What Does a Single SRO Mean for the Investment Industry?

The amalgamation of IIROC and MFDA opens up many questions about the future. What is the role of the new SRO? How will it be different from the two previous organizations? A panel discussion hosted by NBIN explored the answers to these questions.

On September 29, 2022, members of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) passed a special resolution approving the amalgamation of the two self-regulatory organizations (SROs) into a single SRO.

The topic of the new SRO was at the top of the agenda for NBIN's annual conference, Vision/22. Christine Rodrigues, Senior Vice President & Chief Operating Officer, National Bank Independent Network, hosted a panel discussion with the following guests:

?·??????Andrew Kriegler, President & Chief Executive Officer, Investment Industry Regulatory Organization of Canada (IIROC); CEO of new SRO

·??????Laura Paglia, President & Chief Executive Officer, Investment Industry Association of Canada (IIAC)

·??????Claire Van Wyk-Allan, Managing Director, Head of Canada, Alternative Investment Management Association (AIMA)

·??????Katie Walmsley President, Portfolio Management Association of Canada (PMAC)

The session covered how and when the process will take place, and initial implications for the industry. This article outlines several key take-aways.

The First Step: Setting the Foundation

The amalgamation will take time. That was the key message from Andrew Kriegler, CEO of the new SRO.

While it's natural for the investing community to seek answers about how their businesses will be affected, Andrew emphasized that his priority is to build a strong foundation by integrating the organizations properly.

He compared the amalgamation to any other business merger. "We're trying to merge two regulatory models, but at the same moment, we're bringing together two operating entities. So all of the stuff that comes with any merger — bringing together the management and the staff, bringing together systems, whether they're frontline regulatory systems or the finance system or the HR system — all has to happen in parallel."

Executing this process as smoothly as possible will be the priority in the next year, he said.

Increased Efficiency and Optionality

Close on the heels of getting the new SRO up and running, will be the goal to make the system operate more efficiently.

By way of example, Andrew noted that investors and the industry alike currently face challenges when an investor makes the transition from mutual fund dealer to investment dealer. The process involves significant re-work, essentially requiring all parties to start from scratch. ?

The new SRO aims to facilitate this transition, making it possible for investment dealers to carry mutual fund dealers. "The goal from the perspective of the industry I think is to try and deliver some optionality as to how you structure your businesses," said Andrew.

Also on the to-do list: addressing a long-standing discrepancy in which certain MFDA advisors can direct commissions they earn to go into their unregistered corporations. The new SRO seeks to harmonize across the system the ability to direct commissions.

Perspectives on CSA Oversight

Panelists had various opinions about how much oversight of the new SRO is appropriate.

Claire Van Wyk-Allan from AIMA said that her membership's preference is to continue the status quo. "We want to make sure as new processes are being put in place, that they are going to be efficient and effective and not burdensome. The governance and oversight of the SRO is a national issue and we think the CSA generally has been effective as a quasi-national regulator. While each jurisdiction will bring different experience and expertise, it’s important to not add duplication or delays.”

Laura Paglia from IIAC shared her organization's differing perspective. "We've been quite vocal that we think there's too much CSA oversight over the new SRO." She pointed to the addition of a non-objection clause which she said effectively removes all decision-making power from the new SRO. "There is too much duplication...that will impact the culture and the bureaucracy that we're trying to avoid."

Katie Walmsley from PMAC added her organization's view that there needs to be strengthened CSA oversight to ensure accountability for the delegated authority the SRO has been given by the CSA.?

Andrew acknowledged these concerns and noted that it will take time to find the right balance.

Phase 2: Jurisdictional Concerns

Looking ahead, industry association representatives expressed concerns about Phase 2 of the merger, in which the CSA has committed to forming a working group to engage with stakeholders and to consult on the possibility of incorporating into the new SRO other registration categories such as Portfolio Managers (PMs), Exempt Market Dealers (EMDs) and Scholarship Plan Dealers (SPDs).

"We would be hugely unsupportive of moving PMs, EMDs and SPDs under the oversight of the SRO," said Claire of AIMA's position. "We do think that that is working reasonably well today with the CSA."

Katie agreed. "Moving PM regulation under the SRO for our membership, which is two-thirds IFMs, many are EMDs, would not make sense. The principles-based regulation in the CSA adapts well to the multiple business models that exist in the PM side of the business, in particular institutional business. Moving portfolio management firms under an SRO would increase costs, be out of step internationally, and would not be good for investor protection."

Laura mentioned that there is confusion about Portfolio Managers because they sit both inside and outside of the SRO system. "Within the IIROC system, the role of carrying brokers, and the role of National Bank Independent Network, in maintaining the viability of independent dealers has been enormous...National Bank also provides custodial services to Portfolio Managers who are not part of the SRO world."

Andrew said he understood the interest in these issues, however he is focused on the amalgamation itself. For the Phase 2 topics, he said, "We will have an interesting discussion in a while, but it's not going to be for a while. There's too much to do in the near term."

Impact on the Independent Space

Panelists hope the amalgamation will be positive in terms of independent firm registration.

"I think we are going to continue to see the growth in the independent space, and I think that's a good thing," said Katie. "That's a good thing for Canada, it's a good thing for the economy...we just have to make sure we have proper regulatory oversight of that."

"We really think this is going to be positive in minimizing fragmentation of the independent space," said Claire. "We feel passionate that the end Canadian investor have access to independent advice and independent product."

Expectations for the Future

The investment industry has been seeking change for some time. The idea of having two regulatory bodies — one for mutual funds and another for investing — did not make sense.

The process of making the change is complex, but all parties have expectations for more streamlined regulation in the future.

"We're seeing a transition to a pan-Canadian system that we don't have in a lot of other places in this country," said Andrew. "This is real progress, and we should be happy about that. Is it nirvana? Nope...but it's a big step forward."