Three major investment associations have banded together to push the industry for a quick merger between two self-regulatory organizations, or SROs, that oversee Canada’s investment community.
Currently, the Investment Industry Regulatory Organization of Canada, or IIROC, supervises securities dealers, while the Mutual Fund Dealers Association of Canada, or MFDA, handles 90 mutual fund dealers. The two SROs have been criticized for overlapping areas of oversight as more wealth managers serve customers who buy both mutual funds and individual securities.
In a joint statement on Wednesday, the Investment Funds Institute of Canada, the Investment Industry Association of Canada and the Federation of Mutual Fund Dealers submitted recommendations to regulators to “leverage” the best assets of both SROs to the “fullest extent,” rather than build a new organization from the ground up.
“It will be important for the SRO consolidation process to proceed as quickly as possible to safeguard the ongoing stability of the Canadian capital markets,” said Richard Rousseau, co-chair of the forum and vice-chair of Raymond James Ltd.’s private client group in Quebec.
The three associations – known jointly as the Investment Industry SRO Forum – began working on the recommendations in January. The forum includes board members from each organization.
In late 2019, the Canadian Securities Administrators, or CSA, an umbrella organization of Canada’s provincial and territorial securities commissions, announced it was reviewing the “regulatory framework” that governs both the IIROC and the MFDA. The results of the CSA review are expected to be released in June, but the review sparked both SROs to publish conflicting proposals on how to join forces.
The MFDA proposed an 18-month plan that would build a new entity from scratch and include the regulation of exempt market dealers, scholarship plan dealers and portfolio managers, which are currently handled by provincial securities commissions.
Under IIROC’s plan, the two regulators could merge in just three months by continuing to perform the same functions with little change in their regulatory design – but reduce overlap and regulatory costs for wealth managers.
Now, the forum has published 32 recommendations on how the CSA could begin to merge the two entities quickly, including suggestions around governance, policy and operating efficiencies.
Forum co-chair Carol Lynde, who is also the chief executive officer of Bridgehouse Asset Managers, said the forum’s “overarching” objective in developing these recommendations is “to improve the investor experience and strengthen investor protection.”
The recommendations focus on investor access to advice and financial products and services, stronger investor protection, better governance, improved operating efficiencies through streamlined regulation and reduced regulatory barriers, and more effective rule-making and compliance oversight.
For example, the SRO board of directors should include members with knowledge and experience of consumer issues, as well as incorporate advice from an investor advisory panel.
Other suggestions include a new rule-approval process that ensures oversight, but allows for a “swift response to emerging risks,” and the SRO should no longer permit rule-making by guidance notices as it does not include stakeholder consultation, as well as CSA oversight of the rule development.
Rules should be harmonized where appropriate, including “know-your-client” requirements, outside business activities, continuing education and suitability.
“IIROC and MFDA rules are already highly harmonized … however, there are a number of areas where SRO rules that address the same risks are different without any principled reason why they should be different,” the report said.
A more “disciplined approach” to rule-making will help control the future cost of regulation, the forum said. Using cost-benefit and impact analysis for significant rule proposals and publishing plain-language rules will also help the way rules are interpreted and applied by the SRO.
The new SRO should also streamline accounts for investors to more easily access multiple investments, it said.
Currently, the two SROs require separate client accounts because of different compliance oversight requirements for each account type.
“The new SRO should invest in technology that will support multiple views of client account ranges: a regulatory view to support all necessary account supervision requirements and a client view that would provide the client with ‘one touch’ access to their accounts,” the forum said.
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Clare O’Hara