Stacked white books on rules and regulations

Investment dealer reps may soon be able to join fund dealer reps in utilizing more tax-friendly commission structures under proposals being worked on by the Canadian Investment Regulatory Organization (CIRO).

Speaking at the Investment Fund Institute of Canada’s annual operations day, Richard Corner, CIRO’s vice-president and chief policy advisor, member regulation, said the new industry self-regulatory organization’s policy team is working on a paper that will detail options for expanding so-called “directed commission” structures.

That paper will likely set out both short-term and long-term alternatives to resolving the inconsistency between rules for fund dealer reps and investment dealer reps, with a view to eventually adopting a common approach.

“Both the short-term and long-term solutions would involve broadening out a more efficient structure than is currently allowed to the entire [rep] community at both investment dealers and mutual fund dealers,” Corner said.

The policy paper is expected to go through “significant review” from the Canadian Securities Administrators as the regulators try to come up with an approach “that is both tax efficient and tax compliant,” he said. “That’s why we’re potentially looking at an interim solution that would be different from a long-term solution.”

Alongside the work on reps’ commission structures, the new SRO isĀ  working to develop a harmonized approach to account transfer standards for both sides of the industry.

CIRO aims to publish proposals within the current fiscal year that will likely require firms to use automated account transfer facilities as much as possible, Corner said, and will also set deadlines for dealers to meet when transferring accounts.

These projects are both underway against the backdrop of a major effort to consolidate the two previous SROs’ rule books. That initiative will aim to shift to a more principles-based, plain-language approach that sets common standards for both sides of the industry, with some flexibility for different business models.

Consolidating the rule book is expected to take about two years, Corner said, with the first phase of the project slated for release in the fall, following CIRO’s board meeting in September.

The SRO is taking a phased approach to integrating the rule books to cushion the impact on the industry, Corner said.

The first phase will deal with the structure of the consolidated rules and general conduct standards, and CIRO is aiming to release subsequent phases roughly every quarter.

Phases two and three will cover rules that are unlikely to raise any issues for the industry or the regulators, whereas phases four and five will address bigger challenges.

Phase four will deal with issues such as rep proficiency requirements and continuing education, while the fifth phase will take on potentially tricky issues such as dealer capital rules, the differences between client name and nominee name structures, principal/agent and introducing broker/carrying broker arrangements, and sales conduct rules.

Although the rule book consolidation is expected to take about two years, it will be longer before a new rule book takes effect, since provincial regulators will have to approve the consolidated rules along the way.

The other major post-merger policy issue that CIRO is working on involves approving dual-registered firms, which was one of the central justifications for merging the previous two industry SROs.

Corner noted that there are two basic ways to structure dual-registered firms: a single legal entity with two divisions, or an integrated firm that employs mutual fund reps alongside investment reps.

The SRO intends to publish guidance on securing approval for dual licensing as it works through the process with firms that have already applied to adopt dual registration.