handshaking and exchanging contract documents

Envisioning benefits in the “hundreds of millions” of dollars, the Investment Industry Regulatory Organization of Canada (IIROC) is making its latest pitch for a merger with the Mutual Fund Dealers Association of Canada (MFDA).

Late last year, the Canadian Securities Administrators (CSA) promised to undertake a review of securities industry self-regulation. Since then, the self-regulatory organizations (SROs) have been readying for the exercise.

In early February, the MFDA proposed a fundamental realignment of self-regulation that would bring together all registered firms under one SRO while hiving off market regulation into a separate body.

In its new paper, IIROC envisions a more modest proposal — simply merging with the MFDA — and leaving broader SRO reform for consideration further down the road.

A straightforward merger of the two SROs could take place within three months, IIROC suggested in its paper. It said that the benefits of consolidation could start to be realized within a year.

In its proposal, IIROC estimated that “hundreds of millions” in gains could be realized over the next 10 years by enhancing investor access to products and services, and by eliminating regulatory duplication.

IIROC said these projections are based on research being conducted by an outside firm, which will be released in the next few weeks — after the work has been shared with the CSA.

The most obvious savings would come for “dual platform” firms that run fund dealers and investment dealers side by side, which would then be able to rationalize their structures.

The IIROC proposal envisions allowing firms to continue operating under their existing rule set, so that fund dealers would remain subject to MFDA rules, and IIROC dealers would continue following its rules — although IIROC dealers would be able to employ mutual fund–only reps under the merged SRO, doing away with the need for dual platform structures.

At the same time, an SRO merger would make it cost-effective for fund dealers to enter into correspondent broker arrangements that would enable a wider array of reps to deal in ETFs, thereby expanding access to cost-effective products for less affluent, underserved clients.

“We know that Canadians need broader access to financial products and financial services, and this would deliver that,” said Andrew Kriegler, president and CEO of IIROC, in an interview with Investment Executive.

As it stands, there’s a significant opportunity cost to the current structure, he said, which, he believes, would be eliminated by consolidating IIROC and the MFDA.

Kriegler stressed that IIROC’s proposal wouldn’t impose a “disruptive change” on dealers or reps.

While it promises potential benefits, Kriegler said IIROC’s approach wouldn’t force firms to abandon things that are working well for them under the current structure.

Irene Winel, senior vice president of member regulation and strategy at IIROC, said, “We want to build on what’s already working.”

For instance, a key difference between the two regimes — the ability of fund reps to flow their commissions through personal corporations — would be preserved under the combined SRO.

These arrangements, which have traditionally been prohibited in the investment dealer world, would still be off limits, at least initially.

Winel stressed that IIROC’s proposal wouldn’t force firms to adapt to new requirements.

Both fund dealers and investment dealers would still have flexibility to pursue an array of business models under the combined SRO, she said.

It’s not just a dollars and cents issue either, she added, noting that consultations with industry and investors produced “a resounding call for improvement in client service and investor protection that can flow from [SRO consolidation].”

Whether this latest bid to merge IIROC and the MFDA gets traction with the CSA remains to be seen.

CSA’s consultation paper on self-regulation is expected by month’s end.