Industry News

However, Canada’s securities dealers are firmly in favour of IIROC proposal to allow them to hire mutual fund-only reps

By James Langton |

Investment dealers are split over whether representatives should be allowed to use personal corporations, the Investment Industry Association of Canada (IIAC) reports.

The IIAC has submitted a comment on an Investment Industry Regulatory Organization of Canada (IIROC) white paper published late last year, which proposes allowing IIROC dealers to employ reps who are only qualified to sell mutual funds and exchange-traded funds (ETFs) and to allow reps to funnel their revenue through personal corporations. The IIAC's submission says the association supports allowing IIROC firms to employ mutual fund-only reps by doing away with the requirement that reps upgrade to full-service status within 270 days of joining a firm. However, it does not weigh in on the issue of whether reps should be allowed to use personal corporations, citing a lack of unanimity on the issue among dealers.

"The IIAC cannot put forward a position on commission redirection because IIAC member firms are divided on the merits of the proposition," the association says in its comment.

Instead, the trade group says it has encouraged firms to submit their views on the issue to IIROC directly. Last week, IIROC extended the comment period on the paper, which was set to expire at the end of March, to April 29, in response to industry requests for more time.

See: IIROC extends white paper comment deadline

Mutual fund reps have historically been able to use personal corporations as a way to save taxes, among other benefits. However, regulators have worried that these structures may pose some added risk by potentially disrupting the chain of liability from a rep to the dealer. 

On the issue of simply eliminating the proficiency upgrade requirement, the IIAC is in favour of that step, indicating that it "would bring MFDA and IIROC advisors together on a single IIROC-registered operating platform producing business synergies and efficiencies from an integrated operation."

For individual advisors, the IIAC's comment says that scrapping the proficiency upgrade requirement would give mutual fund-only reps greater employment options, enhance their knowledge and allow them to enhance service to clients through "in-house" referrals.

The IIAC's comment also argues that this would benefit investors by facilitating "one-stop shopping" among investors, enhancing "consumer convenience, provide greater flexibility, and potentially lower costs as investors access the full range of investment products through a single dealer, rather than having to migrate assets to a new firm when they wish to build a more diversified financial portfolio or becoming more sophisticated over time."

The IIAC's comment argues that this would not compromise investor protection as reps would be subject to IIROC's oversight; and that the cost savings for firms could be passed on to investors through owed fees.

As for the possibility that this could undermine the membership of the Mutual Fund Dealers Association of Canada (MFDA), the IIAC acknowledges this possibility, noting that it could "put the viability of the self-regulator at risk."

The IIAC's comment adds that "IIROC should be aware of this possible outcome and the potential disruption it could cause small, regional mutual fund dealers regulated by the MFDA."

If these firms were effectively forced to join IIROC, the IIAC says that the self-regulatory organization would have to "make appropriate regulatory accommodation" so these smaller firms could stay in business, and "avoid disenfranchising small investors in regional communities."

Any consideration on an IIROC/MFDA merger "should be undertaken in a manner to enable MFDA firms to employ their existing business models and avoid disruption in their operations," the IIAC's comment stresses.

Furthermore, it calls on the two SROs to work together to reduce overlap and improve regulatory harmonization. "We urge IIROC to move forward expeditiously with the elimination of the upgrade requirement and begin discussions between the boards of the SROs to encourage increased cooperation and integration of rule-making and regulatory processes."