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4 | INVESTMENT EXECUTIVE NEWS February 2020 Next head of the OSC faces an “enormously challenging role”
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Stromberg calls Jensen’s resig-
nation a “sad day” for investors, particularly retail investors.
“Maureen will leave big shoes to fill. She was what the OSC so badly needed, and it made great strides under her leadership,” Stromberg says.
Some of Jensen’s most notable accomplishments as head of the OSC involve efforts to improve investor protection. She cham- pioned higher industry conduct standards. She also pushed for a statutory best interest stan- dard amid resistance from the rest of the provinces (except New Brunswick), ultimately settling for reforms designed to ensure that industry firms and reps put their clients’ interests before their own.
Under Jensen’s watch, the OSC worked to improve the rep- resentation of women on corpor- ate boards and in executive suites. The regulator embraced the rise of fintech by creating the first dedicated fintech unit in Canada (OSC LaunchPad), a regulatory “sandbox” that enables industry innovation, and holding Canada’s first (and, so far, only) regulatory “hackathon.” And, in an effort to enhance enforcement, the OSC introduced Canada’s first (and, so far, only) regulatory whistle- blower program that pays for tips about possible misconduct.
Jensen’s efforts to enhance investor protection won her lasting admiration of investor advocates.
“Investors across Canada are lucky to have had Maureen Jensen leading the OSC,” says Neil Gross, chair of the OSC’s independent
Investor Advisory Panel. “She spearheaded several measures to improve investor protection, and those measures will enhance global confidence in our capital markets.
“She’s not been afraid to chal- lenge the status quo or do what’s right. She’s gotten results,” Gross adds. “I almost pity whoever takes over — Maureen will be such a tough act to follow.”
Initially, Jensen will be replaced by Grant Vingoe, a vet- eran securities lawyer and cur- rent vice chair of the OSC. He is slated to become acting chair when Jensen takes her leave in April and the government seeks a permanent replacement.
When Jensen first took her position with the OSC in 2016, the future of the regulator seemed uncertain amid efforts to cre- ate a new co-operative regu- lator among willing provinces (including Ontario) and the fed- eral government. Four years later, the proposed Capital Markets Regulatory Authority (CMRA) remains a work in progress, and Ontario still is officially committed to that project. But there remains a lot of work to be done if the CMRA is ever to get off the ground.
Says Frank Switzer, chief communications officer with the Capital Markets Authority Implementation Organization: “The governments that are par- ticipating in the CMRA are still considering launch timelines.”
While the CMRA remains a possibility, it doesn’t appear imminent. Whether the new regulator comes to fruition or not, the OSC is going to need a new leader in the meantime.
Investor advocates would like to see a new OSC chief who is much like the outgoing one.
Douglas Walker, senior policy counsel for the Toronto- based Canadian Foundation for the Advancement of Investor Rights (a.k.a. FAIR Canada), says the next head of the OSC should be “someone who is a champion of protecting investors through securities regulation; who has a deep understanding of the capital markets, securities law and regu- lation; and knows what it means to act as a public interest regula- tor. [That’s] an enormously chal- lenging role. It requires someone who is truly special.”
Jensen’s willingness to push for higher industry standards and more effective investor pro- tection brought her into con- flict with Ontario’s Progressive Conservative government, which was elected in June 2018.
The first real sign of trouble between the government and securities regulators came in September of that year, when the provincial government openly clashed with the Canadian Securities Administrators (CSA) over the fate of deferred sales charge (DSC) mutual funds.
After years of consultation and research, the CSA decided to effectively ban DSC funds amid a variety of investor-protection concerns. Yet, in defiance of the traditional policy-making pro- cess — and without deference to regulatory experts — Ontario’s government immediately came out against the CSA’s proposed action, declaring that the gov- ernment would seek alternatives to an outright ban.
Soon afterward, the OSC announced it would be embarking on an all-consuming effort to root out needless red tape and look for ways to curb industry compliance costs. That initiative was prompted by the priorities of the new government, which has pledged efforts to reduce regula- tion across all sectors.
The OSC gamely embraced those new marching orders, launching a regulatory burden- reduction initiative that ultim- ately delivered a report last November that featured more than 100 recommendations to cut costs, ranging from rule revisions to internal operational reforms.
Notably, the OSC insisted that none of the recommendations to reduce the regulatory burden would proceed if they com- promised investor protection. Maintaining industry standards was the regulator’s prerequisite for adopting any reform that could curb compliance costs.
Even so, those efforts were welcomed by the provincial government, and seemed to signal a possible thaw in rela- tions. In the wake of the OSC’s widely applauded burden- reduction efforts, the govern- ment seemed to be taking a less antagonistic approach toward the industry’s regulators when it signed off on the CSA’s client- focused reforms (CFRs). This series of rule changes, which would require the industry to put investors’ interests ahead of their own, is one of Jensen’s sig- nature achievements as far as retail investors are concerned.
The friendlier tone between the government and regulators
also followed a cabinet shuffle in June 2019 that brought a new finance minister, Rod Phillips, who replaced Vic Fedeli.
On the matter of the CSA’s CFRs, the Ontario government deferred to the regulators, which had spent several years devel- oping policy, thus allowing the reforms to take effect at the end of 2019 (although the require- ments will be phased in over the next two years).
Yet, the rift between the regulators and the Ontario gov- ernment never fully healed. Notably, the government refused to rethink its stance on the DSC issue. Instead, in late December 2019, the CSA declared that it would move ahead with a planned ban on DSC funds this year — without Ontario.
