In response to a call for comments from the Canadian Securities Administrators (CSA) regarding the CSA’s review of the regulatory framework governing the industry’s self-regulatory organizations (SROs), the Investment Funds Institute of Canada (IFIC) and the Portfolio Management Association of Canada (PMAC) have both published comments regarding the CSA’s consultation paper 25-402.

The Consultation on the Self-Regulatory Organization Framework paper was published after the CSA announced in December 2019 that it would undertake a review of the regulatory framework governing the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The 120-day comment period ended October 23, 2020.

In its response to the CSA, PMAC’s main recommendation is that the CSA maintain regulation of portfolio managers (PMs) and investment fund managers (IFMs) under the CSA. PM firms are unique from other registrant categories, they argue. More, they say any shift by Canada to a rules-based, prescriptive, self-regulatory model would put Canadian PMs at a significant competitive disadvantage globally.

“PMAC member believe that direct regulation of PMs by the CSA is and historically has proven to be extremely effective,” PMAC writes in its submission.” We fail to see how changing direction would better serve investors. CSA staff have developed a deep understanding and institutional knowledge with respect to the PM firms they oversee; the principles-based approach to PM regulation is appropriate and aligned with international regulation.” In addition to this, the PMAC submission advocates for the creation of a national cooperative regulator. “Canada is the only developed country in the world without a national securities regulator which puts Canada at a significant disadvantage in the global capital markets,” they add.

Inappropriate and incompatible

Although the SRO’s regulatory structures work well with the investment dealer model, they say the prescriptive nature of SRO regulation is inappropriate and incompatible with the business models and client types served by PM firms.

Know your client (KYC) requirements, PMAC says are just one specific example of SRO regulation that works for retail dealers, but which is incompatible with certain PM business models. “These requirements are clearly beneficial with respect to retail investors, (but) they are unworkable for conducting KYC with a global pension plan that has hired a PM firm for a specific asset class mandate,” they write. “This is simply one example of many that could be provided of prescriptive rules designed to protect retail investors that add compliance costs without corresponding investor protection value for pension, foundation and other institutional clients.”

“We defer to others in the industry to opine on whether a merger of the two current SROs makes sense. PMAC strongly opposes PMs being regulated by a single or merged SRO; we believe that the current regulation of PMs by the CSA is effective and that it is in the public interest to maintain direct regulation of these registrants versus delegating to an SRO.”

The IFIC paper, meanwhile, is decidedly more supportive of self-regulation, calling it a cost effective way to regulate dealers and provide investor protection. It too, however, stops short of calling on the CSA to bring PMs under the purview of an industry SRO.

“IFIC members do not support the inclusion of other categories of registration currently regulated directly by the CSA as a precondition to a consolidation of IIROC and the MFDA. The time and complexity involved in such an undertaking would be orders of magnitude greater than the consolidation of two existing SROs. In our view, this would create an unacceptable delay,” they write. “IFIC members would support further discussion to assess the issues involved in the implementation of this larger self-regulatory mandate, but only after (the new regulator) has been established for the regulation of investment dealers and mutual fund dealers.”

IFIC also points out that such registrants may not want self-regulation. “Conscription of registrants into and SRO is not self-regulation,” they write. “Furthermore, this additional consolidation would add significant complexity to an already complex project and would require a much longer, phased approach for the new SRO to operate successfully.”

Two alternative measures that should be considered

In the rest of its submission, IFIC says its members believe that the creation of a new SRO through a consolidation of the MFDA and IIROC is the best possible outcome of the CSA’s consultation. If the creation of a new SRO cannot be implemented, they say there are two alternative measures that should be considered: It proposes IIROC eliminate rules that require dealing representatives to upgrade their proficiency within 270 days of being employed with an investment dealer. It also suggests IIROC take over the MFDA – a move which could be accomplished relatively quickly, with little cost, they say, if IIROC were to add and manage the MFDA’s personnel and programs as a separate dealer division.

“To be clear, IFIC is not recommending either of these alternatives. A swift implementation of NewCo would provide the best result for investors,” they write. “A single SRO with complete national jurisdiction would be the best outcome.”