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Why Canada needs a single SRO

Consolidating the MFDA and IIROC would ultimately benefit investors

Guest column for Investment Executive

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

In June, the Canadian Securities Administrators (CSA) published a consultation paper asking the industry whether a single dealer self-regulatory organization (SRO) would be less duplicative, more efficient, more flexible and less confusing for investors. The Investment Funds Institute of Canada (IFIC) believes that a single SRO would achieve all of these outcomes and best serve the interests of investors.

In our submission to the CSA, we reiterated the industry’s strong support for self-regulation for securities dealers. SROs provide additional protection for the clients of investment dealers and mutual fund dealers. They also provide additional avenues for consumer redress and compensation through their mandatory membership in industry-sponsored organizations like the Ombudsman for Banking and Investment Services, the Canadian Investor Protection Fund and the Investor Protection Fund.

IFIC believes that investors would benefit from the consolidation of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) into a new SRO that would combine the best elements of each organization.

The existing SRO model can be frustrating for investors. As a modest investor’s assets grow and their financial needs evolve, they may transfer their account to a full service dealer. Sometimes this means transferring the account to another firm within an affiliated family of firms, and sometimes it means transferring the account to an entirely different firm. In either case, the investor loses the relationship they have built with their advisor and their account history. They have to start again, simply because the regulation of their advisors is split between two SROs.

A single SRO would also reduce the complexity and confusion around filing a complaint and searching for the discipline and proficiency history of a prospective advisor.

For advisors, SRO consolidation would mean a more durable relationship with their clients. Consolidation would also provide access to a broader range of investment products and the ability to service the full range of investor needs. A single SRO would also recognize the convergence of the investment dealer and mutual fund dealer practice toward managed investment solutions. It has become increasingly common for advisors to recommend a managed portfolio of assets structured as a fund of funds or sub-advised managed account that will deliver long-term risk adjusted returns.

On the question of public confidence, IFIC argues that investors should not have to become experts on securities regulation to rely on SROs. A recent CSA survey found that only 39% of investors know there is a provincial government agency responsible for regulating financial investments. It’s likely an even smaller percentage are aware of the SRO that regulates their advisor.

The CSA oversees all aspects of SRO governance and operations through regular oversight audits to ensure an SRO is complying with the terms of its recognition order. An SRO’s recognition order and audit results are public documents that support public confidence. In addition, anyone affected by an SRO decision can request a hearing and review of that decision by their provincial securities commission.

Investors should be entitled to rely on the rigorous and comprehensive due diligence — and the ongoing oversight audits — conducted by securities commissions to ensure their confidence in SROs is not misplaced.

Any new SRO resulting from the consolidation of IIROC and the MFDA would have to apply for a new recognition order. All aspects of governance, operations, organizational design, capacity, policies and rules would be assessed to ensure the new SRO will fulfill its investor protection mandate.

We believe, however, that if there is to be a consolidation, the industry should act expeditiously.

The industry members of the SRO boards have a common interest in seeing self-regulation thrive. Based on public reports and statements, it is clear that both the MFDA and IIROC support the creation of a new, consolidated SRO, though they may disagree on scope of such a project and a timeline for its completion.

The CSA will conduct a thorough review of the comments on its consultation paper and provide a report and recommendations. If some form of re-organization or consolidation of SROs is recommended by the CSA, it will not likely be accompanied by a blueprint. That would be left to the SROs and the industry members who support them. If a consolidated SRO is recommended, only the SROs, their boards and professional staff can determine the best way to see it done.

The CSA consultation is an important opportunity for stakeholders to provide their views; however, it should not prevent or delay the SROs from proactively considering how to improve self-regulation and respond to the CSA recommendations. Furthermore, there are a variety of operational and strategic issues the SROs could work on together today to reduce costs and improve efficiency.

The CSA has given this initiative a high priority. Time is of the essence. SRO partners must be ready and willing to work together to enhance the value of self-regulation for the benefit of Canadian investors.