On August 4, the Canadian Securities Administrators (CSA) published Position Paper 25-404 New Self-Regulatory Organization Framework (Position Paper), outlining their plans to consolidate the functions of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) into a single self-regulatory organization (New SRO). The CSA will also combine IIROC’s and the MFDA’s existing investor production funds (IPFs) into an integrated fund that is independent of the New SRO.
Two implementation phases are planned. Phase 1 will begin immediately, with the CSA establishing an integrated working committee led by CSA staff to determine the appropriate structure for the New SRO, define and oversee the execution of the implementation strategy to integrate IIROC and the MFDA into the New SRO and facilitate the adoption of certain enhanced governance mechanisms for the New SRO. This phase will also include harmonization of the existing SROs’ rules, policies, compliance and enforcement processes, and fee models, as well as consolidation of the IPFs into the New IPF.
In phase 2, the CSA will launch a formal consultation with stakeholders to consider whether it is appropriate to have the New SRO assume direct oversight of registrants (such as exempt market dealers, portfolio managers and scholarship plan dealers) that, currently, are overseen directly by the various provincial securities commissions. Possible modifications to the New IPF (such as extending coverage to other registration categories) will also be considered.
What you need to know
- For market participants that offer both an MFDA-regulated and an IIROC-regulated platform to their clients, a single, consolidated SRO will seek to achieve efficiencies in compliance and regulatory burdens.
- The proposed changes may result in mutual fund dealers being able to offer a broader suite of product offerings (e.g., ETFs and certain bonds).
- Although there are many similarities across the conduct rules imposed by IIROC and the MFDA today, market participants will want to pay close attention to the integrated working committee’s harmonization project. Harmonization across both sets of dealer rules is likely to result in changes on both the IIROC and MFDA platforms.
- The Position Paper features investor protection as a key objective for the integration of the two SROs and identifies the following initiatives, among others, to support that objective:
- Transparency in enforcement processes: The CSA plans to introduce greater transparency around enforcement processes and reasons for disciplinary decisions. It also will review the New SRO’s sanction guidelines and policies on the public disclosure of credit for cooperation, specifically for the inclusion and consideration of compensation to clients harmed by misconduct as a mitigating factor (or an aggravating factor if a determination is made that inadequate compensation was provided) in assessing appropriate sanctions.
- Complaint-handling: The CSA will consider whether to centralize the complaint-reporting process (e.g., through creation of a single complaint-filing portal), apply a consistent complaint-handling process, deploy service standards for complaint resolution, and allow client / victim impact statements for consideration by hearing panels during sanction proceedings.
- Governance: The CSA plans to require a reasonable proportion of the directors to have relevant experience regarding investor protection issues and to require that a majority of the New SRO’s directors and its chair to be independent. The Position Paper does not specify in detail how independence will be defined but indicates that the independence requirements for the New SRO directors should at least be comparable to those for directors of public companies (as set out in National Instrument 52-110 Audit Committees), with necessary adaptations to reflect the SRO context. The securities regulators plan to consider a definition of “independent director” that excludes individuals associated with a member affiliate of the New SRO, to require cooling-off periods for any independent director position, and to require term limits for New SRO directors as well as the chief executive officer. The compensation structure for the New SRO’s executives will also be linked to delivery of the New SRO’s public interest mandate.
- Investor advocacy and education: The New SRO will be required to establish a separate investor office as well as an investor advisory panel, formally engage directly with investor groups on an advisory basis, require regulatory policy committees to include a reasonable proportion of investor / independent / public representatives, and fund investor education and outreach.
- Comments on the Position Paper can be submitted until October 4, 2021.
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