Regulators give small, specialized investment firms greater flexibility

Regulators give small, specialized investment firms greater flexibility

New guidance from Canada’s securities regulators that will allow investment firms to hire an external chief compliance officer (CCO) are expected to boost the viability and competitiveness of small and specialized players in the industry and help serve a broader range of investors.

“It could be a really significant step toward providing more flexibility in our regulatory system,” says Lori Stein, a partner in the investment funds and asset-management group at Osler, Hoskin & Harcourt LLP in Toronto. “It shows that regulators want to be flexible and accommodate different business models and innovation.”

The Canadian Securities Administrators (CSA), the umbrella organization for all the provincial and territorial securities commissions, recently issued a staff notice with guidance that it says will allow firms to adopt “more flexible” CCO arrangements “that better align with their operational needs and business models.”

The guidance includes three models that the CSA says will help small and specialized businesses as well as firms with multiple lines of business.

The models include a shared CCO model (one person can work for more than one firm); multiple CCOs model (a firm can have more than one CCO, each responsible for a different part of the business); and a specialized CCO model (for specialized firms like financial technology companies for which industry-specific experience is more valuable).

“We have heard from firms, especially small and medium-sized, that the current one-size-fits-all approach doesn’t align with their business needs and can be burdensome on their operations,” said Louis Morisset, chair of the CSA, in announcing the changes earlier this month.

The CSA says firms looking to adopt one of the three models need to show it’s appropriate for their business and those people applying for the CCO position must meet registration requirements.

In the distant past, firms were allowed to outsource the CCO role but, in the eyes of regulators, some didn’t have enough experience or connection to the firm to manage the risks, Ms. Stein says. The CSA then made it mandatory for the firms to make the CCO role an internal position, which was costly for many smaller firms that didn’t need a full-time person in that role. It was also hard to find candidates who had the specific qualifications required.

“It was a real challenge … and a barrier to entry [for smaller firms],” she says.

Ms. Stein says regulators have granted exemptions to some firms over the years, on a case-by-case basis, for CCO candidates that demonstrated “fitness for registration” but didn’t meet certain proficiency requirements, which generally includes at least three years of relevant compliance experience and completing specific exams.

In the meantime, the financial services industry has evolved because of technology and the onslaught of specialized experience, including fintech firms, which regulators have recognized in their new guidance.

Ms. Stein says the CSA isn’t changing the regulations and will remain strict about who can be a CCO at a firm but are more open to the different models.

“[Regulators] are saying they recognize that sometimes the prescriptive rules don’t make sense and they’re very willing to grant relief,” she says. “They’re telling these startups, fintech companies and individuals wanting to go out on their own that … if you have a set of skills that translates and if you’ve taken the exams, we’ll look at your application. It’s very encouraging.”

Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm that’s part of IPC Securities Corp., says the new guidance helps to remove another obstacle for smaller firms as well as advisors looking to go independent.

“This revision allows them to outsource [the CCO role] at a fraction of the cost of a full-time employee,” Mr. Pereira says. “It also frees up the time and administration burden placed on new [investment counsellor portfolio managers] in Canada. That’s huge.”

Sandra Jakab, a legal advisor and compliance consultant with Vancouver-based Jakab Law and Compliance, says the new CSA guidance will help smaller firms better compete and focus on niche clientele.

“It looks to me like the regulators have keyed in on the critical issues that need to be addressed that will serve both the firms and clients,” says Ms. Jakab, a former director of capital markets regulation at the B.C. Securities Commission.

For example, the multiple CCO model is good for investors because it allows the professionals to focus on specific market categories, such as a fund manager, portfolio manager or exempt-market dealer, she says.

“It will allow firms to better resource each line of regulatory duty they have,” she adds.

With a shared CCO model, Ms. Jakab says firms will be able to leverage other experiences the professionals have at different companies.

Still, firms will need to ensure their shared CCO isn’t in a conflict of interest with other businesses they work for and that they honour confidentiality clauses.

“It sounds elementary, but [identifying conflicts of interest] can be a difficult exercise for many people in many industries,” she says. “You need to make sure that the regulator, CCO and firms are all comfortable that there are controls in place to manage any conflicts.”

Source: The Globe and Mail

Close Menu