;e conduct expected of a registrant in meeting her, his or its
standard of care would be that of a prudent and unbiased ;rm or
representative (as applicable), acting reasonably. In complying
with the standard of care, registrants would be guided by the
a. Act in the best interests of the client; [Note: this is circular and
ill-de;ned where a registrant, such as an EMD, must act in the best
interest of the client in order to satisfy one component of the BIS]
b. Avoid or control con;icts of interest in a manner that prioritizes
the client’s best interests;
c. Provide full, clear, meaningful and timely disclosure;
d. Interpret law and agreements with clients in a manner favourable to the client’s interest where reasonably con;icting interpretations arise; and
e. Act with care.
IMPLICATIONS IF OSC ADOPTS THE BIS
7. ;e BIS is ill-de;ned and is tantamount to imposing a ;duciary
duty on EMDs which is unreasonable since most trades by EMDs
are transaction-based. EMDs are not ;nancial planners. ;ey have
a duty to act honestly, fairly and in good faith towards investors
under Ontario securities law which standard should be maintained, not replaced.
8. ;e OSC may, in e;ect, be making registrants, such as EMDs,
de facto guarantors of investment outcomes. Any movement in
that direction is contrary to the risk/reward continuum, being the
relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment – the
more return sought, the more risk that must be undertaken.
Investments may not work out for many reasons, including a
downturn in the economy. Registrants (including EMDs) should
not be responsible if an investment does not work out, yet that
may be the practical consequence of requiring registrants to
demonstrate that every investment satis;ed the BIS.
9. ;e reverse onus will put EMDs on the defensive and will
discourage investments outside the most conservative investment
opportunities. ;is would be a logical reaction since any failed or
questionable investment would require an EMD to explain how
the investment satis;ed the BIS and a riskier investment would be
more easily found to fall short of that mark. Given the regulatory
bias to regard every private capital market investment as “high
risk”, it is reasonable to assume a chilling e;ect in the private
capital markets. If such retrospective analysis is conducted from a
“pro-client” perspective, it may result in an extremely high
standard equal, in e;ect, to the duty required of a portfolio
manager who manages discretionary investment accounts.
10. ;e BIS will encourage securities litigation against EMDs
since they will be required to justify any and all investments which
may not work out for many reasons, including poor management,
supplier problems, no or reduced demand for a product and/or
service and other matters.
11. EMDs will be less likely to focus on capital raising for all issuers
toward what might be perceived as the riskier end of the risk/reward
spectrum, which will directly impact capital raising for many small
and medium sized enterprises (SMEs). ;is, in turn, could impact
jobs and the Ontario economy. EMDs may limit their capital
raising e;orts to more established SMEs and larger issuers rather
than a higher risk investment where they will face a higher possibility of being sued if the investment does not work out.
12. Typically, an EMD has errors and omission insurance. However, with the BIS, insurers may be reluctant to provide coverage or
may only provide coverage where the premium is
unreasonable/una;ordable for an EMD due to real or perceived
exposure to excessive claims.
13. ;e BIS is a principles-based rule. ;e di;culty with
principles-based rules is no one, including the regulators, knows
how it will play out. ;is will result in the OSC making decisions
as they go, while providing little guidance to registrants on what
they have to do to satisfy the BIS. One might even take the view
that this approach violates the rule of law.
14. ;e PCMA agrees with the views of the BCSC as set out in the
a. ;e adoption of a broad, sweeping and vague best interest
standard will create uncertainty for registrants and may be
unworkable in the current regulatory and business environment.
Introducing an over-arching duty called a BIS while continuing to
permit certain fundamental con;icts to exist between registrants
and their clients is not in the public interest.
b. Doing so may exacerbate one of the issues we identi;ed; the
expectations gap between clients and registrants and may raise
clients’ expectations about investor protection that may not be
realized under a BIS.
c. ;e CSA should establish clear requirements for registrants to
follow and regulators and courts to enforce. ;e proposed targeted
reforms, followed through with coordinated and focused compliance and enforcement e;orts, and full realization of the CRM2
and Point of Sale initiatives, will achieve the best outcomes for
investors and advance the best interests of investors.
15. Many EMDs believe that the BIS will put them at a fundamental disadvantage. Simply, the cards are stacked against the
BEST INTEREST STANDARD - THE CASE AGAINST (Cont.)
BRIEFING NOTE FOR THE PCMA’S PRESENTATION AT QUEEN'S PARK ON MARCH 9, 2017