Canada is one of the few major jurisdictions to utilize self-regulatory organizations (“SROs”) in its capital markets regulatory regime. Many argue that provincial-based securities regulation provides a welcoming platform for pan-Canada self-regulation. But in this era of burden reduction, is regulatory rationalization or consolidation inevitable if not desirable?
In late 2019, the Canadian Securities Administrators (the “CSA”) issued a news release announcing its commitment to review the SRO regulatory framework, and the roles that each of the Investment Industry Regulatory Organization of Canada (“IIROC”) and the Mutual Fund Dealers Association of Canada (“MFDA”) play within it.
That news release prompted response from both IIROC and MFDA. In February 2020, MFDA published a special report entitled “A Proposal for a Modern SRO” [PDF]. In June 2020, IIROC published a paper entitled “Improving Self-Regulation for Canadians” [PDF]. Both proposals suggest that change is needed and call for the creation of a new SRO that they have termed “NewCo”. However, the proposals diverge on what NewCo should be, and how change should be achieved. The similarities and differences in the IIROC and MFDA proposals are described in greater detail below.
The need for change
In June 2020, the CSA released the consultation paper it promised in its earlier news release. We have written about the paper here. The CSA does not directly discuss the IIROC or MFDA proposals in its paper. Rather, the CSA paper invites general feedback on whether there is a need for change and if so, what that change should be. It remains to be seen whether the IIROC and MFDA proposals will have an impact on the comments received by the CSA in response to its consultation paper.
Significantly, the CSA's consultation paper conveys a willingness to re-examine the SRO framework to reflect the evolution of the industry that has occurred over the past two decades. This objective is consistent with the CSA's push for client-focused reforms and the reduction of regulatory burden, efforts that we have written about here.
The IIROC and MFDA proposals each echo the concern that the current multi-regulatory model has failed to keep pace with the technology-driven transformation of the financial services industry. IIROC comments that, “the current SRO model denies many firms the ability to give Canadians efficient access to the advice, products and services they want, need and deserve”, while the MFDA concludes that the model is “unnecessarily burdensome, costly, inefficient and susceptible to risk”. IIROC and MFDA both suggest that harmonization and consolidation are necessary to reduce regulatory burden and accommodate modern investor demands. The “solution” proposed by MFDA and IIROC is an entirely new SRO termed “NewCo”, as further detailed below.
The proposed “NewCo”
A significant difference between the IIROC and MFDA proposals is the nature of the NewCo they suggest be created to address the deficiencies identified above.
MFDA envisions NewCo as “a frontline, client facing business conduct and prudential regulator” responsible for the regulation of all firms requiring registration under securities laws to trade or advise in respect of securities (subject to limited exceptions). This would include oversight of exempt market dealers (“EMDs”), portfolio managers (“PMs”) and scholarship plan dealers (“SPDs”), groups currently outside the mandate of both MFDA and IIROC. Overall, the MFDA NewCo “would be a ‘purpose built' SRO modelled on practical considerations and best practices derived from relevant, modern regulatory principles”.
Importantly, MFDA advocates for NewCo to be built from a “blank page”, stating that:
“NewCo should be viewed as … a fresh approach and its development and the interests of Canada should not be compromised by a temptation to perpetuate the current SRO model because it is ‘what we are familiar with' or that ‘change is too hard'”.
In contrast, IIROC advocates for its version of NewCo to leverage the existing SRO model thereby allowing for more immediate action, stating that:
“The opportunity — and imperative — to act now is upon us. An existential debate about the merits of going back to the drawing board will only delay progress and enshrine a status quo that is no longer effective or cost-efficient and which has already stifled innovation for too long.”
Instead, IIROC recommends that IIROC and MFDA consolidate as separate divisions of NewCo. Post-consolidation, IIROC suggests that dealers and representatives be allowed to continue to perform the activities they currently perform under the same level of regulation. Alternatively, if they so choose, dealers and representatives could consolidate their regulatory oversight into one division of the SRO. For example, dual platform dealers could “choose to consolidate all their representatives in a single legal entity, etc., with each activity regulated in proportion to its risk”. This arrangement would allow for each division of the IIROC NewCo to adopt essentially the same CSA-approved rule books currently in use by MFDA and IIROC. Over time, the divisions could work towards harmonizing and developing new rules under the supervision of the CSA. IIROC proposes that NewCo's potential role regulating and supervising EMDs, PMs and SPDs is a longer-term objective subject to future consultation.
The next steps
The next steps the CSA endorses in retaining or remaking the SRO framework governing IIROC and MFDA will likely be influenced by the responses it receives to the questions raised in the CSA consultation paper. IIROC [PDF] and MFDA have both announced their support of the consultation process. In their respective proposals, IIROC and MFDA have also signaled their position on the appropriate next steps to pursue. IIROC suggests their plan for NewCo is straightforward enough for immediate or near immediate implementation, and contends “this would create a streamlined platform on which to continue the evolution of the SRO model in partnership with the CSA”. MFDA, given their “blank page” approach, suggests that the immediate next step would be to canvas the level of interest in their proposed NewCo. Once interest is established, MFDA proposes moving forward with the design and implementation of NewCo following focused consultation, and under the supervision of specialized steering groups and design teams.
The consultation period ends on October 23, 2020. Affected market participants and investors are encouraged to provide input to advance this important initiative.
Originally published by Osler Hoskin, August 2020
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