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The case for self-regulation (July 8, 2020)

Why SROs work well for investors and the industry

Guest column for Investment Executive

By: Paul Bourque, President and CEO, The Investment Funds Institute of Canada

The Canadian Securities Administrators (CSA) have published a consultation paper on Canada’s self-regulatory organization framework. The investment funds industry strongly supports self-regulation and welcomes this review.

As this consultation gets underway, and as individuals and organizations prepare their submissions, it is important to ensure that the vital role self-regulatory organizations (SROs) play in regulating investment and mutual fund dealers is clear and well understood. While self-regulation has served Canadian investors well, it is important through this consultation not to lose sight of the “self” in self-regulation. The members of the SROs must continue to have a voice in their governance if they are to continue to have value.

Some countries have embraced self-regulation, while others have replaced self-regulation with government regulation. Canada, however, has a long history of reliance on dealer self-regulation. In fact, some provincial regulators have recently provided Canada’s SROs — the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) — with additional statutory investigative and fine-collection powers.

There are several factors that make self-regulation more appropriate in Canada than in some other jurisdictions.

One is Canada’s fragmented securities markets regulation. The national SROs bring a single set of rules and a national approach to compliance and enforcement. This would still be necessary even if the Cooperative Capital Markets Regulatory System is implemented without all provinces and territories participating. This national, harmonized approach would be lost if direct dealer regulation were divided among the 13 provinces and territories.

Another factor is Canada’s close proximity to and integration with the American capital markets, where self-regulation has been a long-standing fixture of the regulatory landscape. The United States was one of the first, and remains one of the strongest, supporters of self-regulation. The National Association of Securities Dealers (today’s FINRA) was enshrined in the federal legislation that created the U.S. Securities and Exchange Commission in 1934. Many investment industry participants effectively operate on a North American basis, so it is beneficial to have a consistent North American approach to SROs.

In our view, self-regulation also has intrinsic value. If the industry has a role in the development of the rules that govern its behavior, the resulting rules are likely to be more effective, better understood and fully supported by the industry.

It is important to note that self-regulation is funded by the industry, not taxpayers. And these costs are not inconsiderable. In 2018, the combined annual budgets of IIROC and the MFDA were approximately $133 million, which is more than the individual budgets of most provincial securities commissions.

Self-regulators have proven to be nimble (for example, in dealing with COVID-19 challenges) and, with broad jurisdiction over Canada’s provinces and territories, can move more quickly than 13 statutory regulators could to address changes in rapidly evolving markets. Because self-regulators are closer to the business activity being regulated, they bring greater expertise and experience to their regulatory duties. Furthermore, they can and have implemented higher standards for their members than the statutory minimums.

Provided the self-regulator’s inherent conflict of interest is managed through good governance practices, accountability and transparency, self-regulation has the potential to make the overall regulatory framework even more efficient. For example, legislative powers, such as registration, can be delegated to the SRO (as is the case with IIROC), relieving the statutory regulator from these duties. In addition, the statutory regulator can avoid duplicating the same compliance and enforcement work that the SRO is doing.

Self-regulation is a privilege, not a right. SROs, if they are to continue to regulate in the public interest, must be able to maintain investor confidence by vigorously pursuing their public interest mandate.

At its heart, self-regulation is an agreement between the regulated industry and the government. As long as both parties have trust and confidence in the other to uphold their obligations, self-regulation works well for the benefit of investors and the industry.