The OSC stated it will look for other ways to reduce the harms associated with the use of DSCs without banning them entirely — such as restricting their use with elderly clients or banning leveraged DSC sales. However, that effort will now proceed without Jensen at the controls.
Jensen’s departure in April means she is ending her term 10 months early; she was slated to remain at the helm of the OSC until February 2021.
Where she goes from here isn’t clear, but she’s not retiring, accord- ing to an OSC spokesperson.
In Jensen’s message to OSC staff, she stated she will “con- sider new challenges and oppor- tunities,” but that she’s ready to move on from the OSC: “This is a decision I have thought long and hard about and I am confident that it is the right one for me.” IE
Unlikely to see pharmacare or a higher capital gains rate
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to win Opposition support.
“No one wants an election; no one is ready to go,” says Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc., and a former deputy director of tax policy to Finance Minister Bill Morneau. “The Conservatives are in the midst of a leadership campaign [and] the NDP are flat broke.”
Hughes says he expects the Liberals will get the votes needed to pass the budget from the Bloc Québécois, which has signalled an interest in working with the government.
“I would expect the govern- ment to follow through on most of [its campaign promises, but] I wouldn’t say all and I wouldn’t say all at once,” Hughes says.
Aaron Wudrick, federal dir- ector of the Canadian Taxpayers Federation in Ottawa, says he thinks the Tories may support a budget from the Liberal gov- ernment, whose policy pushes so far have involved the Trans Mountain pipeline expansion andataxcutintheformofan increase in the basic personal exemption amount to $15,000 over four years. “[Those] are things that the Conservatives are essentially going to be forced to support,” Wudrick says.
Prime Minister Justin Trudeau’s mandate letter to Morneau, released in mid- December, includes a long list of priorities revolving around the Liberals’ campaign policy themes of supporting the middle class; encouraging investment in clean energy and the fight against climate change; closing tax loop- holes; and fighting aggressive tax avoidance and tax evasion.
For example, the Liberals are likely to go ahead with a proposed 10% luxury tax on vehicles valued over $100,000, and a 1% annual vacancy and speculation tax on residential properties owned by non-residents, says Hughes: “I don’t see why [the government] wouldn’t have those in [the 2020 federal budget].”
Other priorities in the man- date letter, such as “a review of tax expenditures to ensure wealthy Canadians don’t bene- fit from unfair tax breaks” and the closing of perceived tax loop- holes that favour large multi- national corporations, are likely to gain ready support from the NDP and the Bloc.
These and similar measures also would help the govern- ment raise revenue, something the Liberals will need to do if they introduce pricey spending programs, such as a universal drug-coverage plan — a priority
included in the finance minis- ter’s mandate letter.
“I don’t think pharmacare can be implemented without raising taxes,” says Brandon Schaufele, assistant professor in business, economics and public policy at the Ivey Business School at the University of Western Ontario in London, Ont. Schaufele says the Liberals are at least two or three years out from introducing a uni- versal drug plan.
Says Wudrick: “I think the [Liberals] would love to raise taxes, but they know they can’t right now.” Wudrick suggests that recent tax cuts in the U.S. essentially force the Canadian government to keep the status quo in terms of rates, “if not look for ways to match.”
One way the Liberals could raise billions in tax revenue immediately would be to increase the capital gains inclu- sion rate. The NDP, which prom- ised in its election platform to raise the inclusion rate from 50% to 75%, would likely support such a move.
Raising the capital gains rate would fit well with the Liberals’ policy goal of taxing high- income Canadians more. And a higher rate would effectively close a tax loophole available to Canadian small businesses that allows for the conversion
of dividends into capital gains in a practice called “surplus stripping.”
“All of these factors say that if there ever was ever a time that the government will look at [rais- ing the capital gains rate], this might be the time,” says Jamie Golombek, managing director of tax and estate planning, CIBC financial planning and advice, with Canadian Imperial Bank of Commerce in Toronto.
Others say the government isn’t likely to raise the rate, particularly since such a move wasn’t included in the Liberals’ election platform.
“I would be really sur- prised if it happened,” says Ian Russell, president and CEO of the Investment Industry Association of Canada. He sug- gests that raising the capital gains rate would be “counterproduct- ive” for promoting investment.
Schaufele, for his part, says he “can’t see” the Liberals rais- ing the capital gains rate in the 2020 budget.
The government also stated it will revisit the rules gov- erning the taxation of employee stock option deductions in the upcoming budget, changes the government first proposed last year. The Liberals proposed limiting the employee stock option grants that can be taxed
effectively at the capital gains rate to $200,000 annually, with carve-outs for small businesses and certain startup businesses.
“We’re waiting to find out what’s going to happen to the stock option rules, because there’s a lot of uncertainty,” Golombek says.
The good news for the Liberals, in terms of policy flex- ibility, is that the state of the domestic economy is good, if not necessarily great, Schaufele says. “Ottawa’s books are in pretty good shape, [the Liberals have] maintained a good credit rat- ing and the debt-to-GDP ratio is within reasonable bounds.”
Morneau’s mandate letter instructs him to implement the government’s fiscal plan while lowering the debt-to-GDP ratio, keeping Canada’s AAA credit rat- ing and ensuring the government has “the fiscal firepower in the event that we need to respond to an economic downturn” — all while continuing to invest in people.
“It’s going to have to be a fiscally responsible budget,” says Katie Walmsley, president of the Portfolio Management Association of Canada, “but at the same time, consistent with [the Liberals’] messaging about respecting and taking care of middle-class Canadians.” IE