On August 3, 2021, the Canadian Securities Administrators (CSA) announced their plan to “consolidate the functions” of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The consolidation will create a new single self-regulatory organization (New SRO) with the goal of providing enhanced regulation of the investment industry. The CSA will also consolidate the two existing investor protection funds into a single protection fund independent from the New SRO. The CSA plans to implement the New SRO in two phases, described below.
This development follows a process that started last year, as discussed in our post when the CSA released a Consultation Paper outlining the key issues in the existing framework for SROs. The CSA then opened a 120-day comment period to receive feedback from industry stakeholders and the public. IIROC and the MFDA both released their own proposals and comment letters with their recommendations. Although the CSA’s proposal differs from the proposals made by IIROC and the MFDA, both of those SROs have announced their support of the CSA’s plan. Position Paper 25-404 stipulates that according to the Autorité des Marchés Financiers (AMF), the creation and recognition of the New SRO will not affect the mandate, functions and powers of the Chambre de la Sécurité Financière (CSF). The CSF has also announced its support of the CSA proposal.
Highlights of the New SRO
The CSA’s vision for the New SRO will involve a number of solutions to address the issues identified in the CSA’s Consultation Paper. There is a focus on improving governance, strengthening proficiency for investment and mutual fund dealers, enhancing investor education and reducing investor confusion, increasing access to advice, reducing industry costs, fostering harmonization and efficiencies, harmonizing directed commissions, maintaining strong market surveillance, and leveraging ongoing related projects. In particular:
- To address concerns that the current SRO corporate governance structure underrepresents the concerns of investors and stakeholders to the benefit of industry, the CSA has emphasized the need for an improved corporate governance structure. The CSA’s solutions include the following requirements: a majority of the New SRO’s directors be independent; the Chair of the board is to be an independent director; the New SRO will undertake due diligence as well as the use of evergreen lists and board skills matrices to ensure a balanced board; a “cooling-off period” where CSA regulators are considered for independent director positions; maintenance of appropriate term limits for new board members; and the New SRO is to develop diversity and inclusion policies;
- A policy review of the existing IIROC and MFDA rule books will be conducted to identify differences and overlaps in the rules. The CSA will propose either to maintain the necessary differences or will seek amendments to harmonize or eliminate any regulatory gaps;
- To foster harmonization, the New SRO will be required to solicit CSA comment and input on annual priorities, business plan and budget;
- A review of the complaint resolution processes will be conducted to assess the merits of creating a single complaint filing portal with a standard complaint form for investors. The portal would then consolidate, filter and route the complaint to the appropriate organization.
One of the unresolved issues relates to Directed Commission arrangements. These arrangements involve a dealing representative or other individual submitting a request for their sponsoring firm to pay all or part of the commissions or fees earned by the individual to a personal corporation owned by the individual or their family members. With the exception of Alberta, the MFDA currently permits Directed Commission arrangements, but the IIROC rules preclude them. Given the complexity involved in this matter, further work and consultation will need to be completed to reach a conclusion on the appropriate treatment under the New SRO model. A Directed Commissions Working Group will be formed to engage solely in this analysis and will be directed to consider the tax status of advisors using these arrangements, consult with stakeholders, and propose a rule to provide protections.
Going Forward: A Two-Phase Process
To establish and operationalize the New SRO, the CSA has outlined a two-phase process. Phase 1 of the New SRO will include investment dealer and mutual fund dealer registration categories, as well as marketplace members. Phase 2 will then consider the addition of other registration categories, such as portfolio managers, exempt market dealers, and scholarship plan dealers.
Phase 1 will begin immediately with a focus on design, integration, harmonization and governance. An Integrated Working Committee (IWC) will be established and led by CSA staff, and will be responsible for a number of key roles in the plan. First, the IWC will be required to determine the appropriate corporate structure for the New SRO. Second, the IWC will be required to define and oversee the implementation and integration of the existing SROs and consolidation of the two Investment Protection Funds, and facilitate the adoption of enhanced governance mechanisms. Third, the IWC is responsible for coordinating the harmonization of SRO rules, policies, compliance and enforcement processes, and fee models. In addition, the current IIROC and MFDA rules will be reviewed by the IWC to identify any differences and propose changes to harmonize where appropriate. Finally, the IWC will be required to oversee the review and approval of the by-laws for the New SRO.
Phase 1 will also require new Recognition Orders that include many of the governance enhancements for the New SRO and will require the approval of each statutory regulator. A new Memorandum of Understanding will also need to be implemented. This will require consideration of the oversight relationship management structure between CSA members and the New SRO, which must be agreed upon by all recognizing regulators. Once the corporate structure has been finalized, an implementation timeline will be released.
Phase 2 will focus on modification and consultation by formulating a CSA SRO Working Group (Working Group) to engage in consultation with stakeholders. At this stage, the Working Group will coordinate with the CSA Registration Steering Committee to consider incorporating other registration categories. This phase will also involve continued harmonization efforts with insurance regulatory bodies.
Now that the plan has been announced, the Working Group is accepting written representations on the New SRO framework, and will accept those submitted on or before October 4, 2021. In the meantime, the CSA will be working to establish and lead the IWC to begin its work in implementing the New SRO. For the time being and until the New SRO is formed, IIROC and the MFDA will work with the CSA to implement the new framework while continuing operations as usual.