On June 25, 2020 the Canadian Securities Administrators (“CSA”) released their Consultation Paper 25-402 – Consultation on the Self-Regulation Organization Framework (“Consultation Paper”). The Consultation Paper discusses seven key issues of the existing framework for self-regulatory organizations (“SROs”) and is seeking feedback from industry representatives, investor advocates, and the public on how the innovation and development of the financial services industry has impacted the current regulatory regime.
CSA announced its plan to undertake this review in December 2019. In anticipation of CSA’s Consultation Paper, the Investment Industry Regulatory Organization (“IIROC”) and the Mutual Fund Dealers Association of Canada (“MFDA”) released papers outlining their proposed new framework for SROs.
MFDA - Proposal for a Modern SRO
MFDA released its special report titled A Proposal for a Modern SRO on February 3, 2020. MFDA recommended creating an entirely new SRO referred to as “NewCo”. NewCo would be a Canadian business conduct and securities regulator and its mandate would include registration, business conduct standards, prudential matters, policy and rule development and enforcement. However, its mandate would not include market surveillance and regulation. Regulation of markets and exchanges would be integrated with the CSA Statutory Regulators (e.g., OSC, BCSC, etc.,).
IIROC – Improving Self-Regulation for Canadians
IIROC released its proposal titled Improving Self-Regulation for Canadians on June 9, 2020. The proposal recommends bringing together IIROC and MFDA as divisions of a consolidated SRO. IIROC believes that the consolidation would save hundreds of millions of dollars over the next decade from reduced duplicative regulatory costs. The proposal highlights the burdensome and lengthy process of trying to develop a new rule book from scratch and emphasizes that a consolidation of IIROC and MFDA would allow dealers and representatives to continue performing under their existing regulatory regime or consolidate their regulatory oversight under one division of the combined SRO.
CSA – Consultation Paper
CSA’s Consultation Paper discusses seven key issues of the existing SRO framework that were identified during informal consultations. The issues were grouped into three broad categories: structural inefficiencies, investor confidence, and market surveillance. With respect to each issue, the Consultation Paper provides a targeted outcome for consideration. The following summarizes each issue and states the CSA’s targeted outcome.
Issue 1 – Duplicative Operating Costs for Dual Platform Dealers
Dual platform dealers often experience higher operating costs and difficulty achieving economies of scale. This inhibits dealers’ ability to minimize costs for investors and innovate product and service offerings. In addition, dual platform dealers are faced with maintaining separate compliance functions and, as a result, are saddled with separate information technology systems. Lastly, dual platform dealers incur both IIROC and MFDA fees.
CSA’s targeted outcome is a “regulatory framework that minimizes redundancies that do not provide corresponding regulatory value.”
Issue 2 – Product-Based Regulation
Different rules or different interpretations of similar rules between IIROC and MFDA exist at a time where there is a convergence of similar products and services between registrants of each SRO. The inconsistent application of rules and compliance between the SROs creates an opportunity for some registrants to take advantage of these differences.
CSA’s targeted outcome is a “regulatory framework that minimizes opportunity for regulatory arbitrage, including the consistent development and application of rules.”
Issue 3 – Regulatory Inefficiencies
There is inefficient access to certain products and services for some registration categories. For example, mutual fund dealers under the MFDA are unable to easily distribute exchange traded funds. The current framework also makes it difficult for any one of the SROs or even the CSA to effectively resolve issues that span multiple registration categories.
CSA’s targeted outcome is a “regulatory framework that provides consistent access, where appropriate, to similar products and services for registrants and investors.”
Issue 4 – Structural Inflexibility
Evolving business models are restricted by the current framework. The structural inflexibility is posing challenges for dealers to accommodate changing investor preferences and to access to a wider range of products and services from a single registrant. Additionally, the current regulatory structure places unnecessary barriers on professional advancement. For example, the higher IIROC proficiency standard makes the transition from mutual fund dealer to investment dealer challenging.
CSA’s targeted outcome is a “flexible regulatory framework that accommodates innovation and adapts to change while protecting investors.”
Issue 5 – Investor Confusion
Investors are generally confused by the existing regulatory framework. There is investor confusion surrounding the number of SROs and their roles and jurisdictions, accessing the complaint resolution processes, and why an investor cannot access similar investment products from a single source.
CSA’s targeted outcome is a “regulatory framework that is easily understood by investors and provides appropriate investor protection.”
Issue 6 – Public Confidence in the Regulatory Framework
There is a possible lack of public confidence in the existing SRO framework. Inadequacies in the SRO governance structure (industry-focused boards and a lack of formal investor feedback mechanisms) fail to provide enough support for SRO’s public interest mandate. Further, there is concern regarding ineffective SRO compliance and enforcement practices.
CSA’s targeted outcome is a “regulatory framework that promotes a clear, transparent public interest mandate with an effective governance structure and robust enforcement and compliance processes.”
Issue 7 – The Separation of Market Surveillance from Statutory Regulators (CSA)
IIROC continues to conduct the surveillance of trading activity on the debt and equity marketplaces in Canada. Statutory Regulators that regulate marketplace operations require IIROC to provide the necessary information. There is concern over possible information gaps and lack of market transparency resulting from this separation of market surveillance away from Statutory Regulators.
CSA’s targeted outcome is an “integrated regulatory framework that fosters timely, efficient access to market data and effective market surveillance to ensure appropriate policy development, enforcement, and management of systemic risk.”
CSA is collecting feedback on the Consultation Paper for a 120-day comment period ending October 23, 2020. The consultation process will result in a CSA paper outlining a proposed regulatory framework for SROs whereby the CSA will seek further public comment.