Follow principles or face new rules, IDA warns

(March 14, 2005) Canada is a long way from adopting a principles-based system of securities regulation, partly because of a “show me the rule that prohibits it” mentality among some market participants, says IDA senior vice-president Paul Bourque.

Nothing illustrates this point more clearly than the reaction of some participants to the recent regulatory probe on mutual fund trading and market timing, Bourque writes in the IDA’s winter report, noting some reported responses such as “We didn’t actually do anything illegal” and “We didn’t actually breach any securities laws or rules.”

Bourque concedes that market timing is not illegal, but adds that securities registrants are bound by numerous ethical guidelines, such as dealing fairly, honestly and in good faith with clients, observing high standards of ethics and conduct in their business transactions, and not engaging in any practice that is detrimental to the public interest.

“Employees are expected to behave in a principled fashion and firms are expected to supervise their employees to ensure they are living up to these standards,” Bourque says. “Let’s by clear on why abiding by the spirit as well as the letter of the law is appropriate for employees and firms.”

“Do we really need a new rule that prohibits investment dealers facilitating a trading strategy that benefits a few clients at the expense of many?” he asks. “It would be remarkable if principles of ethical behaviour were not sufficient.”

Still, if firms continue to follow the “show me the rule” approach, regulators — if the past is any guide — will be happy to oblige with another prescriptive rule, Bourque warns.

The proliferation of prescriptive rules is not only expensive, Bourque points out, but may actually reduce the effectiveness of compliance and weaken investor protection.

Industry participants cannot have it both ways, adds IDA president Joe Oliver — complain about too many rules, but when hit with an enforcement action where the principles are clear, ask “Where are the rules?”

“The way off the rule-making treadmill, and to solve the problem of regulatory burden, is to support, reward and ultimately institutionalize thinking about right and wrong,” Bourque concludes.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com