The Canadian Securities Administrators (CSA) are proposing to create a single new self-regulatory organization (New SRO) which will consolidate the current functions of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The New SRO may take on additional regulatory responsibilities over time.

The proposal is described in a recent CSA Position Paper (the Paper) which follows consultations conducted by the CSA last year on the question of SRO reform. Comments on the Paper may be submitted by October 4.

In the lead-up to last year’s CSA consultations, both IIROC and the MFDA published their own proposals for SRO reform. The IIROC proposal envisioned a merger between IIROC and MFDA, while the MFDA proposal would have created a new SRO that would have overseen all registered firms, not just investment dealers and mutual fund dealers.

Earlier this year, the Ontario Modernization Taskforce (whose work we blogged about in a previous article) also recommended SRO reform following a two-phase approach involving an immediate integration of IIROC and the MFDA into a new SRO, and a further consolidation within 6 years of all other registration categories under the oversight of the new SRO.

The New SRO

The New SRO will have a different governance structure than IIROC and the MFDA. There will be more independent directors who do not come from the industry and the CSA will have a more direct hand in choosing management and directors.

The process to establish and operationalize the New SRO will have two phases:

• Phase 1 will focus on the design of the New SRO and of a new investment protection fund (the New IPF) that will combine the existing Canadian Investor Protection Fund and the MFDA Investor Protection Corporation. In Phase 1, the CSA will work to integrate the existing SROs and IPFs under the new framework and to adopt specific changes including the following:
  • Harmonization: Harmonization of SRO rules, policies, compliance and enforcement processes, and fee models.
  • Governance: The New SRO will be implemented by new Recognition Orders to be approved by each supervising securities commission.
  • New MOU: There will be a new Memorandum of Understanding (MOU) among the recognizing regulators setting out a CSA oversight framework

• Phase 2 will consider whether it is appropriate to grant the New SRO jurisdiction over other registration categories, including Portfolio Managers (PMs), Exempt Market Dealers (EMDs), and Scholarship Plan Dealers (SPDs), which are currently overseen by the securities commissions . A CSA SRO working group will coordinate with the CSA Registration Steering Committee to consider incorporating other registration categories into the New SRO, including a review to assess the merits of proficiency-based registration categories and a consideration to extend IPF coverage to these other registration categories.

Recognition of the New SRO in Quebec

Currently, IIROC, but not the MFDA, is recognized as an SRO by the Quebec securities regulatory authority, the Autorité des marchés financiers (the AMF).  If a mutual fund dealer carries on activities in Quebec, the dealer is directly regulated by the AMF in Quebec and, if the dealer carries on activities outside of Quebec, those activities are regulated by the MFDA.  The individual dealing representatives (salespersons) of a mutual fund dealer with activities in Quebec must become members of the Chambre de la securité financière (the CSF), an SRO recognized by the AMF, which oversees disciplinary and compliance matters for individual representatives of scholarship plan dealers, insurance agents and insurance brokers as well as mutual fund dealer representatives. 

In the Paper, the AMF announces that it will recognize the New SRO in the same way as the other CSA members to ensure harmonized oversight of firms registered as investment dealers and mutual fund dealers as well as individuals registered in the categories of investment dealer representative and mutual fund dealer representative on the firms’ behalf.  However, because the CSF’s powers and mandate will not be affected by the recognition of the New SRO, the CSF will continue to have oversight over mutual fund dealer representatives with respect to disciplinary and compliance matters.  As a result, under the proposed new regime, individual mutual fund salespersons of mutual fund dealers with activities in Quebec will be subject to the oversight of both the New SRO and the CSF.  The AMF indicates that, when approving the New SRO’s rules, it will ensure that these rules are not duplicative when equivalent provisions administered by the CSF apply already to mutual fund dealer representatives under Quebec law.