When the Ontario government released a regulatory proposal to eliminate the so-called 30-per-cent rule on March 14, it appeared neither controversial nor significant at first blush.
The rule prohibits an administrator from holding, directly or indirectly, securities to which are attached more than 30 per cent of the votes that may be cast to elect the directors of a corporation. It’s not a particularly well-known rule. Outside of some of Canada’s largest pension plans, most administrators rarely hold voting securities at a level even approaching that threshold.
But the manner in which the government is proposing to eliminate the rule should concern everyone.
There are different theories on the genesis and original purpose of the 30-per-cent rule. Was it a regulatory concern for beneficiary protection or a fiscal desire to limit tax-exempt pension funds to passive investments? None of these theories has satisfactorily dispelled the notion that the rule has always been somewhat arbitrary.
Why did they set it at 30 per cent? Why not make it 40 per cent or even 50 per cent plus one (the threshold over which an administrator would actually have voting control of a corporation)? In any event, the rule has become a bit of an anachronism. Last fall, the Ontario government recognized it as such and indicated it would eliminate the rule in order to “open up new investment opportunities and tap the capacity of the pension sector to contribute more to economic growth.”
But given the government’s clear statement in the fall, some of the questions it posed for discussion on March 14 don’t, on their face, seem congruent with the policy goal of eliminating the 30-per-cent rule. In that regard, the government has asked whether a series of new disclosure requirements should accompany the elimination of the rule.
Among the possibilities, any corporation in which the administrator holds more than an as-yet undetermined threshold of voting securities (the proposals suggest the threshold could remain at 30 per cent) would need to file an undertaking with the superintendent of financial services and provide what some might call cumbersome annual reporting, including the corporation’s audited annual financial statements; a list of its directors, officers and shareholders; a valuation of all its assets; and various certifications.
Of course, an administrator would have no freestanding ability to cause a corporation in which it held, say, 30 per cent of the voting securities, to file the proposed undertaking and other annual disclosure (except, perhaps, where the administrator actually controlled more than 50 per cent of the voting securities). Therefore, an administrator would have to ensure that a corporation in which it was proposing to take a stake agreed to provide that undertaking as a condition of its investment. That would put administrators at a disadvantage in comparison to other investors who wouldn’t need to commit a target corporation to such stringent requirements.
That seems contrary to the government’s earlier statement that the elimination of the rule would “open up new investment opportunities and tap the capacity of the pension sector to contribute more to economic growth.” If a corporation has a choice between two angel investors, an Ontario pension plan or a private equity firm, why would it choose the one that would require it to incur the compliance costs of annual reporting to the superintendent?
Speaking generally, disclosure for disclosure’s sake doesn’t necessarily provide any greater protection for plan members, nor does it necessarily help the superintendent in regards to supervisory functions. Speaking specifically, aside from the impracticalities and uneven playing field the government’s disclosure requirements that it posed for discussion create, the impetus towards evermore disclosure could undercut what are widely seen as existing strong and robust protections under the Pension Benefits Act.
Section 22 of the act imposes a fiduciary standard and duty of care on the administrator, including, explicitly, in the investment of the pension fund. The fiduciary duty is the highest duty known to law. The administrator must invest plan assets in the exclusive and best interests of plan beneficiaries and cause all of its agents to do the same.
Moreover, subsection 22(4) clarifies that the administrator may not knowingly allow its interest to conflict with its duties to and powers over the pension fund. It doesn’t get more stringent than that. In that light, it’s hard to see how requiring a specific undertaking from a corporation the administrator has invested in can provide any greater protection than the administrator’s freestanding fiduciary duty.
Additionally, the act contains a number of specific compliance and reporting mechanisms that protect plan beneficiaries and provide supervisory tools to the superintendent around plan investments. They include:
- The so-called 10-per-cent rule that prevents an administrator from investing more than 10 per cent of a plan’s assets in any one person or affiliated or associated group. If the government eliminated the 30-per-cent rule in its entirety, the rules would still prevent an administrator from putting too much of a plan’s investments in any one entity.
- The related-party restrictions, which will become even more robust with amendments becoming effective July 1, 2016. The restrictions prevent an administrator from lending the monies of a plan to or investing them in the securities of a related party. To the extent that there may be a concern that the elimination of the 30-per-cent rule could allow administrators to take significant controlling stakes in a plan’s participating employers, the related-party restrictions offer full protection.
- The annual information return, investment information summary, pension fund financial statements and statement of investment policies and procedures provide the superintendent with a series of regular disclosures and reporting related to a particular plan’s investments. In some cases, the superintendent has authority to set the form and contents of the disclosure and may choose to make proportionate amendments in light of the elimination of the 30-per-cent rule. As well, the superintendent has broad powers to require an administrator to furnish any specific information on an ad-hoc basis.
The act already offers a full regulatory toolbox. It’s up to the superintendent to adapt and employ those tools to specific situations, such as an administrator taking a significant voting stake in a corporation (which is a neutral action, by itself, from a fiduciary perspective). If member protection is the ultimate goal, it pays to keep the regulator’s tools as flexible as possible.
The specific disclosure requirements the government has put forth for discussion along with the elimination of the 30-per-cent rule don’t really add to the superintendent’s very broad powers and they could prejudice administrators in comparison to other market players.
Let’s eliminate the rule but let’s do so in a way that doesn’t make the benefits of elimination illusory. Let’s not lose sight of the act’s existing protections.