Open Letter to John P. Stevenson (PDF)

Secretary to the Ontario Securities Commission

By email to jstevenson@osc.gov.on.ca

23 April 2010

Dear Mr. Stevenson,

1. I am writing with questions and concerns about the OSC’s Investor Advisory Panel (IAP).

By way of background, I was previously a member of the OSC’s Investor Advisory Committee (2005-07). In 2006, I participated in a research study conducted by Professor Julia Black of the London School of Economics, “Involving Consumers in Securities Regulation” (30jun06). This study was commissioned by the Task Force to Modernize Securities Legislation in Canada and informs my thinking on this topic. In 2008, I made a submission to the Expert Panel on Securities Regulation in Canada in which I recommended the establishment of an investor advisory panel modeled on the UK’s Financial Services Consumer Panel (15jul08). A related submission to the Expert Panel was made by Professor Laureen Snider of Queen’s University on the importance of third parties representing the public interest in regulatory environments (13jul08). I believe that an independent investor advisory panel, which is able to represent the public interest in the development of regulatory policy, is an important form of protection for the large percentage of Canadians who currently have exposure to capital markets through the investment of their savings and RRSPs.

2. In February 2009, I testified to the Standing Committee on Government Agencies in connection with their review of the OSC, raising concerns about the Commission’s dissolution of the Investor Advisory Committee in December 2007. Again in this context, I recommended the establishment of an independent investor advisory panel to represent the public interest in the context of regulatory policy development. I was pleased that both the Expert Panel and the Standing Committee on Government Agencies supported this recommendation in their final reports and that the Ontario Securities Commission has decided to implement the recommended panel. Nevertheless, I have certain concerns about the timing, process, and parameters of the OSC’s current initiative involving the proposed IAP.

3. Although there are certain differences between the Canadian and UK regulatory environment such as the use of self-regulatory organizations (SROs) in Canada, there are important aspects of the UK panel, such as its independence, which merit emulation in the Canadian context. As it stands, the OSC’s Investor Advisory Panel is deficient in a number of respects, which I shall discuss in further detail below. In particular, there is a significant discrepancy between the claimed independence of the IAP as per the comment in the Response to Enquiries, that the OSC Panel is “intended to operate independently at arm’s-length from the Commission,” and the actual structure and function of the Panel, which does not support such an operation. This will be analzyed in detail below.

4. A further concern, and the one I shall begin with below, is that there has been no solicitation of input on the Panel’s design (structure, mandate, funding, membership criteria, and Terms of Reference). This is inconsistent with the OSC’s repeated acknowledgement of the importance of effective engagement with retail investors in relevant Commission initiatives. Although I am writing as an individual, I have spoken with several advocates in this area who are equally concerned about deficiencies in proposed Panel and the fact that their views were not invited as part of the process of drafting the Panel’s mandate and Terms of Reference.

Lack of Consultation re: IAP design and Terms of Reference

5. The lack of stakeholder consultation about the design of this Panel is a significant concern. It appears that the Panel’s Terms of Reference have already been “adopted” by the Commission as of 06 April 2010 without any preceding discussion or consultation with stakeholders. This is contrary to the assurance given by OSC Vice Chair Lawrence Ritchie to the Standing Committee on Government Agencies at the hearing on 23 February 2009 in which he stated that such discussions were already underway. In response to a question from the Standing Committee about the dissolution of the Commission’s previous Investor Advisory Committee (IAC), Mr. Ritchie confirmed:

1. We have to find a better way of getting some input. So we’re open for suggestions. We’re talking directly to retail investors about how best to engage them and to find a more permanent mechanism to receive input from that perspective, from the retail investor perspective. (23feb09)
   

I am a member of the Small Investor Protection Association and have contact with many of the individuals doing advocacy work in this area. To the best of my knowledge, no discussions were underway at the time as per Mr. Ritchie’s comment, nor was there any solicitation of input prior to the OSC’s announcement of the IAP in February 2010.

6. In its most recent Statement of Priorities the Commission acknowledged that stakeholders had emphasized in their submissions the importance of “open and inclusive consultation.” It expressed the recognition that

1. Effectively listening to and communicating with interested stakeholders is essential to meeting the challenges we face in fulfilling our mandate and addressing expectations about what we can accomplish. (p. 2536, 26mar10)
   

Indeed, the need for effective engagement with stakeholders and retail investors in particular has long be recognized by the Commission as indicated in the OSC documents quoted in my submission on the Statement of Priorities (15feb10). Moreover, this recognition is clearly expressed by Mr. Ritchie in the above comment to the Standing Committee.

