Is now the time to revisit the long-standing idea of merging the investment industry’s two major self-regulatory organizations (SROs)? No. A regulatory rethink certainly has merit, but merging the SROs isn’t the answer.
A recent paper from the C.D. Howe Institute proposes that the time has come to combine the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The think-tank’s paper argues that marrying the two SROs would help reduce compliance costs and operational complexity for securities dealers – and eventually filter down to benefit investors.
While the idea holds appeal superficially, a straightforward merger of IIROC and the MFDA is not the way to go.
To start, regulatory mergers are much simpler in theory than they are in practice.
IIROC was created by merging the investment dealer and market regulators back in 2008, and that process was not easy. The imagined synergies and cost savings to be had by combining regulators are especially elusive. And the impact on the agencies’ core jobs of crafting regulatory policy, providing oversight and ensuring enforcement are inevitably hampered by the bureaucratic disruption that a merger invites.
Moreover, any SRO combination at this time would most certainly be a takeover by IIROC, which is the bigger, more long-standing organization. Fund dealers – particularly smaller, independent dealers – would understandably fear their fate under a combined SRO.
The merger that gave birth to IIROC brought together distinct parts of the industry: investment dealers and marketplaces. An IIROC/MFDA merger would bring longtime rivals (investment dealers and fund dealers) under the same roof, which is a significantly more daunting proposition for the fund dealers.
When the provincial regulators created the MFDA, they determined that fund dealers’ businesses were distinct and that sector needed its own SRO. Over the years, IIROC has repeatedly sought a merger, and the MFDA has resisted. Now, while reconsidering the regulatory structure overall would be worthwhile, a straight-up SRO merger would be a solution looking for a problem.