Oversight of stock market trading in Canada should become the responsibility of the country’s provincial securities commissions, while supervision of investment advisers and portfolio managers should be merged under one roof, a new report recommends.
The Mutual Fund Dealers Association of Canada (MFDA), a self-regulatory organization that oversees mutual fund distributors, published a blueprint Monday to reshape securities regulation in Canada, proposing the creation of a new regulatory body that would combine oversight of the mutual fund sector with oversight of investment dealers, which are currently regulated by the Investment Industry Regulatory Organization of Canada (IIROC).
Both the MFDA and IIROC are self-regulatory organizations, which are industry-funded watchdogs that can sanction and fine delinquent member firms and individual advisers. The two organizations have faced criticism for their overlapping oversight as more wealth managers serve customers who buy both mutual funds and individual securities.
IIROC oversees more than 170 investment firms and is recognized by all 13 provinces and territories, while the MFDA, which supervises about 90 member companies, is recognized by eight provinces. According to the report, there are approximately 1,000 entities outside the purview of the MFDA and IIROC who deal directly with Canadian investors – such as exempt market dealers and scholarship plan dealers.
Securities regulation is "diminished by lack of co-ordinated and harmonized focus among multiple regulators and governmental authorities,” the MFDA said in the report. “Canada can and should do better.”
Under the MFDA’s proposed restructuring, regulatory oversight of exempt market dealers, scholarship plan dealers and portfolio managers would move from the provincial commissions to the newly formed organization.
At the same time, stock market surveillance and regulation of trading would no longer be the responsibility of IIROC, but rather be assumed by the Canadian Securities Administrators.
“That type of regulation is a more appropriate fit for the CSA statutory regulators, given the systemic risk implications of that type of conduct,” Mark Gordon, president and chief executive officer of the MFDA, said in an interview.
Mr. Gordon said the global financial crisis exposed the need to monitor the many different kinds of risks involved with market trading – risks that, he said, the CSA is best suited to monitor.
The report comes just one month after the CSA announced it was reviewing the “regulatory framework” that governs the MFDA and IIROC.
An IIROC spokesperson said the organization is “in active discussions” as part of the CSA consultations.
“Canadians deserve solutions that enhance investor protection and access to advice – that are practical and responsive to their evolving needs, and that can be implemented by the CSA seamlessly, with minimal cost and disruption to Canadians,” said IIROC’s CEO Andrew Kriegler, in an email.
In a statement, the CSA said the proposal is just one of many that it will consider as part of its review of the two self-regulatory organizations. The CSA expects to release a preliminary consultation paper for comment from industry and the public by mid-2020.
The Canadian Foundation for the Advancement of Investor Rights – known as FAIR Canada – said it agrees with the MFDA that the CSA needs to rethink how the industry polices itself.
“We need a wholesale review of self-regulation and not simply the takeover of the MFDA by IIROC as some people prefer,” said Ermanno Pascutto, executive director FAIR Canada.
Mr. Gordon said his organization did not include the CSA and IIROC in drafting the proposal. The report, he said, was part of the MFDA’s “regular planning exercise” for the past five years.
A single self-regulatory body would level the playing field for companies, reduce investor confusion and boost public confidence in Canada’s regulatory system, the MFDA said in the report.
Combining the investment industry under one regulator would also broaden investor protection funds to certain dealers – such as exempt market dealers – who do not currently qualify for coverage under the investor protection plans that apply to both IIROC and MFDA firms.
Ian Russell, president and CEO of the Investment Industry Association of Canada, said the MFDA’s proposed plan has some good intentions as an integrated structure, but would take “far too much time to implement."
He said it would also be more costly to develop a new structure and rules, as well as having to separate the “effective existing SRO surveillance infrastructure."
With a report from David Milstead