A clear majority of investment industry compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card said they would support a merger of the industry’s two self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – because that would reduce costs, complexity and regulatory overlap.

“Merge them right away,” says a CO with a securities firm based in Quebec. “It doesn’t make sense to have two different regulators for distribution of products in such a small country.”

Among the COs and company executives who answered the merger question, 80% were in favour of a merger, up from 66% when the question was asked in the 2012 Regulators’ Report card.

Although merging IIROC and MFDA has been the subject of long-running debate, it increased late last year when IIROC released a white paper proposing to do away with the 270-day licence upgrade rule, thus allowing mutual fund representatives to work for investment dealers without having to qualify as registered reps. That change could lead to a migration of firms to the IIROC platform and away from the MFDA, effectively leaving little choice but to merge the SROs.

Among the Report Card survey participants in favour of a merger, the top reasons given were an anticipated reduction in compliance costs and a corresponding benefit to investors.

“[A merger] would be one of the best things that could happen,” says a chief CO (CCO) with an MFDA-regulated dealer in Ontario. “The cost savings [that would result from a merger] means cost savings for the client, and would clarify the industry to the public.”

Adds a CCO with an IIROC-licensed firm in Ontario: “There’s big inefficiency with having two regulators. From a cost, efficiency and investor protection perspective, investors would be better served with one solid regulator.”

Many COs and company executives who foresee a merger as inevitable said a merger would reduce complexity and duplication, as well as foster regulatory consistency. “Streamlining the process would be best for the industry,” says a CCO with a securities dealer in British Columbia.

In an email response to Investment Executive (IE), IIROC acknowledged that the white paper had “prompted stakeholders to raise the possibility of merging the SROs.”

However, IIROC’s email adds that the primary purpose of the white paper was to prompt debate on a broad range of policy issues and that IIROC is “pleased that [the results of the Report Card] survey suggest this is happening.” The email adds that the SRO continues to view the MFDA as a regulatory partner with which IIROC works closely on an ongoing basis.

Meanwhile, some of the Report Card survey participants who approve of merging the SROs said they do so only if the two distinct platforms – one for securities reps and one for mutual fund reps – were kept strictly separate.

“Conceptually, there would be one [regulator], but only with the proviso that different channels offer different things,” says a company executive with a securities dealer on the Prairies.

Adds a CCO with a securities dealer in Ontario: “If there’s a merger, that new SRO will need to know how best to provide oversight for those two areas.”

Meanwhile, the COs and company executives surveyed for the Report Card who oppose a merger said they believe that compliance costs would rise, not fall; that the merger would endanger smaller firms on the MFDA platform; and that a merger isn’t in the public interest.

“It’s not good for MFDA dealers and clients,” says a CCO with an MFDA-licensed firm in Alberta. “It’s not the quality of rules, but the way IIROC does things. There’s huge overhead [on the IIROC platform], which for MFDA members [would be] too much, so [MFDA firms’] costs would go up and clients would end up paying more.”

“IIROC wants [a merger], and the banks want it for sure because they get rid of the MFDA platform,” adds a company executive with an MFDA-licensed firm in Ontario. “[But] smaller firms would get swallowed up and consolidated with bigger dealers.”

A CCO with an MFDA-licensed firm in Alberta believes the timing for a merger is not right considering the degree of regulatory change the investment industry has dealt with recently.

“Considering the impact on the rules and regulations and stuff that would have to be rewritten, it’s a huge endeavour,” says this CCO. “I don’t know how that would be taken on. Eventually, [a merger] will happen; but with all the other stuff on the table, it would be a terrifying experience. [Merging] would have a big impact on our policy and procedures.”

Nevertheless, MFDA member firms’ concerns with IIROC’s proposed elimination of the licence upgrade requirement for mutual fund reps remain the same as they were more than two years ago, when IIROC granted an exemption to the upgrade rule, says Mark Gordon, president and CEO of the MFDA.

The MFDA canvassed its members at that time and found that its single-platform members believed their business models would be endangered by the new rule and that clients with smaller account sizes would be “orphaned” because they wouldn’t be viable accounts on an IIROC platform.

“As far as the [MFDA] members’ views on the white paper go,” Gordon says, “the public policy concerns and issues are the very same issues that were raised in the [2014] consultation.”

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