Consolidation of self-regulation is taking place on both sides of the Canada-U.S. border. And, while the reasons may be similar, the execution provides a telling contrast between the dynamic U.S. system and the sleepy Canadian one.

This past spring, the Investment Dealers Association of Canada and Market Regulation Services Inc. entered into talks to merge their organizations. It was initially hoped that a deal would be put to a vote by fall. But hammering out details is proving slow and that deadline has passed. Assuming the two quickly reach agreement, a vote could take place in the new year, with the new SRO winning regulatory approval by the end of the first quarter.

In the U.S., on the other hand, talks to merge member regulation of the National Association of Securities Dealers and NYSE Regulation Inc. into an SRO that will regulate all U.S. securities brokers and dealers doing business with the public are proceeding quickly. The deal was announced Nov. 28; on Dec. 6, the NASD’s board of governors approved the bylaw changes that are necessary for the transaction to take place. The following week, a proxy was sent to NASD firms for their approval; they have 30 days to consider it before a vote is held. The new SRO has not been named but is expected to launch in the second quarter of 2007.

The NASD-NYSER merger was announced with the basic management and governance questions already settled. NASD CEO Mary Schapiro will step in as CEO of the new organization and NYSER CEO Richard Ketchum will become non-executive chairman for a three-year transition period. The new organization will be overseen by a 23-person board: 11 public directors, 10 industry directors drawn from a cross-section of its members, the CEO and the non-executive chair.

In contrast, the proposed Canadian SRO has been conducting a lengthy CEO search. As Investment Executive went to press, the new chief had not been named.

Then there’s the question of regulatory approval for the deals. Although the U.S. Securities and Exchange Commission will review the NASD-NYSER transaction once it closes, it has already come out strongly in favour of the consolidation. SEC chairman Christopher Cox touted the merger as “a significant step forward” for American investors and U.S. capital markets. He also praised the proposed governance structure of the new group.

In Canada, there is no equivalent of Cox — certainly not one that could openly applaud the necessity of uniform rules and oversight by a single organization. Instead, what awaits the proposed SRO is the chore of getting multiple provincial regulators to agree on a common, or at least similar recognition order. Intrinsically, that is more challenging than seeking approval from one main regulator, but it also makes it that much harder for the new organization to do anything novel or innovative to improve self-regulation. And that is the logic the deal now turns on — improving self-regulation by earning more responsibility from provincial regulators and attracting passionate, talented people to the new SRO.

Originally, one benefit of consolidation was expected to be greater efficiency. Various participants in the transaction have since suggested that actual cost savings will probably be few, if any — at least, in the short term.

In the U.S., money has been an up-front element of the deal. The NASD is paying the NYSE US$103 million for its regulatory division, and is disbursing US$178 million in one-time payments of US$35,000 to each of its 5,100 members.

The NASD has indicated that it expects to “generate positive cash flows from this deal for the foreseeable future,” and that costs will be reduced through employee attrition, although no layoffs are planned, and the rationalization of technology platforms.

Above and beyond the one-time payment, the NASD is committed to reducing the costs of regulation as efficiencies are realized, and its members will benefit through future fee reductions.

The NASD-NYSER deal has won the endorsement of the North American Securities Administrators Association, an umbrella group of state and provincial securities regulators, plus the newly merged industry trade association named the Securities Industry and Financial Markets Association and its small firms committee. The groups have variously praised the deal as a cost-saving measure, a logical response to globalized markets and a step forward in governance.

@page_break@In Canada, it appears regulators are willing to take only baby steps toward the kind of improvements that could make a merged SRO more effective. In December, the Canadian Securities Administrators published a report that makes a number of recommendations for improving self-regulation and its own oversight of SROs. It calls for increased reliance on SROs, provided that they can show that they are meeting their public-interest mandate and maintaining high standards.

The CSA suggests that increased reliance on SROs might involve less intrusive oversight and more freedom to approve their own rules. Indeed, the report recommends that SROs be allowed to self-certify some of their rules, although the commissions would still review “material” rule proposals.

The CSA report also recommends that SROs be given the power to file their disciplinary decisions with the courts, and that they be granted statutory immunity — an idea that does not have the support of British Columbia. The CSA, however, did not recommend some other enforcement powers sought by the SROs, such as expanding their jurisdiction or enhancing their investigative powers.

As for SRO mergers, the report recommends that any merger proposal should weigh the benefits of the merger against its anticipated costs and explain how consolidation is in the public interest.

It also proposes criteria on which the CSA could evaluate a merger transaction, including: the continuing adequacy of a merged SRO; the quality of governance; cost/benefit considerations; SRO staff proficiency; regional accountability; and the impact on competition and market structure.

It remains to be seen whether either of these SRO mergers comes off and, if they do, whether they pay off as hoped. In the early days, however, the approaches to these deals seem typical of the markets they serve — characteristically contemplatively Canadian and archetypically aggressively American. IE