group collaboration / scyther5

The financial services industry and investors alike are pleased that consolidation of self-regulation finally is in the works, but there also are widespread concerns about the new regulator’s governance and its plans for enforcement.

The Canadian Securities Administrators’ public consultation regarding a new self-regulatory organization (SRO) ended in early October. Submissions on the plan to merge the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) revealed an array of views on the proposed SRO’s governance structure and the level of involvement by the provincial regulators.

The CSA proposed limiting the new SRO’s board to 15 directors — seven of whom would be from investment industry firms. Some comments raised concerns that smaller players, particularly independent fund dealers and financial advisors, won’t have much of a voice in a structure that demands the majority of board members represent the public.

“We would like to remind the CSA … that this is supposed to be a ‘self’ regulatory organization and that the board composition should reflect that,” stated the Federation of Mutual Fund Dealers’ submission.

Comments from the Investment Funds Institute of Canada (IFIC) and its Quebec division, the Conseil des fonds d’investissement du Québec (CFIQ), also raised concerns about the adequacy of a 15-member board.

“Efficiency is an important goal; so too is representation,” stated the CFIQ’s submission. “The new SRO will bring together members from different registration categories, of different sizes and with business models from different regions across Canada with their share of local issues.”

The CFIQ was particularly concerned for fund dealers in Quebec, which are not under the MFDA’s jurisdiction but would become part of the new SRO. The CFIQ asked how the new SRO will fit into Quebec’s regulatory structure without creating duplication and investor confusion, given that fund dealers fall under the oversight of both the Autorité des marchés financiers and the Chambre de la sécurité financière.

The CFIQ also pointed to Quebec’s unique legal system and the existence of the province’s own investor protection fund (alongside the MFDA and IIROC funds, which would be combined as the SROs are merged). Properly examining all such issues will require adequate representation at the new SRO, the CFIQ argued. It also suggested the new SRO’s headquarters be based in Montreal.

Ensuring an adequate voice for individual advisors within the new regulator was a concern for the Financial Advisors Association of Canada (a.k.a. Advocis). While Advocis acknowledged that advisors don’t sit on IIROC’s or the MFDA’s board, advisors do participate in regional councils, which have decision-making authority under the current structure but would be reduced to an advisory role within the new SRO.

“We are disappointed to see that the new SRO could actually represent a step backward in [terms of advisor representation],” Advocis stated, while also expressing support for increased investor representation in the new SRO through both a new investor office and advisory panel.

Other industry players worry the CSA would be too involved in the new SRO’s operations. TMX Group Ltd.’s submission noted a concern about the requirement for all provincial regulators to sign off on prospective board members: “[This] could add significant delay to the SRO’s director onboarding process, with no commensurate benefit.”

IFIC echoed these concerns: “Without timely and effective CSA coordination, the swift implementation of needed rule changes could be impaired by a cumbersome and complex review process.”

At the other end of the spectrum, the Portfolio Management Association of Canada (PMAC) — which favours direct regulation over SRO regulation — suggested the provincial regulators be more hands-on with the new SRO. PMAC stated the CSA should be able to veto the appointment of the new SRO’s chair and its CEO, as well as any guidance and rule interpretations crafted by the new regulator. PMAC also recommended the CSA have approval power over the proposed SRO’s policy agenda and strategic plans.

Furthermore, PMAC’s comment called for a highly investor-focused board. Among other things, it recommended that most (if not all) directors be required to have a background in investor protection, that investors have direct representation on the board and that anyone who has worked in the investment industry be excluded from consideration as a public director — not merely subject to a cooling-off period.

Opinions within the industry differed sharply regarding how fast the reform effort should move. Some comments advocated the proposed SRO be ready in short order (the CSA is targeting the second half of 2022); others recommended the CSA take its time.

“The establishment of such an important new organization will only happen once in a generation,” the CFIQ stated. “We believe that it is useful, even necessary, to take appropriate time for the initial implementation of the new SRO … to increase the chances of success of the new SRO and ensure its sustainability.”

The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) expressed similar sentiments, stating the organization supported the CSA’s decision to “forgo a straight merger of IIROC and the MFDA in favour of a thorough review and enhanced SRO.”

FAIR Canada also stressed the need to improve SRO enforcement by prioritizing investor compensation in cases where misconduct results in losses, taking more action against supervisory failures of firms and senior management, and ensuring investors are treated fairly even if firms are technically compliant.

“Creating a new SRO structure is something we will be living with for many decades,” FAIR Canada stated. “As such, those responsible for establishing the new structure should not race towards arbitrary deadlines, but rather focus on meaningful change and improvements to the current system.”