MFDA proposes SRO overhaul

A new paper envisions a single SRO, with the CSA taking responsibility for market regulation


This story was updated on Feb. 4, 2020, to include comments from the Investment Industry Regulatory Organization of Canada (IIROC).


With the Canadian Securities Administrators (CSA) preparing to undertake a review of industry self-regulation, the Mutual Fund Dealers Association of Canada (MFDA) is envisioning a new approach that features a single self-regulatory organization (SRO) covering all dealers and the CSA taking control of market regulation.


The MFDA published a discussion paper on Feb. 3 that sketches out a new model for self-regulation. It proposes a new SRO, referred to in the paper as NewCo, that would have responsibility for mutual fund dealers, investment dealers, portfolio managers (PMs), exempt market dealers (EMDs) and scholarship plan dealers.


Under the proposed model, the CSA would take over direct regulation of the markets (overseeing exchanges and alternative trading systems) while giving up oversight of EMDs, scholarship plan dealers and certain PMs to the new SRO.


The proposed new SRO would “preserve the strengths of what exists today while eliminating or reducing the weaknesses and barriers that have developed in the current system,” the MFDA paper said.


The new SRO would have responsibility for the registration, business conduct, prudential standards, policy and enforcement of the firms under its jurisdiction.

Further, the MFDA suggested that the new SRO be staffed with personnel from both of the existing SROs (the MFDA and IIROC), along with CSA staff that currently oversee the industry segments that would shift to the new SRO (EMDs, PMs and scholarship dealers).


At the same time, IIROC staff that are currently engaged in market regulation and surveillance would move over to work at their respective provincial regulators (members of the CSA). So, too, would those performing “other roles not within the mandate of NewCo.”


The paper argued that the proposed model would have a variety of benefits over the current system, including the creation of a level playing field among firms. Registrants “with like conduct and activities [would be] subject to similar regulation, rather than outdated product-based and historical registration categories,” the paper said.


What’s more, the proposed approach would enhance confidence in Canada’s regulatory system by creating “an investor focused, single regulator” with improved governance, the paper added.


It said that the proposed model could reduce regulatory burdens by establishing one portal that would be for registration, business conduct and “prudential compliance and enforcement matters.”


“The creation of a new kind of SRO by the CSA statutory regulators and current SROs is the easiest path to the kind of forward-looking and investor focused regulatory system that Canadians deserve, rather than attempting to work with the existing outdated structure,” the MFDA said in the paper.


“Attempting to restructure the current historical patchwork of regulation will result in complexity, delays and, most importantly, compromise of the overarching objective of achieving a regulatory model that best serves Canada,” the SRO added.


Back in 2016, the MFDA published a paper that recommended policymakers wait until the planned the Capital Markets Regulatory Authority (CMRA) launched before overhauling self-regulation as well.


“Today, while the CMRA initiative has had some modest progress, it has taken much longer than predicted,” the MFDA’s paper noted. “While certainty regarding the CMRA initiative would be desirable before any SRO model changes are implemented, the MFDA is of the view that the time for planning and action has arrived.”


In an emailed statement, Andrew Kriegler, president and CEO of IIROC, said that “IIROC acknowledges the MFDA’s contribution to the CSA’s consultation” on SRO reform.


“IIROC will continue to work with all stakeholders to develop solutions for the CSA to consider as the CSA reviews the regulatory framework of IIROC and the MFDA,” Kriegler said. “Canadians deserve solutions that enhance investor protection and access to advice that are practical and responsive to their evolving needs, and that can be implemented by the CSA seamlessly, with minimal cost and disruption to Canadians.”

The CSA is expected to publish its own consultation paper on the self-regulatory structure by mid-2020 that will consider the strengths and weaknesses of the current approach. It will also examine the impact of industry innovation on the existing framework for self-regulation.


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