7. Yet, I have to question the sincerity of this commitment to stakeholder engagement, given that no input was invited from “interested stakeholders” prior to the Commission’s announcement of the Investor Advisory Panel and its already “adopted” Terms of Reference. This approach is inconsistent with Commission’s express acknowledgement of needing to consult with interested parties and is contrary Mr. Ritchie’s assurance to the Standing Committee that the Commission was “open for suggestions” about how best to engage retail investors – and that it was already engaged in such discussions in February 2009.

8. OSC Investor Secretariat. A further aspect of the present concern relates to the establishment by the OSC of an Investor Secretariat in order to facilitate this engagement. In his presentation to the Standing Committee at the hearing on 7 April 2009, Mr. Wilson gave assurance “we’re well on the way to developing better channels of communications with investors” (p. 6, 07apr09). My understanding is that the Investor Secretariat was created by the Commission some time in the spring of 2009 to facilitate this development in communications. 

9. This body is referenced in the OSC’s written Response to the Stakeholder Presentations made to the Standing Committee on February 23, 2009. Under point 3: “Investor Input in Securities Regulation,” Mr. Wilson responds:

1. We recognize the importance of effectively engaging investors in obtaining input on securities-related matters, particularly initiatives that directly affect investors. We have been seeking innovative ways to obtain input from investors. We know that more needs to be done in this area. We are actively engaged in a rigorous exercise to identify the most effective ways to obtain investor input and to address investor interests. For example, we are establishing an Investor Secretariat as a coordinating body within the Commission to better identify and address issues of concern to investors ... As part of this new Secretariat, we are also assessing the best ways to encourage and facilitate investor input recognizing the challenges investors face in commenting on regulatory proposals. (p. 9, 07apr09)
   

10. The Investor Secretariat is referred to again in the 2009 OSC Annual Report:

1. In order to serve the interests of all investors, especially retail investors, the OSC understands how important it is to solicit and obtain their input and understand their concerns about regulatory matters. The OSC is developing better channels of communications with investors by building on the experience of earlier initiatives related to investor outreach and consultations. ... One such initiative that has been announced is the establishment of the OSC Investor Secretariat. It is anticipated that the Investor Secretariat will function as a hub within the OSC to better coordinate its policy efforts and assist with identifying and addressing issues of interest and concern to investors, especially retail investors. (30jun09)
   

11. In line with this, the mandate of the Secretariat, as stated at the OSC website was “to assist with identifying and addressing issues of interest and concern to investors” and “to help foster more effective communication of investor concerns and issues to OSC staff so they can be reflected in our priorities and policies”. To this end, the Secretariat was to focus on “soliciting comments from investors on Commission initiatives” (quoted from the Secretariat’s webpage as of 14 Feb 2010, now removed). Yet, it appears that the Secretariat was recently abandoned – apparently without having solicited any input on the new Investor Advisory Panel. This would have been an obvious project for such a body, given its stated mandate and the oft-repeated recognition by the Commission on the need to consult stakeholders on OSC initiatives.

12. In February 2010, almost a year to the day following the February 23rd hearing, the Commission suddenly announced the creation of a 7‑member Investor Advisory Panel (26feb10). The announcement states that part-time Commissioner, Mary Condon, worked on the development of the Panel. Nevertheless, there was no preceding discussion nor any invitation from Ms. Condon, the Investor Secretariat or the Commission to provide input on the Panel’s design, structure, function, membership criteria or Terms of Reference.

13. It is well known to the Commission that consumer advocates have been recommending the establishment of such a panel for some time. As mentioned above, in addition to testifying on this subject at the Standing Committee hearing in February 2009, I made a submission to the Expert Panel on Securities Regulation in July 2008 in which I recommended the establishment of a retail investor panel along the lines of the UK’s Financial Services Consumer Panel. In this context, I attended an Expert Panel roundtable chaired by Ms. Condon in October 2008.

14. Following the announcement of the IAP in February 2010, the Commission published a Request for Applications in March, which included a statement of the Panel’s mandate, operational structure, funding, and membership criteria (19mar10). Two weeks later, a 10‑page Terms of Reference was published, stating that it had already been adopted by the Commission as of 6 April 2010 (06apr10).

15. At no point has the OSC invited input in the course of designing this new body, contrary to its repeated assurances, especially regarding retail investors, about “how important it is to solicit and obtain their input and understand their concerns”.

16. The Commission had ample opportunity to obtain input in the year following the stakeholder presentations in February 2009 where significant concerns were raised about how it was engaging with retail investors. Although the OSC created a special body, the Investor Secretariat, to solicit comments on Commission initiatives, this has now vanished – apparently without fulfilling its function regarding the present issue. Instead of consulting, the Commission seems to have reverted to a command-and-control approach, rolling out the new Panel with everything already decided.

