The Canadian Securities Administrators (CSA) has taken one step closer to realizing on its recommendations to consolidate the two existing self-regulatory organizations (SROs), IIROC and the MFDA, into a single SRO (New SRO) in CSA Staff Notice and Request for Comment 25-304 Application for Recognition of New Self-Regulatory Organization. The New SRO would be amalgamated under the Canada Not-for-profit Corporations Act. Current members of the MFDA and IIROC will be members of the New SRO.
The CSA has an ambitious agenda to work towards establishing the New SRO by December 31, 2022. The Chair of the Board of the New SRO, along with industry and independent board members, was also announced along with the publication of the CSA Staff Notice. The CEO of the New SRO remains to be announced.
The New SRO would have an expansive mandate to act in the public interest, including protecting investors from unfair, improper or fraudulent practices by its members and fostering public confidence in the capital markets. Other aspects of its mandate will include facilitating investor education, administering a fair, consistent and proportionate continuing education program, and recognizing and incorporating regional considerations and interests from across Canada.
Initially, the New SRO will have two classes of members, the first being Dealer Members, who are comprised of investment dealers and/or mutual fund dealers. The second class would be Marketplace Members, comprised of recognized exchanges, quotation and trade reporting systems and others that facilitate trading of securities or derivatives in Canada in the enumerated circumstances.
The application for recognition of the New SRO includes a draft by-law, draft interim rules, draft terms of reference for the New SRO Investor Advisory Panel, and new requirements for Québec. The application also includes a draft recognition order and draft Memorandum of Understanding among regulators regarding oversight of the New SRO.
The application and draft approval order sets out the proposed governance structure for the New SRO, including a requirement for the board and committees to be composed of a majority of independent directors and independent chairs, with the governance committee composed of all independent directors. It is proposed the initial board will consist of 15 members, six of which will represent the members and 8 of which will be independent, plus the President and the CEO of the New SRO. The New SRO will also have policies and procedures to manage actual, potential or perceived conflicts of interest of its directors, officers, employees and members of its disciplinary panels.
The current IIROC District Councils will be replaced by Regional Councils, which will have an advisory role to staff of the New SRO on regional regulatory policy matters. It is proposed that there be a National Council and seven Regional Councils, comprised of Dealer Members from each region (as defined). The National Council would be comprised of the Chairs and Vice-Chairs of the Regional Councils to act as a forum for cooperation among the councils and make recommendations to the CEO and Chair of the New SRO. A new Appointments Committee will have responsibility for appointing members of the District Hearing Committees.
In addition, the new SRO will have new formal investor engagement mechanisms, including an Investor Advisory Panel and investor office. The investor office will support rule development and provide investor education and outreach, while the Investor Advisory Panel will provide independent research or input on regulatory and public interest matters. The Investor Advisory Panel will provide input to the New SRO with respect to its annual priorities, strategic plans, policies, and other regulatory initiatives, and may also raise current and emerging policy issues that it identifies. Members of the panel will be selected by a public application process administered by staff of the New SRO and will consist of 5-11 members. The Chair of the panel must meet with the New SRO board at least once a year and will publish a public report annually to be posted on the New SRO’s website.
The New SRO continues its planning to develop an appropriate fee model post amalgamation. On an interim basis, the existing fee structures and models of IIROC and the MFDA will initially be maintained by the New SRO, as will the existing criteria for access to membership and the provision of regulation services.
With respect to rules, the New SRO will initially adopt interim rules which incorporate the regulatory requirements in the rules of IIROC and the MFDA, which include:
- Investment Dealer and Partially Consolidated Rules;
- Mutual Fund Dealer Rules;
- Mutual Fund Dealer Form 1; and
- Universal Market Integrity Rules.
The Interim Rules include proposals to (i) amend the current IIROC proficiency requirements to allow dual registered firms to employ mutual fund only licensed persons without having to upgrade their proficiencies to those required of a securities licensed person, and (ii) permit introducing/carrying broker arrangements between mutual fund dealers and investment dealers.
The SRO will work toward harmonizing CE programs, but for now the existing CE requirements will continue to apply. Mutual fund dealers will continue to be exempt from the CE requirements of the New SRO for their activities in Québec. Furthermore, the power to make decisions relating to the supervision of the New SRO’s activities in Québec will be exercised mainly by persons residing in Québec, and complaints will be referred to staff of the New SRO in Montreal or to the Autorité des marchés financiers or the Chambre de la sécurité financière. Members of the hearing panels of the New SRO in respect of Québec residents will themselves be Québec residents. While firms registered as mutual fund dealers in Québec will join the New SRO, there will be a transition period for their activities in Québec and their fees will be prorated to the services offered to them by the New SRO.
Comments on the materials are due shortly, by June 27.
May 31, 2022