The Investment Industry Regulatory Organization of Canada
(“IIROC”) has proposed a major change to the regulatory structure of the
investment industry.
In response to an announcement by the Canadian Securities
Administrators (“CSA”) that it will undertake a review of
the regulatory framework for industry self-regulatory organizations
(“SRO’s”) later this year, IIROC has proposed to
merge with the Mutual Fund Dealers Association (“MFDA”)
to form a new SRO, which would regulate the majority of financial
advisors in Canada.
Currently, most financial advisors in Canada (outside of Quebec)
operate through dealer firms that are governed by either IIROC or
the MFDA. IIROC was formed in 2008 through the merger of the
Investment Dealers Association of Canada and Market Regulation
Services Inc. and regulates investment dealers and trading activity
on virtually all debt and equity markets except insurance. The MFDA was formed in 1998 and
regulates dealers of mutual funds and certain exchange traded funds
and exempt fixed income products.
As IIROC notes in its proposal, the piecemeal and duplicative
regulatory structure currently in place reflects a bygone and
simpler era in which one could more easily draw rigid divides
between financial products and services available to consumers. The
investment industry has changed dramatically in the last decade as
a result of technology, a change which has only been exacerbated by
COVID-19. As a result, according to IIROC, many firms are
“increasingly focused on delivering a more comprehensive
advice and service experience to their clients, across a broader
range of products and services, and are forced to spend valuable
resources to work around the requirements imposed by the existing
fragmented self-regulatory regime.”
According to IIROC, merging with the MFDA will have numerous
benefits including:
- Freeing up resources that investment
firms currently spend trying to comply with duplicative and
overlapping regulations that can then be invested in
innovation; - Creating economies of scale that will
result in more effective and consistent regulation across the
industry; - Improving customer experience,
including the availability of ‘one stop shopping’, since
investment firms will be able to create and offer products in
compliance with a single regulatory standard; and - Increasing investors’
understanding of and confidence in the regulatory process, since
one SRO would be responsible for regulating the majority of
investment advisors.
IIROC argues that the consolidation can be accomplished within
three months of the CSA’s approval and without disrupting the
existing rule framework, business models, or regulatory fee
structures.
Though seismic, IIROC’s proposal is not novel, and follows a
similar recommendation by the C.D. Howe
Institute from last year.
While the MFDA agrees with the need to revamp the current
regulatory structure, it has publicly opposed such a merger, and
proposes instead the creation of an even broader SRO that would
also include oversight of Exempt Market Dealers (EMDs), Portfolio
Managers (PMs) and Scholarship Plan Dealers (SPDs), which goes
beyond both IIROC and the MFDA’s present mandates (currently,
EMDs, PMs, and SPDs are regulated directly by provincial and
territorial securities commissions).
IIROC argues in response that “going back to the drawing
board” in the manner proposed by the MFDA would take years to
accomplish and effectively freeze the status quo for the
foreseeable future, whereas its proposed merger with the MFDA could
be accomplished quickly, since provincial and territorial
securities commissions already recognize IIROC and the MFDA.
Following the merger, IIROC proposes that the new SRO would assist
the CSA in reviewing other registration categories like EMDs, PMs,
and SPDs.
Both IIROC and the MFDA agree that significant changes are
necessary and support greater consolidation. They differ (to a
lesser extent) on the extent of those changes, and (to a greater
extent) on the process (the MFDA proposes a broader consolidation
of existing SROs and regulatory participants notwithstanding that
that process will take some time to accomplish, while IIROC seeks
the immediate consolidation of the two largest SROs in the
industry, with the potential for further consolidation with other
regulatory participants in years to come). While it remains to be
seen which approach the CSA will prefer, it is clear that there are
major changes on the horizon for the regulatory structure of the
Canadian investment industry.
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