17. Why hasn’t the Commission undertaken to solicit timely input on this new advisory panel when it was made aware of the interest and concern about this issue in the context of the Standing Committee’s stakeholder presentations in February 2009?

18. The recommendation of the Standing Committee on Government Agencies was that the UK Consumer Panel was to serve as a basis for the design of an investor advisory panel. As I will show below, the OSC Panel falls short in multiple respects when compared with this model.

19. A fundamental notion governing any consideration of such a panel is the concept of ‘interest representation’. The following self-definition of the UK Consumer Panel illustrates the incorporation of this notion into its mandate:

1. We are an independent statutory body, set up to represent the interests of consumers in the development of policy for the regulation of financial services. (about us: fscp)
   

20. The focus of interest representation with the UK panel is the individual consumer of financial services. The equivalent category in the present context would be the retail investor – an especially vulnerable group in need of properly resourced advocacy in regulatory policy development.

21. The vulnerability of retail investors was specifically referenced by OSC Vice Chair Lawrence Ritchie in his comments at the third Standing Committee hearing in April 2009. He testified that

1. The retail investor is the most vulnerable of market participants, and therefore protecting retail investors is and needs to always be in the front and centre of everything that the OSC does. (07apr09)
   

22. Mr. Ritchie outlined a number of initiatives, which he claimed were then underway to address the concerns raised in the stakeholder submissions the previous February: “We’re in the midst of working towards realizing three distinct but interrelated initiatives that we believe directly respond to much of what we have heard.”

23. The first initiative involved the setting up of the above-mentioned Investor Secretariat, which Mr. Ritchie described as “a hub, interacting with the operating branches of the OSC to help them better identify issues of interest to retail investors and to identify and assess the impact of OSC projects on retail investors.” Regarding the operational output of this body, Mr. Ritchie stated that “The secretariat intends to publish those assessments and encourage responses from the investing public”.

24. Nevertheless, it seems this body produced no output nor did it solicit any input from

retail investors during the year of its existence. The only record of its existence are references in the OSC’s testimony to the Standing Committee, the Commission’s 2009 Annual Report quoted above, and the Secretariat’s webpage. The latter was still posted until at least mid-February 2010, but subsequently was removed (a pdf of the webpage may be downloaded here).

25. As mentioned above, this Secretariat was identified by Mr. Ritchie as the “first prong” of three interrelated initiatives responding to the stakeholder representations at the February 2009 Standing Committee hearing. The third prong involved an initiative

1. to establish a more effective means through which to receive input from retail investors. We’ve heard comments from stakeholders on this issue and, in principle, the OSC supports the concept of a funded, independent voice for retail investors.
   

26. Mr. Ritchie claimed that efforts were already underway to find an appropriate structure for this body. As quoted above, he testified to the Standing Committee in February 2009 that

1. We’re talking directly to retail investors about how best to engage them and to find a more permanent mechanism to receive input from that perspective, from the retail investor perspective.
   

Nevertheless, it seems this outreach was not underway at the time nor did it occur prior to the OSC’s announcement of the Investor Advisory Panel in February 2010.

27. At the third Standing Committee hearing in April 2009, Mr. Ritchie again reiterated that consultations were underway regarding the establishment of the above-mentioned permanent mechanism:

1. We’re currently in the process of reaching out to third party organizations and universities to assist us with this initiative. ... we are committed to hearing directly from retail investors to find more and better ways to serve and protect investors.
   

Yet, it appears this outreach never occurred and that the commitment to engage with retail investors and hear from them “directly” regarding this initiative was never kept.

28. The Commission would have been aware by February 2009 that retail investor advocates were contacting provincial government MPPs with their concerns about the dissolution of the Investor Advisory Committee in December 2007. In response, the Commission spoke about a new ‘Investor Secretariat’ – a “hub” focused on retail investor issues. Although it appears this body was created to address the concerns raised by consumer advocates and MPPs at the February hearing, it produced no output, solicited no input, and was quietly dropped earlier this year.

29. As a consequence, the current IAP initiative does not reflect due process. In fact, the timing has raised questions as to whether the Commission may have received a ‘heads up’ from the provincial government following the dissemination to government officials in February of several advocates’ submissions on the OSC’s Statement of Priorities and responded by rushing out the current IAP initiative.

INVESTOR ADVISORY PANEL DESIGN FLAWS

In my estimation, there are multiple design flaws in the proposed IAP. 

