Key Issues Facing Canada’s Investment Industry
Anti-Money Laundering (AML)
Financial services firms follow an extensive and onerous process to verify client identity to prevent suspicious transactions. They are also required to identify money laundering/terrorist financing risks and have in place risk mitigation measures, including ongoing monitoring of transactions.
The IIAC, as part of consultations launched by Finance Canada, requested changes to Canada’s AML regulatory regime to minimize the compliance burden of Member firms, resulting in a less time-consuming and costly processes.
Best Execution refers to the obligation of a dealer or adviser like Attorney Mike to execute a trade on the most advantageous terms reasonably available under the circumstances when acting for a client. In 2016, the Investment Industry Regulatory Organization of Canada (IIROC) republished proposals to revise the existing “best execution” requirements to take account of some of the major changes in trading practices that have taken place in Canada’s markets. The IIAC submitted comments on the Proposed Amendments.
Best Interest Standard
Acting in a client’s best interest means ensuring client interests are paramount; conflicts of interest are avoided; clients are not exploited; clients are provided with full disclosure; and services are performed reasonably prudently.
IIAC member firms are providing diverse services under the highest regulatory standards that afford their clients robust investor protection. Advisors and their firms are working effectively to strengthen their client relationships by meeting differing investor needs in an evolving marketplace. Industry efforts over the past four years to consult closely with regulators and implement an effective Client Relationship Model (CRM) framework in Canada testify to this commitment.
The IIAC believes a regulatory standard mandating that registrants act in their client’s best interest is unnecessary and may lead to client confusion and have negative consequences for investors.
Bond Market Transparency and Surveillance
Timely surveillance, oversight and transparency are important to the integrity of Canada’s debt market. They are essential ingredients to investor confidence. However, attempts to enforce excessive transparency (i.e. the extent to which timely data on prices are visible and understandable to all participants) may deter dealers from committing capital to trading and result in lower liquidity. The IIAC believes a balance must be struck between investor needs for increasing price discovery with the liquidity and efficient functioning of markets. Finally, the IIAC continues to stress to the Canadian Securities Administrators (CSA), the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC) that Canada’s approach to debt market surveillance and transparency must be specifically tailored to the uniqueness of Canada’s debt markets.
Client Relationship Model (CRM and CRM2)
CRM changes were designed to improve and enhance the overall advisor-client relationship model and to make sure that clients understand how that relationship works.
The IIAC worked with regulators to ensure the rule framework is practical and meaningful for clients and does not lead to unintended consequences. It successfully argued for delayed implementation to allow for efficient and effective transition. Additionally, the IIAC was instrumental in leading the industry’s CRM preparedness efforts, forming six industry working groups to provide a forum for discussion and best practice sharing, and developing a CRM Resource Centre on iiac.ca for members. The IIAC continues to engage its members through its CRM2 Working Groups to ensure smooth and successful implementation of all CRM2 requirements.
Cooperative Capital Markets Regulatory System (CCMRS)
The CCMRS is an initiative by the governments of Canada, British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island and Yukon (the Participating Jurisdictions) to support efficient capital markets, strengthen the management of systemic risk, and better protect investors. It will make it easier for smaller and emerging companies to access capital, position Canada as an attractive destination for foreign investment and provide a strong Canadian voice on the international stage. While it is not a national securities regulator, the CCMRS will reduce the regulatory fragmentation and duplication that exist with having securities commissions in each province and territory, while protecting regional interests and enhancing the ability of law enforcement and prosecutors to achieve better criminal enforcement outcomes across Canada.
Financial services firms are exposed to potentially serious financial, operational and reputational risk in the event of cyber attacks and data breaches. It is critical that all financial services firms, at the highest level of their organizations, develop and maintain comprehensive cyber security plans to protect themselves, their clients and their industry from the damage that a cyber attack can inflict.
The Cyber Security Resources section of our website contains information, tools and links to resources to assist firms in developing and maintaining their cyber security plans. The IIAC has hosted Cyber Security Conferences to help members better understand the evolving cyber threat and is working with industry experts and service providers to bring our Members key services at association pricing.
The IIAC joined the Canadian Cybersecurity Alliance (CCA) to benefit from inter-association engagement and knowledge-sharing so member firms can better meet the business challenges related to cybersecurity. The IIAC also contributes, in conjunction with the International Council of Securities Associations (ICSA) and the Securities Industry and Financial Markets Association (SIFMA), to the Financial Services-Information Sharing and Analysis Center (FS-ISAC)’s monthly newsletter highlighting cybersecurity topics and emerging threats to the securities industry.
