On June 25, the Canadian Securities Administrators (CSA) published a consultation paper (Consultation Paper) seeking feedback on whether the current framework for self-regulatory organizations (SROs) should be reformed. As our readers know, the existing system requires investment dealers to be members of the Investment Industry Regulatory Organization of Canada (IIROC) and requires most mutual fund dealers (except those in Québec) to be members of the Mutual Fund Dealers Association of Canada (MFDA). CSA members directly regulate and oversee exempt market dealers (EMDs), investment fund managers (IFMs), portfolio managers (PMs), and scholarship plan dealers (SPDs).
The Consultation Paper is the latest in a series of publications considering whether the existing SRO system should be reformed. In February, we discussed the MFDA’s proposal that the CSA take over direct oversight of markets while giving up direct oversight of EMDs, SPDs and certain PMs to a new self-regulatory organization (NewCo) that would take on direct responsibility for the registration, business conduct, prudential oversight, policymaking and enforcement functions of the registrants mentioned above, plus those currently overseen by IIROC and the MFDA. More recently, IIROC proposed that IIROC and MFDA be brought together as divisions of a consolidated SRO.
At this stage, the CSA is not recommending any particular regulatory model or reforms. Instead, the Consultation Paper describes the existing SRO framework, summarizes the results of the CSA’s recent consultations with stakeholders, and seeks feedback on the issues raised by those consultations. According to the Consultation Paper, many stakeholders commended the SROs’ specialized expertise and the benefits of their national scope. However, they also raised some concerns about the existing system, including the following:
- Product-based regulation: Some stakeholders think that there is an unlevel playing field and potential for regulatory arbitrage because similar products and services are subject to different rules, or differing interpretations of similar rules, depending on which organization’s rules apply.
- Duplicative operating costs: There also are concerns that the lack of common oversight standards and differing interpretations of similar rules have led to duplicative operating costs for dealers who operate under both the IIROC and MFDA platforms.
- Structural inflexibility: Some stakeholders think that the existing framework makes it harder for dealers to accommodate evolving investor preferences (e.g. to access a wider range of products from a single registrant), creates succession planning challenges for mutual fund dealers and their representatives (because of the limited product shelf they can offer their clients), and/or limits investment dealers’ ability to grow their businesses due to difficulties in attracting mutual fund dealing representatives because of the additional proficiency requirements.
- Investor confusion: Investors and their advocates stated that layers of regulation have contributed to investor confusion because investors can’t access a broad range of products from one representative and/or are unsure whom to turn to if an issue arises.
- Public confidence in SRO system: Some stakeholders see this project as an opportunity to enhance the SROs’ governance structures to focus on their public interest mandates and strengthen complaint resolution mechanisms.
Although the Consultation is likely to be of particular interest to IIROC and MFDA members, this initiative has the potential to reshape in fundamental ways the regulatory environment for all registrants, including firms and individuals currently subject to direct regulation and oversight by the CSA. The deadline to submit comments is October 23. If you would like to discuss the Consultation and its potential impact on your business, please contact your usual lawyer at AUM Law.
June 30, 2020