A Small Panel with a Diluted Focus

30. The expectation was that the Panel would be dedicated to retail investor issues. In his Standing Committee testimony, Mr. Ritchie expressed the recognition that this constituency is “the most vulnerable of market participants.” Yet, the Commission is also inviting applications from “Institutional investors from the pension sector or other buy side”. This inclusion is not justified and is problematic for several reasons. 

31. The OSC decided without consultation or justification to establish a Panel with only seven members, including the Chair. This contrasts with the original Investor Advisory Committee, which had 10 members, excluding the Chair, and the OSC’s current consultative committees, which have 12-20 members. The UK’s Financial Services Consumer Panel has 12 members, including the Chair.

32. The relatively small number of IAP members together with the relatively broad Panel focus on retail and institutional investor issues inevitably will dilute and weaken the focus on issues affecting “the most vulnerable of market participants.” These issues need to be the exclusive focus of a dedicated Panel. I can attest to this based on my previous experience with the IAC.

33. Institutional and retail investors have significantly different priorities reflecting differences in their access to capital markets. Retail investors access investments through financial intermediaries, i.e. registered representatives with investment dealers. This circumstance gives rise to very different issues and concerns, e.g., relating to the client/advisor relationship, advisor fiduciary duties, high/opaque fees, mutual fund point of sale disclosure, dealer complaint process, restitution options including the Ombudsman for Banking Services and Investments (OBSI), and different concerns relating to product suitability, e.g. involving investment vehicles such as Principal Protect Notes (PPNs) and leveraged ETFs.

34. In contrast, pension funds are currently focused on issues such as corporate governance, executive compensation, International Financial Reporting Standards (IFRS), taxation, shareholder democracy and voting rights. Some of these issues were addressed by OSC Vice Chair John Turner at the third Standing Committee hearing in April 2009 where he specifically mentioned the submission of the Canadian Coalition for Good Governance, a well-funded organization that represents institutional investors. This is further evidence of the distinction between institutional investor issues and those affecting retail investors, which were considered separately by Mr. Ritchie.

35. Also, as I pointed out in my submission on the OSC’s Statement of Priorities (15feb10, p. 13), institutional investors already have an organization to represent their interests, i.e. the Canadian Coalition of Good Governance (CCGG). The CCGG is a well-funded, well-staffed organization – with over 40 dues‑paying members, supporting an executive team, 10‑member Board of Directors, 9‑member Accounting and Auditing Policy Committee, and a 17‑member Public Policy Committee. Moreover, institutional investors already have two representatives on the OSC’s Continuous Disclosure Advisory Committee.

36. In contrast, individual retail investors – “the most vulnerable of market participants” – are left to fend for themselves with virtually no resources to represent their interests – either with the investment industry or the regulators. This is clearly illustrated by the preponderance of industry submissions responding to the OSC’s request for comment on the mutual fund point of sale framework (81-318). The Commission is aware of this disparity and the lack of resources on the side of small investors. A few years ago the Small Investor Protection Association submitted a funding proposal to the OSC and even received assistance from Commission staff in developing the application – which then was turned down by the OSC Board.

37. One aspect of the vulnerability of retail investors is their strategic disadvantage, given their lack of adequate resources to undertake skilled and effective interest representation in the context of regulatory policy development. The inclusion of institutional investor issues on the relatively small Panel further skews the current imbalance of resources in favour of the institutional component.

Lack of Engagement with SROs

38. A further problem with the design of the OSC Panel is the omission of any reference to engagement with self-regulatory organizations (SROs) such as the Investment Industry Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA). Evidently the intention is that the Panel will respond only to OSC regulatory initiatives. Nevertheless, IIROC and the MFDA develop regulatory policies, which have a direct bearing on retail investor interests.

39. The UK Consumer Panel provides the following standard regarding its engagement with regulatory policy:

1. We work to advise and challenge the FSA from the earliest stages of its policy development to ensure they take into account the consumer interest. (about us: fscp)
   

40. This early-engagement principle is extremely important. In the Canadian context, where SROs are used to regulate financial intermediaries, it is essential that retail investor representatives should be able to interface with SROs in the policy development process. In view of this, the lack of any provision for SRO engagement (by which I do not mean Panel membership) in the IAP’s mandate and Terms of Reference is a significant shortcoming.

