From the Regulators

White paper opens the door to SRO merger and raises complex issues that will require a thorough policy debate, some say

By James Langton |

An Investment Industry Regulatory Organization of Canada (IIROC) proposal to allow investment dealer representatives to use personal corporations and brokerage firms to employ reps who just sell mutual funds and exchange-traded funds (ETFs) may give new life to talk of merging the investment industry's two major self-regulatory organizations (SROs), among numerous other implications, according to some prominent members of the investment industry.

IIROC published a white paper on Wednesday that puts forth a few proposals that could fundamentally reshape the industry, if adopted, and appears sure to touch off an intensive debate about the future for the retail investment business in Canada.

See: IIROC proposes personal corporations for advisors

The SRO's white paper contemplates doing away with the requirement that investment dealer reps be licensed to trade in a full range of products and allowing IIROC firms to employ reps that just deal in mutual funds and ETFs. It also considers allowing IIROC reps to direct their commissions through a personal corporation, a model that has long been in use in the mutual fund industry through which reps enjoy favourable tax treatment, among other advantages.

Sandra Kegie, executive director of the Toronto-based Federation of Mutual Fund Dealers, suggests that if the proposals go ahead, they could erode the mutual fund dealer channel, and possibly even lead to a merger between the MFDA and IIROC. "I don't think you can go down this road without talking about an SRO merger," she says.

The idea of merging the two SROs has been discussed from time to time over the years, but has never had sufficient investment industry support to go forward. Although this paper may spark that debate yet again, it's just one of many issues that the paper gives rise to.

Indeed, given the potential implications, it's premature for any in-depth analysis, but various factions within the investment industry are gearing up to do just that. Senior executives at the Mutual Fund Dealers Association of Canada (MFDA) indicate that they have just received IIROC's white paper and haven't had time to thoroughly analyze it just yet. 

The Investment Industry Association of Canada (IIAC) is in much the same position. Ian Russell, the IIAC's president and CEO, notes that the association agrees with IIROC that the paper raises some complex issues that will require a thorough policy debate. He says the association will be soliciting the views of its dealers on the proposals, and "we look forward to presenting an industry perspective" by the consultation deadline, which isn't until March 31, 2016.

Similarly, on the investors' side, Neil Gross, executive director of investor advocacy group, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), says that the implications of the proposals are "certainly broad-ranging." He also says that FAIR Canada intends to study the paper closely.

IIROC is seeking feedback on the possible implications of these changes for the industry (both firms and reps), investors, and for the regulatory and industry landscape, overall. The paper acknowledges that the proposals raise "many complex and interrelated elements that have broad policy implications and will require extensive policy discussions." 

For example, as the white paper notes, if IIROC were to allow reps to use personal corporations, the structure would only be available to firms that use agent-principal relationships, which may spark a shift away from employer-employee arrangements within the investment dealer channel.

Moreover, the changes would likely create more competition for traditional mutual fund dealer firms and could even undermine the membership of the MFDA. The white paper also notes that the proposals also raise issues specific to the regulatory framework in Quebec that would also have to be considered.