Opinion: New registrants can’t possibly know all the rules

Imagine opening a business in a heavily-regulated industry and discovering that even a careful review of the governing legislation and regulations won’t keep you out of the penalty box. Welcome to Canadian securities law.

A person seeking to establish an exempt market dealer, investment fund manager or portfolio manager should be able to determine the requirements applicable to their business from the Securities Act, the National Instruments and the Companion Policies. In practice, that is seldom possible.

Many expectations carrying significant regulatory consequences are difficult or impossible to identify from the rules themselves. They emerge through compliance reviews, staff guidance, practitioner advice and evolving industry practices.

Consider accredited investor verification. While the exemption is set out in National Instrument 45-106, issuers and registrants often struggle to determine what level of documentation and inquiry is sufficient in practice. Firms routinely look beyond the rule itself to often inconsistent practitioner recommendations, compliance review findings and industry custom to determine what regulators may ultimately expect.

And that is hardly unique. Similar challenges arise in areas such as suitability, know-your-client obligations and conflict management. In each case, registrants are often left attempting to reconcile broad regulatory principles with evolving expectations derived from guidance, reviews and industry practice.

Large and established institutions can navigate this environment because they possess compliance departments, external advisors and decades of institutional knowledge. New entrants do not.

As a result, entrepreneurs launching registered firms must either accept material compliance risk or spend substantial sums on legal advice, compliance consulting and documentation simply to identify expectations that cannot be derived from the published rules.

Regulatory uncertainty

These costs are a direct consequence of regulatory uncertainty. They disproportionately burden smaller firms while favouring established incumbents. This matters because barriers to entry reduce competition. Fewer market participants mean fewer options for issuers, higher costs for investors and fewer opportunities for innovation.

Unlike established institutions, new entrants cannot spread these costs across large compliance departments or established revenue streams. The uncertainty is therefore felt most acutely by the firms least able to absorb it.

Investor protection and regulatory clarity are not competing objectives. If a compliance expectation is important enough to influence registration decisions, compliance reviews or enforcement outcomes, it should be clearly articulated and readily accessible.

The solution is straightforward. Regulators should publish clear guidance, examples and expectations wherever they expect firms to follow a particular compliance standard in practice.

Staff notices should provide sufficient specificity to allow registrants to understand what is expected of them. Too often, guidance remains high-level and principles-based, leaving firms to guess how regulators will apply the requirement in a real-world compliance review.

Responsibility for providing this clarity rests with regulators. Registrants are responsible for complying with the law. As a matter of justice and procedural fairness, firms should be able to determine the standards they are expected to meet before facing regulatory consequences for failing to meet them.

Regulators should ensure that material compliance expectations are communicated clearly, consistently and accessibly.

Reducing barriers to entry does not require weaker regulation. It requires transparency. New entrants should be able to compete on the quality of their business, not on their ability to decipher unwritten rules.