41. Moreover, this is also clear from the testimony of OSC Chair David Wilson and Vice Chair Lawrence Ritchie to the Standing Committee on Government Agencies in February 2009. In the context of responding to questions about the dissolution of the previous Investor Advisory Committee, OSC management undertook to justify the discontinuation of the IAC on the basis of the perspective that the IAC was only engaging with OSC staff. The argument was proposed that because retail investor issues involve the SROs, it is necessary to have them at the table as well. This is the outlook behind the following comment by Mr. Ritchie:

1. ...the concerns of retail investors transcend just the Ontario Securities Commission. It involves, for sure, the Ontario Securities Commission, but it transcends it because of our system of SROs and also other complaint-handling processes.(23feb09)
   

42. When a member of the Standing Committee continued to raise questions about the dissolution of the IAC, Mr. Wilson responded:

1. Let me try to explain a little bit about how the system works, Mr. Prue. The retail investors, when they are touched by the system, are not directly touched by the Ontario Securities Commission. When retail investors get involved in the system of investing securities, their point of contact is through a registered representative. To really have a forum where retail investors’ issues get to the core of who regulates investment advisers, IIROC has to be in the tent. ... If the advisory committee is going to have its ideas land on fertile soil, it should have the IIROC people listening to it.
   

43. In fact, SRO staff attended about half the IAC meetings, as had been planned from the beginning. Since Mr. Wilson acknowledged the importance of the SROs being “in the tent” relative to the consideration of retail investor issues, the absence of any provision for their inclusion in the Investor Panel process and the prospect that the Panel will be dealing solely with OSC regulatory issues is a significant weakness vis-à-vis retail investor concerns. Although I questioned this in my comments on the OSC’s Statement of Priorities, there was no response and no provision for this engagement was incorporated into the IAP design.

Lack of Independence of the IAP

44. Another significant concern is that the Panel proposed by the Commission is not independent. The word “independent” is not used in the original news release announcing the Panel (26 Feb 2010), nor does it occur in the Request for Applications, which describes the Panel’s mandate and operational structure (19 Mar 2010), nor is independence referenced at any point in the Terms of Reference (06 Apr 2010).

45. Nevertheless, the following comment occurs on page 2 of the Commission’s “Responses to Enquiries on the OSC Investor Advisory Panel” (06apr10):

    The Panel is intended to operate independently at arm’s-length from the Commission.

The mere use of the words “independent” and “arm’s length” in the context of this Response and the reference to the Commission’s undocumented intentions about how the Panel should operate is insufficient to establish that the Panel is an independent, arm’s length body or that it has the capability of operating “independently at arm’s-length from the Commission”. The further concern is that the use of these terms in the Response to Enquiries is intended to quell legitimate concerns while nothing was actually changed in the Panel’s structure and function.

46. In fact, it appears that the Commission has not created an independent, arm’s length body but merely a variant of its current consultative committees. This reflects a shortcoming, given the recommendation of the Standing Committee on Government Agencies that an investor advisory panel should be “based on the financial services consumer panel in the United Kingdom.” This body is indeed independent as shown by several key features, which are lacking with the IAP. Moreover, the Expert Panel on Securities Regulation in Canada also recommended the establishment of an independent investor panel in its report.

47. The Commission has published documents in which the structure and function of the Panel is specified in some detail. These specifications and the lack of other key features provide a basis for determining whether in fact the Panel is independent and has an ‘arm’s length’ relationship with the Commission.

48. The term ‘arm’s length’ is a relational term with implications about how one party (person or organization) functions relative to another party. A discussion paper by Canada Revenue Agency (CRA) on the “Meaning of Arm’s Length” for the purposes of the Income Tax Act provides a helpful elaboration about the meaning of this phrase, which is applied analogously in different relational contexts (08jun04). I want to emphasize that I am using this source in the present context to extract an analogical meaning for the purpose of determining whether the Investor Advisory Panel, as designed by the OSC, is set up to function in an independent, arm’s length manner relative to the Commission.

49. The CRA discussion focuses on the nature of the relationship between two parties. It specifies criteria that determine whether or not parties have an arm’s length relationship. A major consideration is the nature and extent of the control or influence of one party over another. For example, in considering the adoptive relationship, CRA clarifies that the mere appointment of someone as a guardian does not constitute de facto adoption. It is a question here of determining the nature of the relatedness vis-à-vis relevant influence and control:

1. The factors to look for in determining whether a certain relationship between an individual person and a child constitutes an adoption in fact are actual control and custody, an exercise of parental care and responsibility on a continuing basis, dependency, and proximity to each other. (¶10)
   

50. In a section on Corporations and other “persons”, the issue of control is equally prominent in determining the nature of the relationship. Control here means de jure control,

1. which generally means the right of control that rests in ownership of such number of shares as carries with it the right to a majority of the votes in the election of the board of directors of the corporation. (¶11)
   

51. In another section, which clarifies the notion of “control”, CRA observes that

1. The courts have also held, in certain cases, that excessive or constant advantage, authority or influence can constitute de facto control (i.e., effective without legal control). This situation can bring parties into a non-arm’s length-relationship. It is important to note that this advantage need not be exercised to be a factor; the mere ability to do so is sufficient. (¶25)
   

52. In a section under Partnerships, CRA comments that a partner, which has “little or no say in directing the operations of the partnership” will be dealing at arm’s length with the partnership (¶27).

