Industry group recommends advice-focused SRO

A consortium of industry associations submitted their vision for self-regulation to the Canadian Securities Administrators (CSA) on Wednesday — and that vision includes a focus on advice rather than products.

The Investment Industry SRO Forum submitted 32 recommendations to the CSA, all premised on the view that the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) should merge. A possible second phase would add other registration categories, “but only after consultation with those other categories of registrants to ensure willing partners.”

Among those recommendations, the forum suggests the name of the newly consolidated self-regulatory organization (SRO) reflect “the advice-driven culture of the investment industry.”

Forum co-chair Richard Rousseau, who is vice-chair, Private Client Group, Quebec, with Raymond James Ltd., said the industry has evolved away from a product focus — “and yet our regulators are still identified by the products [registrants] are selling.”

It’s time for an SRO to “evolve to the level of professionalism that exists in the industry,” he added.

The forum comprises 15 members representing the boards of the Federation of Mutual Fund Dealers, the Investment Funds Institute of Canada and the Investment Industry Association of Canada. The submission reflects those associations’ views, but members representing portfolio managers, private capital markets and a scholarship plan dealer also provided insight.

While each organization made its own submission during the fall 2020 SRO consultation, the forum convened in January to examine the issues further, with the goal of sharing a broad, consolidated industry view on improving self-regulation with the CSA.

Carol Lynde, forum co-chair and president and CEO of Bridgehouse Asset Managers, said investors are often confused by Canada’s regulatory patchwork, and that she hopes a single SRO will simplify the client experience. While she acknowledged simplification could take time, “you can’t [begin to] do that if you have two different entities,” she said, referring to MFDA and IIROC.

The forum’s remaining recommendations — which concern operating efficiencies, policy and governance — were meant to be practical and build on the SROs’ existing strengths, said Rousseau.

“We’re not talking about a system that is fundamentally broken that needs to be rebuilt from scratch,” Rousseau said. Both the MFDA and IIROC do “a lot of things tremendously well, and the idea is to take the best of those two.”

Under the current regime, however, “you sometimes wind up with an unlevel playing field,” Rousseau said. For example, investors can currently buy the same product from two registrants who are each subject to different proficiency standards, he said.

The forum hopes its recommendations would level that field, with harmonization a common thread throughout the submission.

Recommendations regarding operating efficiencies were focused on reducing duplication.

The forum recommended harmonizing proficiency and continuing education (CE) requirements for all registrants, noting that anticipated introduction of new rules — such as the MFDA’s forthcoming CE requirements — “provides opportunities to harmonize.”

Other operating recommendations included consolidation of advisor titles; a “master account” to consolidate client account information, offering clients “one-touch” access to their accounts; creating better access to disciplinary information (including giving dealers access to “detrimental information” that falls short of public discipline); and developing a platform that would allow “nominee name” and “client name” business models to coexist, eliminating duplication of client reporting requirements.

The forum also suggested the SRO allow member firms to pay advisor commissions to their personal corporations.

On the policy front, the forum asked for a “disciplined approach” to rule-making to reduce costs. The forum suggested the SRO use cost-benefit analyses in decision-making and “proportionate” regulatory tools. Other recommendations advocated for harmonizing SRO rules where appropriate, setting “plain-language rules that articulate a clear regulatory outcome,” and a prohibition on “rulemaking by guidance notice.”

The forum also recommended the CSA delegate registration of dealer firms and individuals to the SRO, as well as giving the SRO the power to impose terms and conditions on registrants.

In terms of governance, the forum recommended that the SRO board’s chair and a majority of directors be independent, with “experience with consumer and retail investor issues.”

The CSA’s consultation paper said investor advocates had raised concerns that SRO directors “with close ties to industry limit the ability of the SROs to carry out their regulatory responsibilities and public interest mandates … due to their potential bias.”

In a paper released earlier this month, Kenmar Associates recommended that independent directors be defined as “persons with no prior direct connection to the industry” who are “capable of providing the investor perspective.” Further, Kenmar suggested there should be at most “one ex-industry director at any time” on the board.

Rousseau said the forum considered these points at length. “We [want to] secure the confidence of the investing public by making sure that not only the majority of the board, but the chair of the board, [are] independent,” he said. As for defining independence, he said the forum would want to see candidates with “no perceived bias” who also have sufficient knowledge of the industry.

The forum also recommended creating an investor advisory panel with a mandate similar to the Ontario Securities Commission’s independent panel.

Other governance recommendations were made so the SRO could move “quickly to respond to fast-moving market developments to protect investors.” For example, the forum suggested the CSA consider “less review of non-material rule changes.”

Lynde said the forum hopes the SROs will begin collaborating soon. “We want the MFDA boards and the IIROC boards to get together and start talking constructively about what needs to happen,” she said, “because there are a lot of bright minds in that group and very experienced staff.”

In February 2020, the MFDA released a position paper advocating a fundamental realignment of self-regulation that would bring together all registered firms under one SRO while hiving off market regulation into a separate body. The MFDA argued for an “ideal” SRO “based on meaningful co-operation with CSA members, SROs, industry and public stakeholders.”

In June, IIROC released its own position paper, calling for a merger with the MFDA and leaving broader SRO reform for consideration down the road. IIROC suggested the merger could take place within three months and that the benefits of consolidation could start to be realized within a year. IIROC further estimated that the merger could generate in excess of $500 million in benefits over 10 years.

An analysis of IIROC’s proposals conducted by Deloitte LLP estimated that while the bulk of the savings would flow to large dual-platform dealers, small firms collectively would enjoy tens of millions in cost savings as a result of an IIROC/MFDA merger, and mid-size firms would see around $100 million in savings.

Both the Portfolio Management Association of Canada and the Private Capital Markets Association of Canada oppose being part of a merged or new SRO. In comment letters, both organizations stated that the SRO model has fallen out of favour in markets such as the U.K., Australia, Hong Kong and Singapore amid concerns about inherent conflicts of interest.

The CSA indicated in February that it will release its SRO recommendations this summer.

With files from James Langton

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.