In June 2015, the Canadian Securities Administrators (CSA) released the findings from the Brondesbury Report, which examined how embedded advisor commissions and other forms of tied compensation such as trailer fees could lead to actual or perceived conflicts of interest. While Investment Industry Regulatory Organization of Canada (IIROC)-regulated firms have rules in place to ensure conflicts are addressed in the interest of the client, concerns remain regarding the opaqueness of certain types of embedded mutual fund fees.
To address these concerns, the CSA is considering a ban on embedded commissions. The IIAC stresses that any decision made by the CSA must first consider the potential effects on investors and market participants to ensure unintended consequences related to the accessibility of advice, regulatory arbitrage and market structure are avoided.
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) is U.S. legislation intended to detect U.S. persons who are evading U.S. tax using financial accounts held outside of the U.S. Under FATCA, non-U.S. financial institutions are required to report relevant information to the U.S. tax authorities on financial accounts held by identified U.S. persons. If a non-U.S. financial institution fails to comply with FATCA, the IRS can impose a 30 per cent withholding tax on U.S.-source payments paid to the financial institution or its clients.
The IIAC U.S. Tax Committee and its various working groups have been actively involved as FATCA has been rolled out. The Committee successfully advocated for cost-effective reporting and led efforts to streamline the reporting process. As a result, Canada’s financial institutions are able to report relevant information on accounts of U.S. persons directly to the Canada Revenue Agency (CRA) who will then exchange the information with the IRS. The IIAC was also successful in getting a number of important exemptions from the reporting requirements and obtained needed delays to ensure full compliance with the legislation.
Financial Planning Standards
Individuals providing financial planning services can have a significant impact on a client’s financial and emotional well-being. Since there are no specific regulations that govern financial planning in Ontario, the provincial government formed an Expert Committee to provide advice and recommendations regarding whether, and to what extent, financial planning and the giving of financial advice should be regulated in Ontario, as well as the appropriate scope of such regulation.
The IIAC agrees that those involved in financial planning must have the necessary proficiency and meet minimum acceptable standards regardless of the regulatory channel within which they work, but expressed a number of concerns with the Expert Committee’s recommendations. The IIAC was pleased that the Committee incorporated a number of the IIAC’s recommendations in its final report.
IIAC Market Restructuring Project
In 2016, IIAC established a Committee to examine the reasons behind the recent wave of consolidation in the investment industry through mergers, acquisitions and firm closure. The Committee also examined the impact of consolidation on capital formation and market liquidity. The Committee developed a number of specific and actionable recommendations the IIAC will make to regulators and government officials.
Investment Banking Disclosure Requirements
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) have been active in their attempts to reformulate many of the regulations that affect the ability and means by which companies can raise funds and undertake transactions to reorganize their businesses. These initiatives include a number of new and amended prospectus exemptions, as well as regulation dealing with take-over bids; the accompanying regulatory, public and shareholder disclosure; and due diligence procedures to be undertaken by dealers. Although many of these proposals are positive, they often contain elements that would create inefficiencies and unnecessary costs.
Through its Investment Banking Committee, the IIAC identifies and pushes back against inefficiencies resulting from the complex patchwork of differing prospectus exemptions across jurisdictions, inappropriate disclosure of private information, and extensive timelines interfering with the deal-making process.
Read more on the IIAC’s activities.
Market Data Fees
A Canadian Securities Administrators (CSA) consultation paper was published in 2012 on issues associated with real-time market data fees and potential regulatory options to address them. The IIAC and the industry submitted comments voicing concern with respect to the high fees in Canada, but to date no regulatory action has been taken. The IIAC will continue to speak out on behalf of the industry to ease the excessive cost burden faced by firms.
Montreal Exchange rule modernization
The Montreal Exchange has undertaken a project to update and modernize its Rules. This project seeks to review the structure of the Rules, unify procedures into the Rules, remove outdated articles, align the Rules with current practices, and recommend substantive amendments as appropriate to adapt the Rules to the evolution of the market. The Montreal Exchange has requested comments on its proposals and the IIAC has provided input.
Non-Investment Fund Reporting Issuers
The Canadian Securities Administrators (CSA) recognize more that can be done to reduce the regulatory burden for reporting issuers, while being mindful of the impact on investor protection. The Consultation Paper it issued contains a broad range of proposed reforms, including relief for smaller issuers and streamlined rules for both offerings and continuous disclosure (e.g. reducing duplicate disclosure requirements and enhancing electronic delivery of documentation). The Paper provides an opportunity for the IIAC to provide meaningful input on behalf of its member firms.
