The industry isn’t of one mind about National Instrument 31-103, the CSA’s outline for a path to registration reform and harmonization of rules and requirements that must be followed by nearly all players in the securities industry.

Take performance reporting on accounts of individual clients, suggests Larry Boyce, vice-president of sales compliance and regulation at the Investment Dealers Association of Canada. Some segments of the industry are getting out their magnifying glasses to do a cost/benefit analysis to determine whether the changes are worth the expenses, he told a Strategy Institute Symposium yesterday, while others are asking why it’s taking so long because they believe it’s important to make these reports to investors.

One stated goal of the reform plan is to eliminate regulatory duplication, especially of SRO and CSA rules. Self-regulators often have more detailed requirements. “This is especially true when it comes to proficiency rules,” says Boyce, who adds the change will save time, fees and the trouble of filling out multiple applications.

Michelle Alexander, a policy director at the Investment Industry Association of Canada — IDA’s recently spun-off trade association — says the permanent registration provision that will allow representatives to avoid the hassle of frequent re-registration required by the different SROs will make it easier for brokers to move around. Further, Ontario’s move to sign on to the mobility exemption in NI 31-103, which allows advisors to relocate, is a big step toward achieving a passport system, but she says restrictions on registered persons having clients in other provinces should also be opened up.

Boyce told the group gathered at the briefing that 31-103 has prompted the IDA to make efforts to reduce the number of registration categories from the current 73 (compliance officers, registered persons, non-registered persons or assistants, and traders among them) to approximately eight. “We’re considering doing away with the branch manager category and putting all the supervisors together,” he says, adding it’s all subject to regulatory approval.

Generally, the National Instrument moves the industry toward principals-based regulation and gives SROs a greater degree of freedom in crafting and proclaiming new rules. With regard to supervision, it removes some of the structural restrictions and the minute supervisory details prescribed in regulation — supervisors monitoring phone calls and time-stamping protocols, for example — that increasingly make less sense in an environment where phone calls can be recorded, computerized audit trails examined and e-mails archived to determine what took place to assemble a particular transaction.

And, says Boyce, that means the IDA now has decisions to make about its own supervision rules. More than likely, they’ll be crafted and applied, depending on the firm’s own business model. “There will be opportunities for firms to build better mousetraps because they know the mice,” Boyce adds. “It’s going to be fascinating to see what people do and what they come up with. But it’s going to be a sea-change in how firms decide to operate. The regulators won’t be giving a checklist.”

Views held by the IDA and its trade association diverge on the topic of Relationship Disclosure Documents (RDDs) outlined in NI 31-103. Alexander notes the instrument contains no requirement for client acknowledgment, although the IDA calls for it in its own rules. IDA further requires audit trails and supervision not spelled out in the national instrument. “We believe all the registrants need to be held to the same requirements,” she says, regardless of whether they’re IDA, MFDA or non-SRO registrants.

She adds that most clients won’t bother to read RDDs and therefore the IIAC advocates adoption of a standard where access equals delivery. Clients could be given a link to a website and those who want to know every detail can delve deeply, while those who want to know only how much money they made each year don’t have to. She adds it will be a huge hassle for advisors to re-paper all their existing clients, and that having to wait for forms to return with signatures will create problems for future transactions. Boyce, however, says he doubts all clients would require mailings. “Firms may want to do that on their own,” he says, “but most of these rules come out on a ‘go forward’ basis.”

Alexander also says the “clients are grown-ups” premise should be applied to the suitability review requirements outlined in the National Instrument. “To have to send out a nine-page document that they’re not going to read and may not understand is a problem,” she says, adding IIAC is working on an alternative relationship disclosure model.

Filed by Philip Porado, Advisor.ca, philip.porado@advisor.rogers.com

(04/13/07)