Regulators go to investors

Four of the nation’s largest regulators announced this month that they are seeking direct input from retail investors on the topic of investment product suitability. It’s an unprecedented move, and one the head of the Investment Industry Regulatory Organization of Canada (IIROC) hopes will yield valuable feedback that can be used as the basis for new regulations.

The Joint Standing Committee on Retail Investor Issues, which has members from IIROC, the Ontario Securities Commission (OSC), the Mutual Fund Dealers Association (MFDA) and the Ombudsman for Banking Services and Investments (OBSI), has released a three-question survey directed at retail investors about product suitability.

The survey will be posted on all member regulator websites. The questions are preceded by a brief overview of the concept of product suitability. Investors are invited to provide their answers to any or all questions, either online or by mail, by October 9, 2008. Investors who participate in the survey will then have the opportunity to participate in further dialogue on product suitability as the consultation process progresses.

According to Susan Wolburgh Jenah, president and CEO of IIROC, the Joint Committee and survey are the products of townhall meetings held by the four regulators to create a direct dialogue with retail investors. An informal committee group was formed to address the comments and concerns that came out of those town-hall meetings.

“This creation of the Joint Standing Committee is in a way an evolution of the original committee and is an attempt on the part of all of these organizations to effectively reach out to [retail] investors,” she says. “We have been criticized as regulators – and I think legitimately so – for not having enough input from that constituency.

“When we, as regulators, put proposals out for comment, we tend to get a lot of feedback from organized groups, like law firms, accounting firms, or the issuer community or the registrant community. It’s harder to get feedback from investors because they are not organized in the same way.”

Ultimately, Wolburgh Jenah would like to see the investor feedback be a factor in the development of future regulation.

“That’s the hope. That is the objective. We want to be integrating the perspective we hear from the investor community into ongoing regulatory efforts and initiatives,” she says.

Depending on the answers, the comments could have an impact on the philosophy of regulators, from the product-specific rule-based regulation currently employed to more standards- or conduct-based regulation.

“We have had a tendency – maybe it’s part of the whole rule-based approach to regulation – where a new product comes along and we regulate it; whether that’s [principal protected notes] through federal deposit regulation or whatever it is,” Wolburgh Jenah says. “A more principle-based approach might look, for example, at structured products generically, such as, here’s what we expect and here are the standards we expect will be followed both in terms of disclosure surrounding these products and how they are distributed or who they are distributed to.”

The first question of the survey directly addresses investors who use a financial advisor, but Wolburgh Jenah says the survey and the follow-up consultation process is about investor product usage and not specifically focused on advisor product recommendations. “The first question does assume they have an advisor,” she says. “The second and the third questions are worded more broadly and encompass questions on those issues. These questions are really about address[ing] transparency overall.”