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Letter Summary:
The application for approval is further to the recommendations in the CAC Position Paper 25-404 to amalgamate the two existing SROs, IIROC and the MFDA, into a single self regulatory organization (New SRO) under the Canada Not-for-profit Corporations Act. Initially, the New SRO will have two classes of members, Dealer Members (comprised of investment dealers and/or mutual fund dealers) and Marketplace Members (recognized exchanges, quotation and trade reporting systems and others that facilitate trading of securities or derivatives in Canada in the enumerated circumstances).
The CSA has published an application for recognition of the New SRO, which includes a draft by-law, draft interim rules, draft terms of reference for the New SRO investor advisory panel, and new requirements for Quebec. The application also includes a draft recognition order and draft MOU among regulators regarding oversight of the New SRO.
The application and draft approval order sets out the proposed governance structure for the New SRO, including a requirement for the board and committees to be composed of a majority of independent directors and independent chairs, with the governance committee composed of all independent directors. It is proposed the initial board will consist of 15 members, six of which will represent the Members and 8 of which will be independent, plus the President and the CEO of the New SRO. The New SRO will also have policies and procedures to manage actual, potential or perceived conflicts of interest of its officers, employees and members of its disciplinary panels.
The current IIROC Distribution Councils will turn into Regional Councils, which will have an advisory role to staff of the New SRO on regional regulatory policy matters. It is proposed that there be a National Council and seven Regional Councils, comprised of Dealer Members from each region (as defined). A new Appointments Committee will have responsibility for appointing members of the District Hearing Committees.
In addition, the new SRO will have new formal investor engagement mechanisms, including an investor advisory panel and investor office.
The New SRO continues its planning to develop an appropriate fee model. On an interim basis, the existing fee structures and models of IIROC and the MFDA will initially be maintained by the New SRO, as will the existing criteria for access to membership and the provision of regulation services.
With respect to rules, the New SRO will initially adopt interim rules which incorporate the regulatory requirements in the rules of IIROC and the MFDA, which include UMIR. The Interim Rules include proposals to (i) amend the current IIROC proficiency requirements to allow dual registered firms to employ mutual fund only licensed persons without having to upgrade their proficiencies to those required of a securities licensed person, and (ii) permit introducing/carrying broker arrangements between mutual fund dealers and investment dealers.
The SRO will work toward harmonizing CE programs, but for now the existing CE requirements will continue to apply.
In Quebec, the New SRO rules will provide that the power to make decisions relating to the supervision of the SRO’s activities in Quebec will be exercised mainly by person residing in Quebec, and complaints will be referred to staff of the New SRO in Montreal or to the AMF. Members of the hearing panels of the New SRO in respect of Quebec residents will themselves be Quebec residents. While firms registered as mutual fund dealers in Quebec will join the new SRO, there will be a transition period for their activities in Quebec and their fees will be prorated to the services offered to them by the New SRO.
Overview of the Council’s Comments:
The Council is supportive of the creation of the New Self-Regulatory Organization (SRO). We were pleased to see that many of our comments have been considered and that the proposed structure, mandate, and processes for the New SRO will represent a positive step in Canadian securities regulation toward increased investor protection, accountability to the public interest, and transparency.
Our key comments are summarized below:
- We applaud the new governance structure requiring a clear majority of independent directors and independent chairs of both the Board and key committees.
- We also applaud the new measures to provide transparency throughout the New SRO’s decision-making processes, particularly the removal of the regulatory decision-making mandate of regional councils and replacement with an advisory-only role.
- We endorse the proposed creation of a strong investor advisory panel and investor office.
- We believe it will be critical early work of the Board (working with staff) to identify guiding principles and KPIs by which successful execution against mandates can be monitored and then reported upon regularly for transparency.
- We continue to be of the view that registrants should be strongly encouraged (and potentially mandated if or when properly grounded in related research and policy development) to pursue a higher standard of minimum competency, continuing skills development, professionalism, and the delivery of ethically-centered advice to clients.
- We believe it in the public interest to maintain responsibility for the market surveillance function with the New SRO.