53. The question, then, taking into account the above criteria relating to the general nature of an independent, arm’s length relationship, is whether the OSC has indeed established the IAP as such a body in relation to itself. As per the above considerations, this needs to be answered in view of the nature and extent of the Commission’s authority, control, and/or influence over the Panel.

54. The Panel’s Terms of Reference states that it is “an advisory panel to the Commission” (1.1). Yet, the extent of the control exercised over the existence, mandate, structure, and functions of the Panel effectively makes it an internal or relatively internal committee of the Commission rather than an independent, arm’s length advisory body to the Commission. In contrast, the UK’s Financial Services Consumer Panel clearly would fall in the latter category relative to the FSA. This contrast will become more clear in the course of considering various constraints on the operations of the IAP.

55. Article 6.1 of the Panel’s ToR states that “The Secretary to the Commission shall serve as the general liaison between the Panel and the Commission and will serve as the Secretary to the Panel”. This liaison through the Commission’s Secretary does not per se establish the Panel in an arm’s length relationship with the Commission. The Secretary to the Commission is itself an office within the OSC as indicated in the organizational chart. While it is true that the FSA provides the Consumer Panel with a secretariat, which is housed in the same building as the FSA, the Consumer Panel has certain operational features or capabilities, which effectively allows it to function independently of the FSA, which are lacking with the IAP.

56. Complete control over IAP mandate and Terms of Reference. A main emphasis in the CRA material with respect to determining whether there is an arm’s length relationship between two parties is on control. In fact, the Commission has designed the IAP in such a way that it has complete control over the Panel’s mandate and Terms of Reference. Article 10.1 states that the OSC can unilaterally “amend, affirm or rescind the mandate” of the Panel upon review, i.e. without the need to seek the Panel’s agreement. If agreement was required, this would have been included. If the mandate of the Panel were to be rescinded, it seems the Panel would cease to exist altogether. Also, the Commission has complete control over the Panel’s Terms of Reference, which it can amend as it sees fit with 60 days notice to the Panel members. Again, there is no indication of any requirement of acceptance of such amendments by the Panel. On this basis alone, the Panel cannot be considered to exist in an independent, arm’s length relationship with the Commission.

57. Determination of IAP agenda & issues. According to article one of the Panel’s mandate, the IAP has been set up as a responder to Commission initiatives including various kinds of requests for comment on a range of issues. While it is expected that the Panel would serve this kind of function, as does the UK Consumer Panel, it does not appear that the IAP is able to determine an agenda of its own regarding issues affecting retail investor interests, i.e. which it might think need a policy response on the part of the regulators. As a member of the OSC’s previous Investor Advisory Committee, I recall that we spent quite a lot of time discussing and determining a set of issues that we felt needed regulatory attention. If the IAP is set up only as a responder to OSC initiatives, this will make the deliberations of the Panel dependent on Commission requests, effectively giving the Commission substantive control over the issues considered by the IAP. This form of control also diminishes the capability of the IAP to function as an independent, arm’s length body.

58. Inability of the IAP to speak out publicly on investor interest matters. On this point, there is a very significant contrast between the Investor Advisory Panel designed by the Commission and the UK Consumer Panel. This operational capacity has a direct bearing on the issue of independence and an arm’s length relationship. In general, if party A is independent of B, then A is able to act independently or, in this case, speak out independently of B. The header at the Consumer Panel website describes it as “An independent voice for consumers of financial services”. Clearly, the ability to speak out publicly is integral to the independence of the UK Panel.

59. Considered more closely, it is clear that in addition to its formal written responses to FSA requests for comment, the Consumer Panel has the ability to publicly express its views outside this context and even has the ability to express its disagreement with the FSA. This ability is embedded in the Consumer Panel’s Terms of Reference and arguably is an essential element of any body that operates in an independent, arm’s length relationship with another. The relevant passage:

1. 10. The Panel can speak out publicly when it wishes to draw attention to matters in the public interests and when it disagrees with the FSA. (fscp-tr)
   

60. The Investor Advisory Panel designed by the OSC has no such capability. The only output envisioned by the Commission will occur when the Panel provides formal written responses in the context of the request for comment process, in which case its responses will be publicly posted together with others. The Commission also envisions an Annual Report, which is described as “a report to the Commission on its activities for the preceding year” (9.2).

