Industry groups weigh in on SRO framework consultation

Comments reflect support for consolidation, oppose inclusion of other registration categories

Industry groups weigh in on SRO framework consultation

The Investments Funds Institute of Canada (IFIC) and the Portfolio Management Association of Canada (PMAC) have submitted their comments to a consultation on the self-regulatory organization (SRO) framework governing Canada’s investment industry.

In a letter to the Canadian Securities Administrators (CSA), IFIC cited several benefits of self-regulation, including improved industry compliance, the ability to adapt more quickly to rapidly evolving markets compared to statutory regulators, and the ability to impose standards for members that exceed statutory minimums. A national framework of self-regulation, it added, is even more important given Canada’s fragmented regulatory structure.

“If self-regulation is to continue to have value, it is important not to lose sight of the “self” in self-regulation,” IFIC said. “This means that the SRO must continue to have some degree of independence from the provincial and territorial securities regulators.”

The industry group expressed its opposition to several proposals by the Capital Markets Modernization Task Force Report that would increase regulators’ control over SRO decisions, including an OSC veto on any significant SRO guidance or rule interpretation; giving the OSC veto  power on key appointments, such as the chair and the president; and the appointment of up to half of the SRO directors jointly by all CSA regulators.

“CSA appointments to the SRO board would result in a significant conflict of interest for those board members appointed by the CSA,” IFIC said.

The group also voiced its support for the formation of a single SRO to regulate retail-facing investment and mutual-fund dealers and their representatives, citing key benefits such as plain and simple investor access to dealing representatives’ disciplinary records, easier access to a single investor protection fund, and less overall investor confusion. To that end, it encouraged the consolidation of IIROC and the MFDA, which would “incorporate the best dealer compliance and enforcement processes and programs from both [organizations].”

However, IFIC said the new SRO’s formation should not be preconditioned on the inclusion of other categories of registration currently under direct CSA regulation, saying that would increase the time and complexity of the process by “orders of magnitude.” Should that consolidation be pursued, IFIC suggested, it should first be determined whether Exempt Market Dealers (EMDs), Portfolio Managers (PMs) and Scholarship Plan Dealers (SPDs) actually want self-regulation.

PMAC echoed that sentiment in a separate letter, saying that while it will allow other industry stakeholders to comment on the wisdom of merging the two current SROs, it “strongly opposes PMs being regulated by a single or merged SRO.”

Noting that PM firms differ from other registrant categories in meaningful ways, the association warned that placing PMs in an overly prescriptive regime of regulation would impede their judgment, lead to hampered competition and innovation, and ultimately be detrimental to investors. The majority of PMs are also registered as investment fund managers (IFMs), it added, which often operate internationally and predominantly work under principles-based, direct government regulation in other jurisdictions.

“Any shift by Canada to a prescriptive, self-regulatory model fraught with burdensome rules-based regulation would put Canadian PM registrants at a significant competitive disadvantage globally,” PMAC said. “PMAC members believe that direct regulation of PMs by the CSA is and historically has proven to be extremely effective and we fail to see how changing direction would better serve investors.”

The association also maintained that rather than creating a new all-encompassing SRO, the goal of establishing a system of nationally harmonized securities regulation through a singular body, such as the Cooperative System, should be prioritized.

“The Cooperative System would be capable of developing and implementing harmonized law and policy more quickly and efficiently than the current fragmented system,” PMAC said.


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