Dealers to vote Sept. 29 on fate of new SRO

Investment and mutual fund dealers will get what amounts to the final say when they vote Sept. 29 on the fate of the new self-regulatory organization.

Mutual Fund Dealers Association of Canada (MFDA) firms will vote on Thursday morning and Investment Industry Regulatory Organization of Canada (IIROC) firms will vote at the end of the day on their proposed merger.

The dealer vote will effectively determine whether the SRO reform envisioned by the Canadian Securities Administrators (CSA) moves ahead. Regulatory approval will still be required but, given this is the CSA’s plan, that’s basically a given.

Before the CSA can give this marriage their blessing, however, the dealers will have to decide whether finally merging the SROs is the right thing to do.

The idea of consolidating the MFDA and IIROC has been around for years, with more enthusiasm for the proposal typically coming from the larger, wealthier investment dealers. The fund dealers have been more reluctant to be thrust into a larger organization where they may have a harder time being heard.

Heading into the proposed merger, IIROC has almost three times the assets and more than double the revenues of the MFDA. The new SRO’s initial board is comprised of five former IIROC directors and just two from the MFDA, along with seven independent directors and the CEO.

Moreover, the payoff of this deal may be less certain for fund dealers. While the new SRO is being pitched as a way to generate “increased regulatory efficiencies,” the SROs’ information circular setting out the terms of the deal is short on detail in terms of future savings. There are no specific targets for synergies or cost reductions stemming from the amalgamation.

There’s also some uncertainty about just how much the merger will end up costing the industry. The regulators estimate that integration costs will run between $25 million and $38 million, though the final number won’t be known until March 2024.

The wide range of that estimate is largely attributable to uncertainty about the extent of retention and/or severance payouts to top SRO employees.

According to the circular, retention arrangements at IIROC will pay $1.25 million to certain employees and $500,000 to certain MFDA employees who stay with the new SRO until at least April 1, 2023 (and haven’t been fired for cause by April 30).

Additionally, the MFDA has an existing employee retention program that could require severance payouts of between $2 million and $7.7 million to employees who are terminated without cause or constructively dismissed in the 12 months following the merger.

Alongside these potential retention and severance costs, the merger will also generate a variety of other expenses: legal and consulting fees, systems integration, branding and communications, and the cost of establishing the new SRO’s investor office and investor advisory panel.

The bulk of the integration costs (between $17 million and $30 million, after the $8.75 million the SROs have paid so far) are to be recouped from the firms that stand to benefit most from the merger — existing dual-platform dealers and any dealer that becomes dually registered while the integration costs are being recovered. This includes 29 current IIROC members and 26 MFDA members. These costs will be captured by a separate fee that will be charged over three to five years until the merger costs are paid back.

Alongside the integration costs, which are still somewhat uncertain heading into the vote, the new SRO’s fee model — to finance its ordinary regulatory activities, not including the merger costs — is also up in the air.

“Development of a new fee model will be a complex exercise and will therefore require expert professional advice,” the circular said, adding that this will involve industry consultation and a public comment process, along with CSA approval.

For Quebec-based fund dealers, there will an added complication given that they haven’t previously belonged to the MFDA. They will retain a distinct status within the new SRO, as there will continue to be a role for the Chambre de la sécurité financière.

“While New SRO will continue to operate on a cost recovery basis, efforts will be made to minimize or avoid fee impacts of duplicative regulatory structures during transition in Quebec, and specifically ensure that mutual fund dealers in Quebec pay New SRO a reduced fee, the amount of which shall be proportionate to the services offered to them,” the circular noted.

Amid all of these uncertainties, industry dealers will vote on whether they see their futures best served with a new, combined SRO, or if they’d rather stick with what they know.