, and the staff must be going through hell.”
Even prior to its dual mandate, Kivenko maintained the OSC has not been fully effective at upholding investor protection. Notably, the call for the Ombudsman for Banking Services and Investments (OBSI) to be granted binding authority has yet to be answered. A recent report from the Ontario Auditor General, which concluded the OSC was vulnerable to political decision-making, doesn’t inspire much confidence.
Securities regulators’ decision to prioritize burden reduction for the industry may make sense in the context of a global multi-year pandemic and broad technological disruption. But the fact that reducing industry burdens has been upgraded from being a program to being embedded into the OSC’s culture, as indicated in its statement of priorities, is likely to make many investor advocates nervous.
“When you already have that, and you put in the capital formation mandate … I don’t know how much you could do to an organization to make it unsteady, but there’s a lot right now,” Kivenko said.
The CMA also proposes to put in place a platform system of regulation, which in principle can provide the OSC with enough regulatory flexibility to respond more quickly to market developments, as well as fine-tune its regulatory treatment of various entities and activities based on the prevailing circumstances. It should also provide OSC staff with the power to effectively make laws, grant exemptions and prioritize reforms.
But that platform approach, Kenmar argues, would not be effective in practice as the OSC is still part of the Canadian Securities Administrators (CSA). Realistically, it can’t start introducing new laws and putting new rules in place without consulting the rest of the CSA’s members, unless it breaks away. That would be a profound step back from the current progress toward regulatory harmonization, and a dangerous step towards fragmentation.
“According to the papers we’ve read about taking a platform approach to regulation, a free-hand regulator must be subject to oversight. But there’s no oversight being proposed,” Kivenko says.
While he’s against the idea of the act being introduced as a whole, Kivenko does acknowledge some provisions within it that are beneficial for investor protection. A recommendation to raise the administrative penalty for errant firms from $1 million to $5 million, he says, is a significant improvement. He also sees a proposal to expand civil liability in the exempt market beyond just dealers, and another that would put in place automatic reciprocation sanction orders, as positives.
“If you want to make those changes, some of which are quite good, go ahead. But don’t introduce a new act,” he said. “In the middle of turmoil like we’re seeing right now, you want to make modest changes.”
