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As provincial regulators prepare to launch a review of investment industry self-policing, they face calls to rebuild the self-regulatory organization (SRO) structure from the ground up rather than simply remodel the existing framework.

Late last year, the Canadian Securities Administrators (CSA) announced a plan to undertake an examination of self-regulation this year, with a consultation paper to be published by mid-year.

In early February, the Mutual Fund Dealers Association of Canada (MFDA), an existing SRO, fired its initial shot in the forthcoming tussle over the future of self-regulation in a paper sketching out the MFDA’s v ision.

Instead of simply merging the MFDA with the Investment Industry Regulatory Organization of Canada (IIROC) – an idea that has been broached several times – the MFDA proposes a more fundamental restructuring that would create a new, comprehensive SRO for registered firms and return the task of market oversight to the provincial regulators.

The MFDA did not consult the CSA or IIROC in drafting the proposal.

“IIROC acknowledges the MFDA’s contribution to the CSA’s consultation,” states an email to Investment Executive from IIROC. “IIROC will continue to work with all stakeholders to develop solutions for the CSA to consider, as the CSA reviews the regulatory framework of IIROC and the MFDA.”

The MFDA’s paper proposes creating an SRO that covers fund dealers and investment dealers (which are under oversight of the existing SROs) as well as firms currently supervised directly by the provincial regulators – firms such as exempt market dealers, scholarship plan dealers and portfolio managers. Thus, the MFDA’s proposed SRO would take charge of both conduct and prudential regulation for all of these firms.

The MFDA paper also recommends that the provincial authorities should handle market regulation – currently an IIROC responsibility – directly.

The MFDA’s paper sets out a proposed approach to governance for the new SRO, which would include a board composed of industry representatives, independent/public directors and CSA nominees.

These recommendations would involve fundamental change, but Mark Gordon, president and CEO of the MFDA, points out that the changes are achievable under existing securities legislation.

At the heart of the MFDA proposal is the conviction that any SRO reform should begin from the ground up, with an eye to crafting the ideal model, rather than attempt to make marginal improvements to what already exists.

The MFDA’s paper argues that the CSA’s review should “not be limited by history or status quo regulatory structures, but should start with a blank slate and be driven by investor protection and regulatory concerns rather than dealer cost savings or competitive strategy.”

Gordon reiterates that vision: “The CSA needs to design a model starting with an investor-centric approach instead of just patching together existing structure for the sake of perceived expediency.”

An investor-centric approach has support among investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and Kenmar Associates.

In response to the MFDA paper, Ermanno Pascutto, founder and executive director of FAIR Canada, says, “We agree that we need a wholesale review of self-regulation.”

Pascutto adds: “We need to ask why we have self-regulation rather than direct regulation. We have to ask whether [the current system] is working in the public interest [and] in the interests of investors.”

FAIR Canada recommends that the provincial regulators’ examination of self-regulation start fresh, with an eye to crafting “a new self-regulatory system that builds on the strengths and eliminates the weaknesses as much as possible.”

FAIR Canada’s stance is echoed by Kenmar, which published a paper arguing that the CSA’s review shouldn’t simply be an exercise in rubber-stamping an IIROC/MFDA merger.