8 July 2003
Statement of David L. H. Yu, CFA for The Association for Investment Management and Research, Wise Persons' Committee Review of Canadian Capital Markets
Opening Remarks
Good morning, my name is David Yu.
I would like to thank the chair, Michael Phelps, and other members of the Wise Persons' Committee for the opportunity to speak on this important issue. Today, I'm speaking on behalf of the more than 8,000 investment professionals in Canada, who are members of the Association for Investment Management and Research (or AIMR).
I am a holder of the Chartered Financial Analyst® designation and a member of AIMR. I served on AIMR's Board of Governors from 1999 - 2001 and currently participate on several standing committees. In particular, I serve as the co-chair of the Canadian Advocacy Committee.
I began my investment career over 28 years ago and have been employed in various investment positions, involving the management of fixed income portfolios, quantitative analysis, and investment counselling. In my current position as a Senior Principal at Perigee Investment Counsel Inc, I manage about $5.0 billion in bonds, mortgages and money market assets. In addition, I am the Chief Compliance Officer for the firm.
Summary of AIMR's Views
For over 30 years, AIMR has been advocating for efficient
capital markets that are ethical, transparent, and provide adequate
investor protection. To promote these values, the Association established
a global advocacy program to address regulatory and standard setting
initiatives in regions where AIMR members are located. The following are
some key views that are maintained and fostered by AIMR:
- Regulations and rules governing capital markets should be harmonized to promote cross-border listings and transactions.
- Oversight and enforcement of regulations must be effective and consistent to ensure the integrity of capital markets.
- There should be one set of global high-quality standards for reporting financial information of market transactions and activities.
Background on AIMR
AIMR is a non-profit professional organization of over 65,000 financial
analysts, portfolio managers, and other investment professionals in 117
countries; 56,000 AIMR members are holders of the CFA designation. Over
8,000 AIMR members live and work in Canada. AIMR's membership also
includes 127 affiliated societies and chapters in 46 countries. In
Canada, there are 13 societies and chapters, with The Toronto Society of
Financial Analysts being the 3rd largest society in the world. AIMR is
internationally renowned for its rigorous CFA curriculum and examination
program, which had more than 100,000 candidates from 148 nations enrolled
for the June 2003 exam.
CFA charterholders, candidates, and other individuals who are AIMR members must subscribe to a Code of Ethics and Standards of Professional Conduct requiring them, among other things, to:
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Act with integrity, competence, dignity, and in an ethical
manner.
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Practice and encourage others to practice in a professional and ethical
manner.
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Strive to maintain and improve their competence and the competence of
others in the profession.
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Use reasonable care and exercise independent professional
judgment.
Our involvement in standard setting and the promulgation of regulations has been a long tradition of AIMR. Standing committees of AIMR's global advocacy program have developed strong liaison relationships with key regulators and standard setters around the world. These committees frequently meet and discuss current issues with these regulators; some examples include the following:
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In February 2003, AIMR conducted a four-day European summit, involving
15 meetings with officials from the European Commission, Committee of
European Securities Regulators, and other European organizations.
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In April 2003, AIMR representatives met with members of the Standing
Senate Committee on Banking, Trade and Commerce to discuss the present
state of domestic and international financial systems. In particular,
whether Canada should make revisions to current legislation for recent
changes in the U.S. regarding the Sarbanes-Oxley Act of 2002.
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In May 2003, AIMR's Canadian Advocacy Committee met with the chair and
principal of the Canadian Accounting Standards Board to discuss current
financial reporting and accounting issues. Additionally, this committee
meets regularly with officials from the major securities commissions to
discuss key proposals, such as continuous disclosures, uniform
securities legislation, and registration reform.
- In June 2003, two meetings were held with accounting standards setters - 1) annual liaison meeting with the Financial Accounting Standards Board to discuss key proposals and 2) a meeting with staff from the International Accounting Standards Board to discuss the performance reporting project.
AIMR representatives frequently testify before regulators and legislative bodies regarding the securities industry. Next week, Tom Bowman, president and CEO of AIMR, is scheduled to present AIMR's views before the Steering Committee of the Canadian Provincial Ministers, concerning the current securities regulatory system.
AIMR's Canadian Advocacy Committee
AIMR shares common interests with your Committee, which are to
promote efficient capital markets in Canada while providing sufficient
investor protection and full transparency of market activities. To
advocate these values in Canada, the AIMR Board of Governors established
the Canadian Advocacy Committee (or CAC) as a regional standing
committee. The CAC membership includes portfolio managers, investment
advisors, and other investment professionals in Canada.
The CAC is charged with representing the views of investors and investment professionals, including AIMR members in Canada. As such, the Committee responds to key regulatory and standard setting initiatives that affect capital markets and participants in Canada's capital markets, including our members. The mandate of the CAC incorporates the AIMR Values, Purpose, Vision and Mission, which are based upon seven core principles to promote efficient capital markets as well as provide for adequate investor protection.
The following core principles are the basis for the CAC's comments in responding to your Committee's questions:
- That there should be reasonable disclosure of information to the capital markets to permit well-informed decision-making is a paramount objective; but the benefits of this disclosure must be weighed against the cost of gathering and reporting the information and the cost of competitive disadvantage unless the result is inadequate information for decision-making.
- All markets should be transparent and regulation should operate to this end.
- Regulation should be designed and enforced to maintain and enhance market credibility, openness, and investor confidence, thereby helping to lower the cost of capital.
- There should not be a two-tiered disclosure system. The same information should be available to all market participants at the same time.
- Investors should have a voice in corporate governance.
