CSA to create new single self-regulatory organization

Many Canadian financial advisors will soon be overseen by a single regulator, creating efficiencies and harmonization within the industry and giving clients access to more products and services.

The Canadian Securities Administrators (CSA) are creating a new self-regulatory organization (SRO) that will provide enhanced regulation, the regulators said in a release on Tuesday.

The new SRO will “consolidate the functions” of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), the release said. The CSA will also combine the two SROs’ existing investor protection funds — the Canadian Investor Protection Fund and the MFDA Investor Protection Corporation — into an integrated fund independent of the new SRO.

In a paper accompanying the announcement, the CSA said this structure was “the best solution” to address SRO reform following a consultation last year that identified shortcomings in the current regime, such as regulatory duplication, inefficiencies and investor confusion.

“The new self-regulatory framework is the result of extensive research, consultation and analysis that informed the creation of a framework designed to protect Canadian investors and enhance public confidence, accommodate innovation, ensure fair and efficient market operations and navigate continually evolving industry conditions,” said Louis Morisset, CSA chairman and president, and CEO of the Autorité des marchés financiers, in the release.

Ahead of last year’s consultation, IIROC and the MFDA each floated a vision for SRO reform. IIROC supported a merger with the MFDA and suggested broader reform be considered later. The MFDA called for a reformed SRO that would oversee all registered firms, with market regulation hived off to provincial regulators.

In the final analysis, the CSA said the new SRO will initially include the investment dealer and mutual fund dealer registration categories. During a second phase of implementing the new SRO, the CSA said it would consider including additional registration categories — portfolio managers, exempt market dealers and scholarship plan dealers, which are currently overseen by provincial regulators.

Market surveillance currently conducted by IIROC will remain with the new SRO, and the CSA will review ways to enhance information sharing of trade-related data between the new SRO and the CSA.

In a separate release, both IIROC and the MFDA said they supported the new framework.

To develop the new SRO rulebook, current IIROC and MFDA rules will be reviewed to identify differences and to propose any changes required for harmonization, the paper said.

One ongoing issue for rule harmonization will be directed commissions arrangements. While MFDA advisors (except in Alberta) can have their commissions or fees paid to a personal corporation, IIROC rules don’t permit the arrangements.

How directed commissions will be treated under the new SRO model requires more work, the paper said, and will be completed as part of the rule-making process. A working group dedicated solely to this issue will be formed, and will consider the tax status of advisors who use these arrangements, consult with stakeholders and potentially propose a rule to provide the necessary protections.

Such a rule would permit directed commissions arrangements “for registered individuals sponsored by any type of dealer member of the new SRO,” the paper said. The working group could also consider other options, such as adopting an incorporated salesperson regime as a longer-term solution, if warranted, the paper said.

To improve client access to products and advice — and in some instances reduce dealer costs — the paper outlined various solutions such as: allowing introducing arrangements between mutual fund dealers and investment dealers, whereby the former contracts out some of its operations to the latter as a way to access back-office and clearing systems; enabling dual-platform dealers to include both types of businesses within one legal entity and integrate back-office functions; proposing rules for centralized client data gathering; and enabling more part-time advisors in all dealer platforms.

Also listed as a cost-saving solution in the paper was permitting CFOs, CCOs and other compliance staff to serve multiple firms.

To address investor concerns, governance enhancements to support the public interest will be an important part of the new SRO’s framework. Last year’s consultation included comments that the existing SROs’ boards were weighted in favour of industry participants at the expense of investors.

As a result, the CSA will ensure that the majority of the new SRO’s board members and its chair are independent and will oversee approval of board members, among other related measures, the paper said. Also, the compensation structure for the new SRO executive will be linked to delivering the new SRO’s public interest mandate.

The CSA will consider an appropriate governance structure for the new investor protection fund as well, the paper said.

As part of serving the public interest, the new SRO will also create an investor advisory panel, which would potentially finance its activities from a fund of collected fines.

The complaints process for investors will be streamlined. One option is creating a single complaint filing portal for the new SRO, which would filter the complaints and route them as appropriate — to the firm, the new SRO or regulators.

The CSA will also streamline continuing education (CE) for advisors, creating a program that is “fair, consistent and proportionate,” the paper said. The new SRO will leverage existing CE programs and initiatives as a starting point for the new program.

Next steps

As part of the first phase of implementing the new SRO, the CSA will create an “Integrated Working Committee” to determine the new SRO’s corporate structure. This CSA-led committee will also oversee incorporating the new governance structure and integrating IIROC’s and the MFDA’s current functions, as well as the functions of the two existing investor protection funds.

This work will involve consultation with staff from the existing SROs and investor protection funds, among others.

“The CSA recognizes the high level of skill, dedication and experience that staff from IIROC, MFDA and the existing investor protection funds have consistently brought to their work,” Morisset said in the release. “The combined forces of these teams will be critical during the creation of the new self-regulatory organization and investor protection fund, and will be crucial to their future success.”

Once the new SRO’s corporate structure is finalized, the CSA said it will issue a public communiqué that will include an implementation timeline.

In the second phase, inclusion of other registration categories will be considered through a formal consultation. In last year’s consultation, both the Portfolio Management Association of Canada and the Private Capital Markets Association were against coming under the SRO model, citing concerns such as conflicts of interest.

Also in the second phase, harmonization efforts with insurance regulators will be considered, building on current joint projects such as total cost reporting, the paper said.

The CSA said it will consider “written representations” on the new SRO framework until Oct. 4. At the same time, it will begin implementing the new SRO by establishing and leading the Integrated Working Committee.