61. The ability of the IAP to publicly communicate its views is thus extremely limited – to an extent that it cannot be described as functioning or having the capability to function “independently at arm’s-length from the Commission”. The inability of the IAP to speak out publicly on investment matters affecting the public interest is a key factor supporting this conclusion.

62. When and why might the IAP want or need to speak out publicly on retail investor interests? The ABCP crisis provides an example of circumstances where the independent voice of a body representing the interests of retail investors would have been appropriate and potentially very helpful, serving to encourage the Commission to consider taking a different approach in the way it was addressing the investor protection issues that arose in the crisis. In its Report, the Standing Committee on Government Agencies noted the critical comments of some stakeholders re: the Commission’s response to the ABCP crisis and observed that

1. it is important that the agency charted with protecting the public interest be seen to be taking a leadership role when there is a major disturbance in the markets that threatens the interests of retail investors. In this respect, we have some concern that the Commission may have adopted a narrow interpretation of its public interest jurisdiction in responding to the ABCP crisis. (29 Mar 2010, p. 10)
   

63. Control of communications: no website. Commensurate with its ability to speak out independently, the UK Consumer Panel has its own website, independent of the FSA. The OSC-designed Panel lacks this functionality entirely, which provides further evidence that the Panel has not been provided with the requisite capability that would allow it to operate “independently at arm’s-length from the Commission”. Overall, the communications of the IAP are controlled to an extent that effectively nullifies its claimed independence and arm’s length relationship with the Commission.

64. Coming back to the IAP’s Annual Report. This is described as a report to the Commission on the Panel’s activities for the preceding year. In contrast, the reporting function of the Consumer Panel is oriented just as much, if not more, to the financial consumers whose interests it represents. It is clear from the language used at the Consumer Panel website that the CP sees itself as working for consumers and representing their interests. In contrast, the IAP mandate and Terms of Reference gives the impression of a body designed to work for, report to, and be accountable to the OSC.

One-way Accountability

65. The accountability envisioned in the IAP/OSC relationship is one-sided and one-way. There is no indication that the Commission sees itself as being accountable to the IAP for what it does with its advice or recommendations. In the case of the UK Consumer Panel, there is a statutory provision establishing the accountability of the FSA to the Panel embedded in the Financial Services and Markets Act 2000. An equivalent provision was included in the Expert Panel’s draft securities act:

1. The Commission shall take into account the representations made by the advisory panels. If the Commission disagrees with a view expressed, or a proposal made, in the representation, it must give the panel a statement in writing of its reasons for disagreeing. (¶25.4)
   

66. While the Canadian regulators do respond in writing (usually very cursory) to submissions in the formal notice and comment process, the mandate of the IAP extends beyond that process. There is a legitimate basis and precedent (as above) for expecting that the OSC will be accountable and responsive to the Panel for its input and advice beyond the formal comment process. It is notable that the Panel’s Terms of Reference lack any provision for this accountability.

67. Another aspect of the role of the UK Consumer Panel, which is lacking with the IAP, is indicated in item #7 of its Terms of Reference: the Panel “can advise the Government on the scope of financial services regulation” (fscp-tr). It would be in the public interest if a suitably independent investor advisory panel (not the IAP as presently designed) could advise or report to the Ontario government, i.e. the Standing Committee on Finance and Economic Affairs, in appropriate circumstances.

Remuneration & Budget: Under-resourced Panel

68. Consistent with the overall approach of the Commission in designing this Panel, there was no discussion or consultation about budgetary matters. Remuneration to Panel members is at a very low rate of $275/day or $34/hr – very out of line with the remuneration of the members of the UK Consumer Panel. According to their most recent Annual Report, remuneration of Panel members averages approximately $650 CAD/day (as of January 2009 at the current £ exchange rate). This disparity (especially considering the ample salaries of senior Commission staff) is not inconsistent with past OSC practice. Despite the fact that the Commission studied the UK Consumer Panel prior to setting up the previous Investor Advisory Committee, we received no funding, not even a research budget.

69. On past occasions, I discussed the remuneration issue with former IAC member, the late Whipple Steinkrauss (a senior public servant and former Assistant Deputy Minister in the Ontario government). Ms. Steinkrauss sat on various boards and committees and was familiar with the kind of per diem people would typically receive for such participation. Knowing her views on the matter, I am confident she would agree with the above assessment.