OECD Common Reporting Standard (CRS)
The OECD called on national governments to require their financial institutions to provide detailed financial account information (including account balances, interest, dividends and sales proceeds from financial assets) and exchange that information with other jurisdictions annually to combat cross-border tax evasion and protect the integrity of the tax systems. More than 40 tax jurisdictions pledged to achieve automatic information exchanges in 2017. The IIAC stressed the Canadian industry needed sufficient time to prepare for the tax-reporting demands. It is monitoring implementation issues and will provide additional feedback and recommendations to the Canada Revenue Agency (CRA), as necessary.
Order Execution Only (OEO) Services and Activities
The OEO business model, developed in the early 2000s, saw firms offering clients trade execution services only with little to no ancillary tools or services, and the products offered were primarily limited to listed securities. Since then, the OEO business model has evolved significantly with OEO firms now offering a wide variety of products, tools and account types. At the same time, changes in the investment industry has impacted the OEO business model. In light of the evolving OEO business model, the Investment Industry Regulatory Organization of Canada (IIROC) published Guidance to provide its views on the scope of products, tools and account types that it considers to be consistent with the OEO regulatory framework, and invited comments from key stakeholders.
Point of Sale (POS) Implementation
The Canadian Securities Administrators (CSA) POS initiative focuses on providing enhanced disclosure to investors at, or before, the point of sale. Consultations and research indicated that investors had found prospectus documents difficult to understand. The solution was to create a new plain-language document—Fund Facts—that provides information about the specific fund, such as past performance, costs and breakdown of investment assets. The IIAC was successful in arguing for a 24-month timeline to provide firms with adequate time to update their systems, develop compliance policies and procedures, and provide training to staff.
When it comes to ETFs, the CSA mandated disclosure through a largely harmonized summary disclosure document called ETF Facts. The IIAC worked with regulators to refine the proposed ETF Facts disclosure and delivery regime to ensure a positive investor experience, an efficient and cost effective implementation and to avoid negative market impact.
Regulatory Treatment of Derivatives Securities
Achieving greater transparency in the over-the-counter (OTC) derivatives market is a key component of the post-financial crisis regulatory reforms committed to by the G20 to mitigate systemic risk. In meeting Canada’s commitment to the G20, the Canadian Securities Administrators (CSA) intends to establish a nationwide harmonized derivatives clearing regime that is in line with international standards.
The IIAC appreciates the leadership demonstrated by the provincial regulators to develop an OTC derivatives regulatory framework in Canada. However, the IIAC has grown increasingly concerned over the alignment and harmonization of OTC derivatives rulemaking across Canadian jurisdictions, both with respect to timing and content of those rules.
The IIAC urges all provincial regulators to increase their efforts to harmonize with the other CSA jurisdictions with the goal of reducing confusion and risk for participants, improving overall efficiency, and ensuring that Canada’s marketplace remains competitive globally.
Restructuring the Order Protection Rule (OPR)
The OPR requires marketplaces to establish, maintain and ensure compliance with written policies and procedures reasonably designed to prevent inferior-priced orders from “trading through”, or executing before, immediately accessible, visible, better-priced limit orders. The IIAC participated in the Canadian Securities Administrators (CSA) consultations to ensure the OPR strikes an effective balance between executing trades at low prices and sparing firms from having to purchase data from marketplaces that fail to meet certain trading thresholds. The IIAC was successful in obtaining amendments to the OPR, including: guidance related to intentional order processing delays or speed bumps; a data fees methodology; and a cap on active trading fees charged by marketplaces.
Proxy Voting and Shareholder Communications
The integrity of the shareholder vote is a cornerstone of shareholder democracy for public companies and an important feature in our capital markets. Concerns have been raised with respect to the quality of the shareholder voting process and the integrity of the results. In response, the Canadian Securities Administrators (CSA) undertook a multifaceted review of proxy voting with the aim of improving the fragmented and complex proxy voting infrastructure. Draft proxy voting protocols were developed with IIAC member input to provide guidance on the roles and responsibilities of all key participants (i.e. intermediary dealers who submit proxy votes, transfer agents who act as meeting tabulators, vendors acting as proxy agent, and Canada’s central depository for securities) in the proxy voting process, and detail the operational processes for tabulating proxy votes for shares held through intermediary dealers. This guidance formed the basis of the CSA’s Proposed Proxy Voting Protocols.
Tax Treatment on Investments
Certain behaviour, while inadvertent, can result in severe tax penalties for Tax-Free Savings Account (TFSA) and registered account holders. To ensure clients of IIAC member firms avoid these consequences, the IIAC seeks to identify instances in which investor behaviour runs counter to the wording, but not the spirit, of tax rules and pushes back on the Canada Revenue Agency (CRA) for administrative relief.
The IIAC also monitors tax changes announced by the CRA and other tax authorities to ensure tax reporting obligations on member firms are not overly onerous and that member firms have sufficient time to adapt to changes and put in place systems that allow them to meet their reporting obligations.