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OSC has little recourse to salvage plan to scrap embedded fees if Ontario against it, experts say

Quoted in a Financial Post article by Barbara Shecter -

The Ontario Securities Commission will have little recourse to salvage a plan to scrap embedded fees tied to mutual fund sales if the provincial government maintains its opposition to the proposal, according to industry watchers.

“The Minister of Finance has the final say on rules that the OSC proposes,” said Anita Anand, a professor at the University of Toronto’s Faculty of Law, noting that the government has long had the power to reject the rules or send them back for reconsideration.

Though it is rare that that happens — there were a couple of noteworthy cases more than 15 years ago involving over-the-counter derivatives and the use of advisor titles — the public nature of the current disagreement and the early stage in the process is drawing attention.

Last Thursday, shortly after the OSC and Canada’s 12 other provincial and territorial securities regulators rolled out for public comment a proposal to ban certain fees including deferred sales charge (DSC) commissions on mutual funds, Ontario Finance Minister Vic Fedeli issued a statement saying his government under Doug Ford “does not agree with this proposal as currently drafted.”

The statement said the proposal came from a process initiated by the former Liberal government and that the new government plans to work with “other provinces and territories and stakeholders to explore other potential alternatives.”

Some industry watchers suggest Ford’s Conservative government — which has already rocked Toronto’s city council with a surprise plan to slash its numbers and the rare plan to use the constitutional notwithstanding clause to override a court decision that rejected the plan — has put a chill on the regulatory process.

“It is a disturbing turn of events to see the province intervene in the policy-making process in this way … before stakeholder comments have even been delivered to the independent body that has charge of the capital markets in this province,” said Anand, who specializes in ethics and investor protection.

However, others downplayed the politics, saying it was little more than a more public manifestation of the type of consultation and negotiation that often takes place between the government and the regulator before formal approval is requested for policies.

“The OSC developed (the proposed) policies consistent with the objectives of the prior government, following consultation of the sort that is typical between the OSC and the government,” said an experienced securities lawyer, who requested anonymity because he deals with the regulator and did not want to be seen to be taking sides.

“The new government has different objectives and … is letting its views be known. The only difference is that its objections are more public than usual,” the lawyer said.

But another lawyer who has worked extensively with regulators and government, who also requested anonymity to protect those dealings, said there are likely to be longer-term implications from the “not subtle” manner in which the Ford government has intervened in the process.

Among those could be less attention paid to the OSC, this person said.

“Why waste your time with the commission? If the decision-making is taking place somewhere else, you go somewhere else.”

OSC chair Maureen Jensen, who was appointed in 2016 by Ontario’s former Liberal government, last year had her term extended until 2021. But industry watchers suggested the remainder of her tenure could be rockier than the first couple of years, given the Ford government’s actions last week.

“Maureen Jensen has proven to be an excellent (OSC) Chair and I sincerely hope that she will remain in this role,” Anand, the University of Toronto law professor, said Monday.

Asked for comment on the finance minister’s statement last week, OSC spokesperson Kristen Rose said: “Our Minister’s support is critically important to the OSC, and we are respectful of our government’s authority to decide whether any rules published for comment ultimately come into effect.”

The apparent impasse over mutual fund fee reform could lengthen a process that has already gone on for more than five years. At the outset, regulators had considered an outright ban on all embedded fund fees that have been criticized for eating into investor returns, following similar moves in jurisdictions including the United Kingdom.

When Canadian regulators under the umbrella of the Canadian Securities Administrators announced in June that they would ban deferred sales charge commissions on the sale of mutual funds, some investor advocates viewed the decision as a watered-down compromise.

Though the overhaul would remove some types of embedded fees — particularly those on discount platforms where no advice is given, and other that penalize investors for cashing out early — it would leave a variety of embedded fees in place.

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First published in The Globe and Mail - Since 1995, Ontario’s Securities Act has contained

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