70. As it stands, it is unclear whether the annual budget of $50,000 (in addition to remuneration) is intended to include research costs. It does not appear so. Schedule A on the Terms of Reference states that this $50K is to facilitate the Panel’s “ability to carry out its mandate through consultations with investors or the procurement of professional services to assist in drafting comment letters”. This is one-fifth the amount allocated to the UK Consumer Panel for professional fees, including its research expenditure (approx. $200,000 CAD per annum averaged over two years). Moreover, the UK amount does not include the secretariat of staff provided by the FSA, whereas it appears that the OSC intends that the IAP should also use the alloted $50,000 for secretarial services.

71. I am not unaware that the population of the UK is several times greater than Ontario and that the UK Consumer Panel covers a broader range of financial issues. Nevertheless, Canada is by now 12 years behind the UK and Australia, which have had advisory panels since at least 1998. There is the need for a rigorous assessment of priorities at the beginning of such an enterprise. Moreover, there is the potential that an under-funded Panel will have an especially adverse effect on the retail investor component given that institutional investors already have a well-funded organization, the CCGG, with a dedicated research analyst.

72. Certain capabilities and facilities are required for an organization to undertake effective interest representation for a vulnerable and dispersed constituency. The UK Consumer Panel justifies its research budget as being necessary to understand the situation, perspective, and behaviour of consumers in order to properly identify its own priorities and influence the consumer priorities of the FSA (fscp-rd). In contrast, it appears that the IAP will not be setting its own agenda and priorities, but will be a responder to OSC-initiated requests for comment. This, combined with the limited budget (if it even includes research costs), inevitably will limit the capacity of the Panel to discover and understand the needs of those whose interests it represents. Institutional investors are in a much better position in this respect given the existence of the CCGG.

Summary and Conclusions

73. Professor Black’s study emphasizes the importance of “involving consumers in the design and implementation of the regulatory regime”. In her view, the effectiveness of regulation will be improved by the incorporation of information, perspectives and solutions deriving from the consumer/retail investor side of the equation. The quality of regulatory decision-making will improve, the regime’s democratic accountability will be enhanced, and trust in the regulator will be restored. (Black, 561).

74. The benefit of incorporating third parties representing the public interest into a regulatory regime was also noted by Professor Snider in her Expert Panel submission:

1. Properly conceptualized and developed, third parties reinforce regulatory power. They help regulators do the job they are obligated by statute to do. (emphasis mine)
   

75. The fundamental problem affecting the Commission’s proposed Investor Advisory Panel is that it has not been properly conceptualized and developed. The Commission issued no white paper on the proposed Panel nor did it solicit input from interested stakeholders. As it stands, the Panel is problematic in the following respects detailed above:

1. 1.Small number of members with a diluted focus on retail and institutional investor issues.
   

2. 2.In the Canadian context, the lack of engagement with SROs is a significant deficiency for retail investor participation in regulatory policy development.
   

3. 3.The IAP is demonstrably not an independent, arm’s length body relative to the Commission given the nature and extent of the Commission’s control over the Panel.
   

4. 4.The accountability envisioned in the IAP/OSC relationship is one-sided.
   

5. 5.The remuneration of Panel members is inadequate and the Panel is under-resourced. Inevitably this will have greater impact on the retail investor component given that institutional investors already have a well-funded body to represent their interests.
   

6. 6.There was no consultation with interested stakeholders prior to the announcement of the IAP and the publication of its already adopted Terms of Reference.
   

76. Recommendation: in view of the significant problems with the design of the IAP, the Commission should put the application process on hold until the requisite consultations have been conducted. These consultations should be facilitated by an independent third party with appropriate expertise in stakeholder engagement.

Thank you for giving this your attention. I will look forward to the Commission’s response to these questions and concerns.

Pamela J. Reeve, Ph.D.

pj.reeve [at] utoronto.ca

c. Hon. Dalton McGuinty, Premier

c. Hon. Dwight Duncan, Minister of Finance

c. Mr. Peter Wallace, Deputy Minister of Finance

c. Mr. Ernie Hardeman, Chair, Standing Committee on Government Agencies

c. Ms. Lisa MacLeod, Vice-Chair, Standing Committee on Government Agencies

c. Mr. Norm Miller, PC Finance Critic

c. Mr. Peter Tabuns, NDP Finance Critic

Update 2 May 2010: The OSC response to my query has been delayed beyond the deadline for applications, Friday, 30 April 2010. In response to a further inquiry to the OSC Secretary early AM on Thursday, 29 April regarding the status of my submission, I was informed that the Commission would respond “shortly”. There was no consideration of the imminent deadline for applications (the next day), although I mentioned this in my query. The submission is also currently being reviewed by one of the above MPPs.