Canadian securities regulators are establishing a new self-regulatory organization that will oversee the country’s investment industry, consolidating the functions of two existing entities – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).
The creation of the new regulator, announced Tuesday, is the result of more than 18 months of feedback and consultation from various industry participants, after the Canadian Securities Administrators – an umbrella organization of Canada’s provincial and territorial securities commissions – announced in December, 2019, that it was considering an overhaul of the regulatory framework that governs IIROC and MFDA.
The CSA also announced that it would also combine two investor protection funds – the Canadian Investor Protection Fund and the MFDA Investor Protection Corporation – into a single fund that will be independent from the new organization.
Some investors and industry participants have argued the existence of two separate investment industry self-regulatory organizations, or SROs, has been unnecessary, given their overlapping areas of oversight.
IIROC supervises securities dealers, while the MFDA handles mutual fund dealers. But an increasing number of wealth managers have customers that purchase both mutual funds and individual securities, leading to complexities and redundancies when it comes to regulating their businesses as a whole.
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Both organizations have also faced criticism for having weak corporate-governance structures stacked with former industry participants that tend to favour their own interests rather than that of investors. As SROs, both are able to fine and sanction their members. In a statement released Tuesday morning, CSA chair and president Louis Morisset said the creation of the new SRO would “better protect Canadian investors, enhance public confidence and ensure fair and efficient market operations.”
As part of the CSA’s mandate to improve the governance of SROs, the new organization’s board will consist mostly of independent directors and an independent chair, a sharp departure from the current board composition of both IIROC and MFDA.
In a report detailing the framework of the new organization, the CSA said that the changes were intended to “address the perception that the current SRO corporate governance structure under-represents the concerns of investors and other stakeholders to the benefit of the industry.” The CSA will play a role in choosing these independent directors.
The positions of chief executive officer and chair of the new organization will be occupied by two different individuals. In addition, the CSA report suggests that an “appropriate cooling-off period” be required for CSA regulators themselves to be considered for independent director positions.
The yet-to-be-named organization will replace IIROC and MFDA in a two-phase process that could take many months to complete. The first phase will begin immediately and will focus on designing a corporate structure, as well as determining how involved the CSA should be in overall governance and oversight of the new entity.
In the second phase, the CSA will initiate a formal consultation with stakeholders to determine whether other registration categories in the investment industry – portfolio managers, exempt market dealers and scholarship plan dealers – should be incorporated into the new organization.
The creation of the new SRO is also expected to reduce industry costs and increase the ability of mutual fund dealers to access a broader range of products and services, the CSA report said.
Currently, for example, mutual fund dealers cannot easily purchase exchange-traded funds for clients, because of the costs involved in integrating back-office systems between dealers. As a result, mutual fund dealers often engage in complicated work-arounds, including referring a client to an IIROC dealer, or advising them to buy an investment fund that wraps ETFs. One of the solutions proposed by the CSA is to allow broker arrangements between mutual fund dealers and investment dealers, since they will all be regulated by a single body.
The new organization, according to the CSA, will also centralize the IIROC and MFDA complaint-reporting process, allowing investors to use a standard complaint form to file all kinds of complaints. A portal will direct the complaint to the appropriate organization, either the new SRO or one of the provincial/territorial securities regulators.
In a statement released Tuesday morning, both IIROC and MFDA applauded the CSA’s decision, saying that a new, consolidated organization would create “significant efficiencies for industry participants.” Both organizations will collaborate with the CSA to implement the process while continuing to operate as usual until the new SRO is formed.
The CSA’s decision to create a new regulatory organization contradicts a recommendation made from a bevy of investment industry groups last March that called for IIROC and MFDA to merge.
The Investment Funds Institute of Canada, the Investment Industry Association of Canada and the Federation of Mutual Fund Dealers had called on regulators to “leverage” the best assets of IIROC and MFDA rather than create a new organization from the ground up, mainly because the latter move would take longer.
A working group created by the CSA will continue receiving feedback for the next 60 days on the framework of the new SRO, while it simultaneously begins the process of creating the new organization.
With files from Clare O’Hara
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Vanmala Subramaniam