National regulator could cure arbitrage

Done right, the creation of a national securities regulator would provide a uniform set of rules for investment dealers, ensuring everyone was playing on a level field.

Done wrong, it would create even more opportunity for regulatory arbitrage than already exists. Now that the Conservative Party has its majority, the national regulator seems more likely than ever.

There already exists an enormous opportunity for regulatory arbitrage for firms opting out of the SROs, leading dealers to choose the jurisdiction and regulatory regime that’s most favourable to them, said Joseph Groia, principal, Groia & Company, one of Canada’s leading securities litigation boutiques.

Groia, who was speaking at the Federation of Mutual Fund Dealers Dealer Day conference Tuesday in Toronto, doesn’t endorse the practice.

“The idea of choosing a securities commission over an SRO didn’t immediately jump off the page to me as a good idea any more than I’d suggest you consider going to the jurisdiction south of the border for their regulation, because that’s probably an even worse choice,” said Groia.

With national commission likely to become a reality, some very significant questions are being asked about how to deal with the regulatory oversight and arbitrage.

“There is an incredible opportunity right now for members of the MFDA and IIROC to play a meaningful role in the government activity that is going on which is going to result within the next 12 months in the institution of the national securities commission finally becoming a reality,” he said.

Interestingly, Groia’s feels the national commission will not include Alberta, Québec and B.C., three provinces officially and doggedly opposed to the idea, creating the first opportunity for regulatory arbitrage.

“The difficulty is that if you have a national commission and you have provincial commissions that have not joined the national agency, what happens to IIROC and the MFDA?”

The merger of the MFDA and IIROC may not be accepted by the national regulator, or may be accepted by the national regulator and not by the provincial regulator. Either way, Groia takes an issue with the way the current system works.

“There can be no doubt anyone who would advocate a system like the one we have now has something seriously wrong with their view of the way the market works,” he said. “We have to have a single SRO, the idea of a dealer not being a member of an SRO is not going to last longer than 2012.”

Groia admitted to dealing with a disproportionate number of cases that arise as a result of dealers who don’t participate in an SRO. Most of the difficulties come from non-SRO registered firms and those are all directly regulated by their provincial securities commission.

“There is nobody who does a poorer compliance review function, in my experience, than the securities commissions across the country, who really aren’t equipped and don’t have the expertise they need to be second guessing compliance groups that work for firms that aren’t members of an SRO.” Groia said.

It all depends on what the industry participants want the capital markets to look like in the next two or three decades.

Strongly recommending the creation of a truly national regulator—with no hold-out provinces—to keep up with the ever increasing regulatory burden, Groia, as a securities lawyer, wants to spend his time on “liability issues rather than useless compliance functions and responsibilities.”