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CSA Consultation 25-402 on SROs
Letter Summary:
The CSA is seeking comments on the current structure of the SRO framework, particularly how the evolution of the financial services industry has impacted the framework as well as the specific targeted outcomes set out in the Consultation Paper. Some stakeholders had indicated to the CSA that the two current SROs result in duplicative costs and a lack of oversight standards. Additionally, stakeholders were concerned about higher operational costs and investor confusion by clients who can’t access the same product from their representatives across platforms and don’t know the redress avenues available to them for issues. The Consultation Paper inquires about these issues as well as others, such as concerns raised about lack of public confidence in the current environment as a result of regulatory capture and the separation of market surveillance from statutory regulators. Next steps will include a consultation paper with the CSA’s proposed option for further comment.
Overview of the Council’s Comments:
The CAC agrees with many of the concerns raised by stakeholders in the CSA’s informal consultation process. We provided a statement on our ‘first principles’ in consideration of this subject matter including regulatory efficiency, noting that we believe the case has been soundly made for SRO consolidation, particularly if it serves as an opportunity to reflect on and entrench the public interest and other design principles moving forward. Confidence and trust of the public is critical to the effective functioning of our markets, and a credible and transparent SRO framework is essential. We supported the general premise of a merger between the existing SROs but noted additional analysis and evidence is required to support consolidation beyond the registration categories currently under SRO oversight. The CAC sees no significant benefit to a continuing regulatory framework that results in duplicative operating costs, many ultimately borne by the end investor. Costs should be minimized to the extent possible without prejudicing investor protection and effective compliance or enforcement.
The CAC increasingly questions the appropriateness of product-based regulation – advocating instead for a model where regulation is based on scope and quality of advice, and corresponding business models. Further, we would not support any changes that would result in lower proficiency requirements for registrants providing investment advice.
The CAC believes investors are best served when they can have confidence that their needs are being served with generally homogenous regulatory expectations regardless of the product or service that is recommended, provided, or sold. Additionally, the CAC cited concern with specific instances of regulatory inconsistency as we understand that rules relating to borrowing funds to invest in securities may be interpreted and implemented differently under SRO and CSA rules. Consistent regulation would result in regulatory efficiencies, cost savings and consistent fair treatment of clients and negate regulatory arbitrage opportunities. It would also bolster public confidence in the advice they’re receiving holistically. The CAC believes that registrants should pursue a higher standard of minimum competency, continuing skills development, professionalism, and the delivery of ethically-centered advice to clients as part of the path forward.
The CAC views the current market surveillance system as functioning well and that wholesale change could be disruptive without clear investor or public benefits. We recommended, to the extent there are concerns with existing surveillance mechanisms, that incremental improvements be made. For example, a revamped SRO with a continued market surveillance mandate could be provided with broader powers to examine records of additional market participants, and additional avenues for operational integration with related functional groups at the CSA could be explored or encouraged, particularly to better ameliorate systemic risk concerns.