CSA promises SRO review for 2020

Investment industry self-regulation may be in for an overhaul, as the provincial regulators pledged on Thursday that they will review the structure of self-regulation in the coming year.

The Canadian Securities Administrators (CSA) are planning to undertake a review of the regulatory framework for industry self-regulatory organizations (SROs) the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) in 2020.

The CSA said that it is expecting to publish a consultation paper in mid-2020 that will, among other things, review the underlying policy justification for the current structure, as well as its strengths and weaknesses. The regulators also said that they plan to consult with the industry and consider the impact of innovation on the current framework.

The MFDA was launched in 1998 after the mutual fund industry experienced exponential growth, and the provincial regulators determined that an SRO was needed to ensure adequate oversight of the fund dealers.

IIROC was created about a decade later, in mid-2008, from a merger of the regulatory side of the Investment Dealers Association of Canada (IDA) and Market Regulation Services Inc., which brought together the dealer and market regulators, with the IDA’s trade association function being hived off to create a stand-alone industry lobby group, the Investment Industry Association of Canada.

Even before IIROC was created, there was talk of possibly merging the MFDA and the IDA, and that issue resurfaced repeatedly over the years. In late October, Toronto-based think tank the C.D. Howe Institute published a paper that raised the possibility once again.

In the years since the current SRO structure was adopted, the investment business has evolved considerably, as industry consolidation has created more firms with both IIROC and MFDA divisions.

At the same time, the exempt market has grown significantly, yet exempt market dealers remain under the direct regulation of the provincial authorities.

In the last few years, the industry has also seen an increase in innovation, including the emergence of novel businesses that don’t fit neatly into the existing regulatory structure.

“The regulatory framework for these self-regulatory organizations has been in place for several years, and the industry has evolved significantly during this time,” said Louis Morisset, chair and president and CEO of the Autorité des marchés financiers (AMF), in a statement.

“In response to requests formulated by market participants, we believe it is appropriate to revisit the current structure and seek comment from stakeholders,” he said.

In a statement, IIROC welcomed the planned CSA review, saying that it looks forward to “participating in the CSA’s consultation and in exploring options that make sense in today’s environment.”

At a reception in Toronto in late November, IIROC president and CEO Andrew Kriegler said that it’s not up to IIROC and the MFDA to determine whether a merger makes sense.

“However, I will say that it is up to the two of us to propose solutions that work and which make sense for the system and for Canadians,” he said.

“For we are self-regulatory organizations – in the same industry – and if we shy away from tackling the difficult questions, if we try only to protect the status quo, if we look only to the CSA to solve our problems and industry’s challenges, then we aren’t doing our job and we are letting Canadians down,” Kriegler added.

The MFDA also welcomed the review.

“This is a very important initiative for Canadian investors, industry and regulators,” MFDA president and CEO Mark Gordon said in a statement. “As part of its ongoing strategic planning, the MFDA has conducted extensive research and analysis on the role of SROs with a view to determining the regulatory model that will best meet Canada’s current and future needs. The MFDA will share this analysis with the CSA and all relevant stakeholders in early 2020.”