WealthManagement Magazine

Canadian Fund Reform Pits Regulator Against Government

Canada's effort to regulate its mutual fund distributors has hit yet another pothole. But this one, according to the acting head of the Ontario Securities Commission (OSC), may have been created by the OSC's own boss-the government of Ontario.In a move that many say is without precedent, the provincial government bypassed the OSC, Canada's largest and most significant securities regulator, to set

Canada's effort to regulate its mutual fund distributors has hit yet another pothole. But this one, according to the acting head of the Ontario Securities Commission (OSC), may have been created by the OSC's own boss-the government of Ontario.

In a move that many say is without precedent, the provincial government bypassed the OSC, Canada's largest and most significant securities regulator, to set up its own small panel to study fund regulation. The new group, which will include three former OSC chairmen, has increased the already tense situation between the government's Ministry of Finance and the securities regulator. And, according to many, the government may serve to undercut the OSC's credibility as an overseer of Canada's largest securities market.

"The minister [Ernie Eves] has the right to seek advice from any place he chooses, but if the key adviser on securities matters is not the OSC, then something isn't right," says acting OSC Commissioner Jack Geller.

Edward Waitzer, the immediate past chairman of the OSC concurs: "Having the government step in seems like an odd thing since the entire concept of regulatory agencies is to have non-politicized entities," he says.

In fact, so politicized has the whole process of fund regulation become that when Geller was advised in October that he would not be appointed to his own term-he took over from Waitzer in November 1996-many, including Geller, chalked it up to pressure from powerful members of the mutual fund lobby, a group that has been at increasing odds with the OSC for several years.

"Let's just say it does not suit many in the fund industry to have Mr. Geller in a position of power," says a former OSC director.

According to sources, the problem stems from the OSC's continuing attempts to tighten the sales and operating practices of almost 200 unregulated fund distributors that sell third-party mutual funds.

After ongoing negotiations, the OSC recently had given the Investment Funds Institute of Canada (IFIC), the mutual fund trade group, a year to create a regulatory entity to oversee these companies. The struggle, according to many participants, has turned ugly of late mostly because IFIC had wanted complete control over these firms while the OSC insisted that either the Investment Dealers Association (IDA) alone, or in concert with IFIC, should handle the job.

IFIC President Thomas Hockin, has said repeatedly that supervising all aspects of the fund industry was central to IFIC's mission and identity. To merge any or all functions into the IDA could kill the group, the IFIC maintains.

"There are many who believe that getting the provincial government to cut both Geller and the OSC out of the picture is a payback from some strong fund leaders for the way the OSC has treated them," says a Toronto-based securities lawyer.

Prior to the announcement that Geller would not be appointed to his own term, there had been no clue from the Ministry of Finance that any change at the top of the OSC was in the offing.

The OSC has been leaning on the fund industry since 1994 when a commissioner, Glorianne Stromberg, released what has become a landmark report criticizing industry sales practices. Since that time, there have been repeated attempts by the OSC to reign in overly aggressively sales techniques, the use of incentives and poor compliance by fund distributors.

Hockin was traveling and could not be reached for comment. The IFIC has claimed its members played no part in Ontario's decision not to appoint Geller to his own term.

As for the new members of the task force, most do not want to be brought into a debate between the government and the securities regulator. So why serve on the controversial task force? James Baillie, a former OSC chairman and a task force member, notes only that it is difficult to say no when the Minister of Finance asks you to step in and help solve a pressing problem.

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