Investor advocacy group raises concerns on governance, transparency, and enforcement
Following a previously announced plan by the Canadian Securities Administrators (CSA) to review the regulatory framework for Canada’s self-regulatory organizations, FAIR Canada has issued comments on what it sees are fundamental areas of concern.
“The SROs’ current practices in areas like governance, transparency and enforcement raise important concerns,” said FAIR Canada Deputy Director Douglas Walker. “If the regulatory system is to continue to rely on SROs, improvements in those areas are needed.”
On the question of governance, the investor advocacy group pointed to a current “conspicuous absence” of directors with experience in consumer or seniors’ rights protection on SRO boards. It recognized IIROC’s recently unveiled plans to enhance representation of directors with hands-on experience for such vulnerable groups, but said time will tell whether it would result in a governance structure with genuine retail-investor representation.
It also called on the CSA to ensure that when SROs collect fines for misconduct that hurts retail investors, those fines do not end up subsidizing fees paid by dealers for SRO operations, including firms involved in the breach of conduct.
FAIR Canada applauded IIROC’s plan to form an expert investor issues panel that would provide authoritative feedback on investor and consumer issues, but noted that the concept is still not in place and unproven.
“The CSA review should continue to consider the appropriateness of SROs’ regulatory policy consultation processes,” the group said, noting that its attempts in recent years to hold meetings and discussions with IIROC has been met with resistance. While IIROC has reportedly shown a renewed willingness to engage in recent months, FAIR Canada said the level of engagement “has not been fully restored.”
There have been proposals from the industry to merge Canada’s SROs to create a more harmonized system of regulation. But Ermanno Pascutto, executive director at FAIR Canada, expressed doubt over whether such a move would be helpful.
“The important question is would a consolidation be in the best interests of the investing public and in the public interest?” Pascutto said. “We urge the CSA to consider a new self-regulator model and SRO organization.”
FAIR Canada maintained that following an SRO disciplinary proceeding that finds a breach of misconduct that harms investors, any resolution should require the offending dealer to compensate the harmed investor. But when it comes to settlements, it said, compensation does not seem to be a feature, leaving investors in a vulnerable position when they challenge a major financial institution.
“With an express mandate for an SRO to address compensation, the system can fairly and efficiently resolve many investor complaints, greatly improve access to justice for retail investors and improve confidence in the financial industry and regulators,” the group said.
