OSC launches review of bank-owned dealers

In response to a government request, the Ontario Securities Commission (OSC) is formally launching a review of bank-owned dealers’ investment fund shelves, along with an examination of tied selling and other anti-competitive industry practices.

At the OSC’s annual conference on Nov. 23, provincial Finance Minister Peter Bethlenfalvy said he had asked the OSC to investigate two concerns involving the bank-owned dealers: the elimination of third-party investment funds from dealers’ product lineups, and anti-competitive practices that tie lending to securities underwriting mandates.

On Tuesday, the OSC announced that it will undertake a series of reviews on these issues.

On the question of dealers’ fund lineups, the regulator plans to carry out a “focused compliance review” to examine how the large dealers have addressed the conflicts of interest inherent in the distribution of proprietary products, and the composition of their product shelves.

The government expressed concern that bank-owned dealers have dropped third-party investment funds from their product shelves in anticipation of the client-focused reforms taking effect at the end of the year. Those measures are intended to improve outcomes for investors, not to limit choice and discourage innovation.

The regulator said Tuesday that it will contact the firms that are being reviewed next week. The firms will be expected to provide information to the OSC by Jan. 6.

At the same time, the OSC issued a staff notice that initiates a public consultation on the tied selling issue, which was raised most recently in a report from the provincial government’s Capital Markets Modernization Taskforce earlier this year.

“The taskforce identified concerns that certain commercial lenders may be engaging in improper practices that may impede competition, such as arrangements where a lender requires issuer clients to retain the services of a dealer or adviser affiliate of the lender for their capital raising and/or advisory needs, as a condition of entering into a commercial lending transaction, or vice versa,” the regulator said in its notice.

The OSC said that its review aims to assess the extent of the problem, and its effect on industry competition.

The government recently expanded the mandate of the OSC to include fostering capital formation and competitive markets alongside its traditional objectives of investor protection and ensuring fair and efficient markets.

“The commission believes that such conduct by commercial lenders and their affiliated firms, if it is occurring, is likely to impede effective capital formation, distort pricing for capital markets services and undermine both the efficiency of, and confidence in, our capital markets,” the OSC said in its notice.

The regulator is seeking feedback on the tied selling consultation by Jan. 10.

Additionally, the OSC said that it will be a examining a sample of initial public offering transactions and carrying out a continuous disclosure review.

The regulator will report its findings and any reform recommendations to the government by Feb. 28.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.