On June 1, 2016, the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (SIFMA) and six other industry and trade groups filed an injunction in Texas federal court challenging the Fiduciary Conflict of Interest Rule, which was introduced by the United States Department of Labour (the "DOL") in April 2016 and became effective June 7, 2016. The Fiduciary Rule imposes a duty on investment advisors to act in their clients' best interests when providing investment advice or recommendations on retirement accounts for a fee or other compensation. Prior to the introduction of the Fiduciary Rule, investment advisors were subject to the lesser "suitability standard" when advising retirement accounts which required them to confirm that each investment recommended was suitable for the investor. According to the DOL, the Fiduciary Rule is intended to enhance investor protection and improve retirement security by mitigating advisor conflicts of interest which have the potential to result in "large, avoidable losses to retirement investors."
In their complaint, the plaintiffs allege that the DOL lacked jurisdiction to make the Fiduciary Rule which they say will harm, rather than protect, retirement investors. The plaintiffs allege that the Fiduciary Rule will impose unjustifiable costs on customers, small businesses, financial professionals, financial firms and insurance institutions.
A Canadian Best Interest Standard?
The Fiduciary Rule and its opposition may be a harbinger of developments on the Canadian securities regulatory landscape. As we have previously written, the Canadian Securities Administrators recently published a consultation paper seeking public comment on proposals to strengthen the obligations of registrants toward their clients. The more controversial proposal is the introduction of a regulatory best interest standard which would require registered dealers, advisers and their representatives to deal fairly, honestly and in good faith with their clients and act in their clients' best interests. The proposed best interest standard would have broader application in Canada than the Fiduciary Rule in the United States, as it would apply to all investment advice provided by registered advisers in Canada, including mutual fund dealers and members of the Investment Industry Regulatory Organization of Canada (IIROC) and is not limited to retirement accounts.
To date, the provincial and territorial securities regulators that comprise the Canadian Securities Administrators (CSA) do not uniformly support the best interest standard, and have expressed different views regarding its benefits and importance. The Ontario Securities Commission (OSC) is leading the charge in favour of the best interest standard, including it as a "top priority" that it "need to complete" in its annual Statement of Priorities released on June 9, 2016. In contrast, the British Columbia Securities Commission is opposed to the proposal, while five other CSA members have not yet formed an opinion. In its Statement of Priorities, the OSC stated that it is prepared to move forward with an "Ontario only solution" if consensus cannot be reached by the CSA.
Potential Implications Of A Canadian Best Interest Standard
Considering the number of financial advisory firms which are headquartered in Ontario, a unilateral decision by the OSC to introduce a best interest standard would have far-reaching implications for the Canadian financial services industry. Canadian industry and trade organizations such as the IIAC and the FMFD have expressed significant concerns regarding the best interest standard during a series of public consultations over the past several years which culminated in the current consultation paper. Like their counterpart U.S. opponents to the Fiduciary Standard, Canadian industry groups claim that the uncertainty and costs associated with a best interest standard may harm retail investors by increasing costs and potentially restricting the availability of investment products and advice. Additionally, several industry groups claim that existing securities regulations, industry rules and the common law adequately protect investors, and have expressed concern that a best interest standard will cause confusion among both investors and advisors. Aside from these policy arguments, industry members, many of which operate across Canada, will face practical challenges in trying to adapt their practices to different standards applicable in different parts of the country.
In addition to the challenges it would present to Canada's financial services sector, the OSC would be making a dramatic political statement moving ahead with a best interest standard without CSA consensus, particularly while advocating for the federal Cooperative Capital Markets Regulator (CCMR), an initiative championed by the OSC which still requires buy-in from the securities regulatory authorities in seven CSA jurisdictions. Given the practical difficulties and political divisiveness which would arise from an Ontario-only best interest standard, we believe this is an unlikely outcome, at least in the short to medium term. Instead, we expect the OSC to carefully consider all public comments on the CSA regulatory best interest standard and seek to frame the responses in a way that supports its position. Comments are due on August 26, 2016.
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