Canadian securities regulators establish a new self-regulatory body to oversee the country’s investment industry, consolidating the functions of two existing entities – the Investment Industry Regulatory Organization of Canada (IIROC) and the Association Canadian Mutual Fund Dealers (MFDA).
The creation of the new regulator, announced Tuesday, is the result of more than 18 months of feedback and consultation with various industry participants, following the announcement of the Canadian Securities Administrators – an umbrella body of provincial commissions and securities jurisdictions of Canada – in December 2019, that it was considering an overhaul of the regulatory framework that governs IIROC and the MFDA.
The CSA also announced that it will also combine two investor protection funds – the Canadian Investor Protection Fund and the MFDA Investor Protection Society – into a single fund that will be independent of the new organization.
Some investors and industry participants argued that the existence of two separate investment industry self-regulatory organizations, or SROs, was unnecessary given their overlapping areas of oversight.
IIROC oversees investment dealers, while MFDA deals with mutual fund dealers. But a growing number of wealth managers have clients who buy both mutual funds and individual securities, resulting in complexities and redundancies when it comes to regulating their business as a whole.
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Both organizations have also been criticized for having weak corporate governance structures stacked with former industry participants who tend to favor their own interests over those of investors. As SROs, both can impose fines and sanction their members. In a statement issued Tuesday morning, CSA Chairman and Chairman Louis Morisset said the creation of the new SRO “would better protect Canadian investors, enhance public confidence and ensure fair and efficient market transactions.”
As part of the CSA mandate to improve the governance of SROs, the board of directors of the new organization will be composed primarily of independent directors and an independent chair, which departs significantly from the current composition of the board. IIROC and MFDA.
In a report detailing the framework for the new organization, the CSA said the changes were intended to “address the perception that the current corporate governance structure of SROs under-represents the concerns of investors and other stakeholders in the business. industry profit ”. The CSA will play a role in selecting these independent directors.
The positions of CEO and President of the new organization will be filled by two different people. Further, the CSA report suggests that an “appropriate cooling-off period” be required for the CSA regulators themselves to be considered for independent director positions.
The organization whose name has yet to be named will replace IIROC and MFDA in a two-phase process that could take several months. The first phase will begin immediately and will focus on designing a corporate structure, as well as determining the degree of involvement of the CSA in the overall governance and oversight of the new entity.
During the second phase, the CSA will begin a formal consultation with stakeholders to determine whether other categories of registration in the investment industry – portfolio managers, exempt market dealers and stock market plan dealers. studies – should be incorporated into the new organization.
The creation of the new SRO is also expected to lower industry costs and increase the ability of mutual fund dealers to access a wider range of products and services, according to the CSA report.
Currently, for example, mutual fund brokers cannot easily purchase ETFs for their clients, due to the costs of integrating back-office systems between brokers. As a result, mutual fund dealers often engage in complex workarounds, including referring a client to an IIROC broker or advising them to buy an investment fund that includes ETFs. One of the solutions proposed by the CSA is to allow brokerage arrangements between mutual fund dealers and investment dealers, since they will all be regulated by a single organization.
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 issued Tuesday morning, IIROC and the MFDA applauded the CSA decision, saying a new consolidated organization would create “significant efficiencies for industry participants.” Both organizations will work with ASC to implement the process while continuing to operate as usual until the new SRO is formed.
The CSA’s decision to create a new regulator contradicts a recommendation made by a multitude of investment industry groups last March that called for the merger of IIROC and MFDA.
The Investment Funds Institute of Canada, the Investment Industry Association of Canada and the Federation of Mutual Fund Dealers called on regulators to “leverage” the best assets of IIROC and the Fund. ACFM rather than creating a new organization from scratch, mainly because the latter would take longer to move.
A CSA-established working group will continue to receive feedback for the next 60 days on the new SRO framework, as it simultaneously begins the process of creating the new organization.
With files from Clare O’Hara
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