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This editorial will appear in the forthcoming Mid-October issue of Investment Executive.

The promise of enhanced self-regulation for the Canadian investment industry is off to a poor start. While the regulators have vowed to build a new self-regulatory organization (SRO) focused on the public interest, the public has largely been excluded from the process.

In the lead-up to a vote by investment dealers and fund dealers on a proposed merger of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, the regulators were unusually secretive. Announcements of the planned votes were not made public, and neither was the information circular laying out the terms underlying the proposed amalgamation.

This approach prevented public scrutiny of the planned transformation — including concessions made to dealers to earn support for the merger, the expected costs of the transaction (which are seen running into the tens of millions of dollars) and the plan for recouping those costs, which will come first from certain dealers but ultimately from investors.

The secrecy exposes the fundamental contradiction at the heart of self-regulation. While SROs purport to operate in the public interest, at the end of the day they are private organizations that answer chiefly to their members. This tension has played out in court when investors have sought to hold SROs accountable for losses suffered at the hands of investment dealers, only to find that investors have no standing in the contractual relationship between the SROs and their members.

While the provincial regulators delegate authority to the SROs, oversee their work and supervise them through their recognition orders, the line of accountability from the SROs to the public that regulators purport to serve is long and imprecise.

In theory, the SROs answer to the provincial regulators, who answer to their respective governments — which ultimately answer to the public. But in practice, the chain of command is too fractured for meaningful public accountability. The SROs can prioritize their own interests — those of their executives, employees and members — ahead of the public’s with little fear of consequences.

The initial pitch for SRO reform was couched in high-minded rhetoric about enhancing investor protection and serving the public interest. The reality so far has fallen short of those ideals.

Now that the scary part of the process — the possibility that plans could be derailed by a dealer vote — is over, hopefully the regulators can focus on their promises of enhanced regulation in the public interest.