Even the wealthy like to get presents, so Bay Street surely was pleased with the early Christmas gift offered up by the Investment Industry Regulatory Organization of Canada (IIROC) in a paper that proposes allowing advisors to incorporate and firms to expand their sales forces dramatically.
In late November, IIROC published a white paper that proposes a couple of fundamental changes to the regulator's rules. The proposals would eliminate the requirement that reps be qualified to sell a full range of investment products. At the same time, reps would be permitted to funnel their commissions through personal corporations. The primary objective of these proposals is to allow investment dealers to employ permanently reps who are solely in the business of selling mutual funds and exchange-traded funds.
Currently, IIROC rules allow its member firms to employ reps who are restricted to selling mutual funds for a limited time; those reps must upgrade their qualifications and become fully licensed securities reps before the expiry of the mandated term.
As well, IIROC rules never have allowed IIROC-registered reps to flow any of their business through personal corporations - an arrangement that has long existed in the mutual fund dealer world. Being incorporated provides tax benefits and other advantages, but historically has raised regulators' concerns related to personal accountability.
Now, IIROC is considering changing both of these policies, which potentially will allow mutual fund reps to jump to IIROC firms; the changes also could result in the creation of a new dealer category under IIROC oversight with rules that are tailored to the mutual fund business.
Of course, there already is a large crop of firms and reps operating under a regulatory regime that's customized for the fund industry and are overseen by the Mutual Fund Dealers Association of Canada (MFDA). And, if IIROC creates its own category of mutual fund dealers, many firms (particularly those with IIROC affiliates) may well defect from the MFDA to IIROC.
Currently, there are more investment dealer firms than there are mutual fund dealers, but there are roughly 83,000 MFDA reps compared with 28,000 IIROC reps, according to the regulators' latest numbers.
How many of those MFDA reps would end up shifting to IIROC if these proposals are adopted is impossible to predict, but such a migration could well be enough to undermine the future of the MFDA.
Indeed, the logical outcome of IIROC's proposals would be to combine the two self-regulatory organizations (SROs), keeping the MFDA's existing rule book and oversight structure to serve as IIROC's fund dealer division.
"I don't think you can go down this road without talking about an SRO merger," says Sandra Kegie, executive director of the Federation of Mutual Fund Dealers in Toronto in response to the IIROC paper. "And I think the most cost-effective way to merge would be to not waste time and resources on a big study; just merge names, leave the rules and staffing as is and work on the synergies over time."
Of course, the idea of an IIROC/MFDA merger has been floating around for a number of years. And, although there's no question that some of the investment dealers (particularly those that also have fund dealer affiliates) would welcome the opportunity to merge the SROs and possibly rationalize the dealers' own corporate structures, a merger is not an idea that has drawn much support among the majority of mutual fund dealers when the subject has been raised in the past.
And with the IIROC paper giving rise to merger talk once again, the MFDA is playing its cards pretty close to its chest.
An MFDA statement issued to Investment Executive to comment on the IIROC paper says: "As with any policy initiative of a Canadian securities regulator, we will monitor any developments with a view to assessing the impact to investors, advisors and members."
Other groups are less circumspect. Investor advocacy group Kenmar Associates of Toronto, questions the wisdom of the IIROC initiative in a comment on the IIROC paper: "We would like to see the many open investor protection issues dealt with, rather than opening up a whole new can of worms that may impair investor protection and encroach on the MFDA mandate.
"If the endgame is for IIROC to merge with the MFDA," Kenmar's comment continues, "[IIROC] should propose that forthrightly, facilitated by the [Canadian Securities Administrators (CSA)]."
However, the IIROC paper goes out of its way to stress that the CSA has not signed off on IIROC's proposals - or even been consulted on them, for that matter.
The CSA isn't keen to comment at this stage. Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers, notes that the IIROC paper raises issues that may have important effects on the current regulatory system.
Morisset stresses that the CSA has not been part of developing IIROC's policy proposal, which would require the CSA's sign off before the proposal could go ahead.
"We understand that after [IIROC's] consultation process, IIROC will decide whether it wants to pursue this project and bring it before the CSA. Until then, the CSA will not comment on any of these matters," Morisset says.
At this point, a decision by IIROC on whether to pursue these reforms is likely to be some way off. Given the litany of policy issues that the proposals raise and the potential impact on the financial services sector, IIROC has put its paper out for a long comment period - the deadline for comments on the IIROC paper isn't until the end of March 2016.
The investment industry's major trade groups have indicated that they will be analyzing the proposals and formulating their responses.
Ian Russell, the Investment Industry Association of Canada's (IIAC) president and CEO, says that the IIAC agrees with IIROC's view that the SRO's paper "raises many complex and interrelated elements that have broad policy implications and will require extensive policy discussions."
And, Russell adds, the IIAC intends to solicit the opinions of its dealers before providing that industry's perspective on these issues.
However, a comment from Kenmar, founded by Ken Kivenko, is ready to declare that the whole project is poorly timed and ill-conceived. Kenmar's comment points out that IIROC's proposal comes at a time when the CSA is reconsidering some of the fundamental aspects of retail regulation (such as fund fee structures and conduct standards) and as an expert panel in Ontario is reviewing the regulation of financial advice.
Furthermore, the Kenmar comment adds, several provinces are preparing for the possible launch of a new co-operative capital markets regulator.
Amid all of these ongoing initiatives, the Kenmar comment states, this latest proposal from IIROC is "an untimely distraction with increased risks for retail investors."
At this point, a decision from IIROC is some way off. It has put the paper out for a long comment period
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