- All markets and market participants should be ethical. They should strive to abide by the principles set forth in the AIMR Code of Ethics and Standards of Professional Conduct; but, at a minimum, they must abide by the International Codes of Ethics and International Standards of Professional Conduct issued by the International Council of Investment Associations (ICIA).
- AIMR members should foster self-regulation of the markets in lieu of government-imposed regulation.
CAC's Views on the Current Regulatory System
Over the past several years, the CAC has been advocating the
harmonization and convergence of securities regulations across all
Canadian provinces and territories. In a recent letter to the Canadian
Securities Administrators, regarding the proposed Uniform Securities
Legislation, the CAC noted the following:
"The CAC commends and supports the CSA in its efforts to harmonize the securities regulation system across Canada's provinces and territories…Such convergence is needed to promote more efficient capital markets as well as to ensure sufficient investor protection and transparency of market activities.
Although harmonization of provincial securities legislation and oversight would improve the current regulatory system in Canada, we have some concerns about proposed exemptions and variances in the enforcement, including remedies for non-compliance with regulations. Therefore, we consider the current USL proposal as a "stop-gap" approach to securities regulation in Canada and not a long-term solution…
We believe strongly that the overarching issue for Canada's capital markets is the disharmony of securities regulation, or the current provincial regulatory system. A regulatory system that consists of multiple jurisdictions is overly burdensome and unnecessarily complex. Moreover, it results in a higher cost of capital for issuers and lower investment returns for investors. Simply put, a regulatory system that is decentralized and lacks uniformity within capital markets interferes with the efficient operation of these capital markets."
AIMR Survey of Canadian Members
To facilitate the CAC's deliberation and discussion of the
issues surrounding the current regulatory system, AIMR recently
distributed an email web-based survey to AIMR members in Canada. The
survey is currently underway and is expected to close at 5:00 pm EDT this
Thursday, July 10th. While the survey is not yet complete, there are some
interesting trends and patterns emerging from the preliminary data which
we would like to share with you today.
Of course, upon completion and review of the final results (July 14th), AIMR will include further details in its formal comment letter.
About the Survey:
The survey was specifically designed to gather opinions from
AIMR members on the reform of the current regulatory environment. Members
are being asked to comment on:
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Whether Canada should reform its current, provincial securities
regulatory system.
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If so, who should lead this reform?
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What are the implications in terms of cost?
- And, more specifically, thoughts and attitudes on possible solutions to reforming the current system.
In addition to close-ended questions, we've asked respondents to provide comments about the strengths and weaknesses as well as other suggestions and comments regarding Canadian securities regulatory reform.
Preliminary Results of the Survey
The following are tentative and preliminary views expressed
as of 9:00 am today. While not final, some responses are very strong as
indicated in the following:
- 90% of respondents believe that the current provincial securities regulatory system needs to be reformed. Within this group, about two thirds of all respondents strongly agree that the system needs to be reformed.
- Although there are mixed views about who should lead this reform, approximately 80% believe that the reform needs to be conducted at the national level, whether with the assistance of the provinces and territories, and/or with SROs.
- Approximately 85% believe that there needs to be a convergence towards one set of uniform market regulations either by the federal government, inter-provincial regulator, or passport system.
- 60% of respondents believe that the current system should be replaced with a single federal regulator that has all or most of the regulatory authority and jurisdiction.
What are the strengths and benefits of the current regulatory system?
- Sufficient resources - trained and qualified personnel and funding dedicated to regulatory oversight and enforcement.
- Flexible and focused on emerging niche markets.
What are the weaknesses?
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Multi-jurisdictions system creates multi-layers of regulations
resulting in redundant and complex requirements.
- Too slow in reacting to changes in financial markets.
- The present system is too costly.
- Enforcement is not consistent across provinces.
- Concerns about regulatory arbitrage, or shopping for favourable jurisdictions.
New Model for Regulatory System
The fundamental objective of any market regulatory system is
to provide an environment for markets that promotes and enhances investor
confidence and protection.
Our ideal model for a securities regulatory system in Canada would promote financial markets that are:
- Liquid and Efficient - capital flows unhindered and allocated properly given the underlying risks and expected returns;
- Transparent and Fair - reliable and relevant information flows in a timely and fair-handed manner to all market participants; and
- Ethical and Sound - market participants act with integrity and in accordance with principles of unassailable conduct as they make capital transactions and other related activities.
So, what are the elements or characteristics of a regulatory system that cultivates such markets?
We believe that the following key elements are necessary for an effective regulatory system in Canada:
- Underlying principles for regulation and enforcement are consistent for similar transactions and activities;
- Regulators possess the requisite expertise and in-depth knowledge of capital markets, including the roles and activities of market participants;
- The market system has sufficient flexibility to respond rapidly to changes in the capital markets;
- The central market system has sufficient regional representation to ensure sensitivity to emerging niche markets and small - medium sized businesses;
- The system is cost-effective in terms of fees, compliance costs and other burdens imposed on registrants, issuers, and investors; and
- Adequate governance is in place to assure objectivity, appropriate independence and accountability to the government.
Closing Remarks
This concludes some of our preliminary findings. To recap, AIMR strongly believes that:
- Regulations and rules governing capital markets should be harmonized to promote cross-border listings and transactions.
- Oversight and enforcement of regulations must be effective and consistent to ensure the integrity of capital markets.
- There should be one set of global high-quality standards for reporting financial information of market transactions and activities.
AIMR appreciates the opportunity to express its views and commends your Committee on its efforts to seek the best solution for the Canadian market and its participants.
We look forward to sending our comment letter with final details and results of the Canadian membership survey.
Thank you. And now I would be happy to answer any of your questions.