The investment dealers Association of Canada is contemplating whether to bow to its critics finally and get rid of its trade association function at the same time as it makes a play for sole possession of prudential regulation responsibilities.

The fact that the IDA serves as both a self-regulatory organization and a trade association for the brokerage industry has long bothered those who see the dual roles as a serious conflict of interest. Most significantly, the Ontario five-year review committee recommended in its interim report that the IDA split the roles, although it dropped the recommendation from its final report. The Ontario Securities Commission’s regulatory burden task force has also called for a split.

The IDA has always fiercely defended its dual role, claiming that the more insidious conflict is the one inherent in self-regulation. That view is shared by the former head of the IDA’s trade association arm, Peter Bailey, now president of Raymond James Ltd.
in Toronto. “The conflict between the trade association and regulation is a complete myth,” he says. “The trade association lobbies the federal government on fiscal policy issues, keeps statistics on the performance of the industry and provides a broad range of services to the members. The conflict is in the concept of self-regulation.”

Bailey maintains that spinning off the trade association isn’t going to resolve the fundamental conflict in self-regulation. “We strongly believe in self regulation, and it has served the industry well,” he says. “We make our living in this business, and it is in our best interest and the public’s [best interest] to police it properly.”

IDA president and CEO Joe Oliver also insists that the dual role doesn’t pose an actual conflict. Yet, he concedes, the organization is talking about splitting the two functions nonetheless. “We’re trying to balance a substantive advantage with an optical problem,” he explains. “So, have we reached the tipping point? That’s the issue.”

The substantive advantage in having dual roles is not obvious. The IDA has argued that the dual role gives the industry greater involvement in public policy, but it’s not clear why an independent trade association couldn’t do as good a job, if not better, in that task.

The IDA’s dual role isn’t purely a problem of perception; it has also become an increasingly significant obstacle to one of its other central aspirations — consolidating self-regulation.

The idea of SRO mergers has been broached from time to time over the years, but has never amounted to much. Oliver revived it most recently at the IDA’s annual meeting in the summer — calling for consolidation of the IDA, the Mutual Fund Dealers Association and Market Regulation Services Inc. ; and for the IDA to take sole responsibility for prudential regulation from the Canadian Investor Protection Fund Inc.

These other SROs have pointed to the IDA’s dual role as an obvious impediment to any merger or reshuffling of regulatory responsibilities. When Oliver raised the idea again in the summer, MFDA president and CEO Larry Waite suggested that the IDA has a good deal of work to do before mergers can be considered (such as spinning off the trade association and improving its governance structure). Waite stands by that position today.

Rozanne Reszel, president and CEO of the CIPF, also points to the IDA’s dual role as a reason why the IDA shouldn’t be given sole responsibility for prudential regulation. She notes that it’s a conflict of interest that’s not present in industry SROs in other parts of the world.

Given that reality, it’s not surprising that the IDA is now taking a serious look at spinning off the trade association. Oliver says that no decision has been made at this point, but the IDA is studying its options. “It’s an issue we are looking at,” he acknowledges. “I understand it’s an impediment to a merger, but if we deal with, it
doesn’t guarantee that a merger will take place.

“We don’t feel it’s a substantive problem, but we understand that the environment changes, so we have to look at it — which we’ve done periodically,” he adds.

Oliver says that the idea is being discussed at the IDA generally but, he maintains, “We’re not at the decision point yet.” However, some in the industry believe a decision is imminent. One Bay Street veteran says the issue is under close study and the IDA will raise the issue at its board meeting at the end of October. Another industry source says the IDA wants to move ahead on it in the next month or so.

@page_break@The sense of urgency appears to be driven by the fact that the IDA is making a move to take over prudential regulation from the CIPF, although SRO merger talks are dormant for the time being, with Oliver reporting that there are “no active negotiations.”

Oliver also reports that the IDA has recently completed an extensive study on the issue of prudential regulation, and it plans to release a paper outlining its findings in the next several weeks. He also notes that the IDA has had informal discussions with the provincial securities commissions about its aspirations and that it will be making a more formal presentation of its position when its study is released.

The IDA’s basic complaint is the CIPF is the only protection fund in the world that sets standards and oversees member firms. Oliver says it may have made sense to invest these powers in the CIPF when there were several SROs overseeing different parts of the securities industry, all doing financial compliance and regulation. However, now it’s just the IDA and, he argues, the IDA is subject to extensive, ongoing oversight from the securities commissions, so it doesn’t need the CIPF as yet another level of oversight.

“This duplication doesn’t make sense any more,” Oliver argues. “Regulatory burden is a huge issue.” He maintains that the cost of additional oversight should only be imposed if there’s a public interest justification for it; and the IDA believes that this justification no longer exists.

However, the CIPF doesn’t appear eager to give up its oversight responsibilities. Reszel disputes the IDA’s arguments in favour of a realignment of responsibilities — namely, that the current system is unnecessarily duplicative, costly and a regulatory burden to brokerage firms.

Avoiding duplication

She says that the existing arrangements between the fund and the provincial regulators are designed to avoid duplication. She argues that even if the CIPF gave up prudential oversight, it would still have to perform risk-management functions for the fund, thereby introducing a new source of duplication. And, she points out, there is plenty of room for minimizing duplication in the work done by the IDA and RS.

“Members are currently visited by the IDA capital examiners, the IDA compliance examiners, the RS trade desk examiners, the external auditors and sometimes [the Canada Revenue Agency]. That’s five separate teams, without the CIPF on the scene,” she says. The CIPF only visits between seven and 10 firms per year, she reports, “So there is work that can be done at the IDA and RS level to minimize regulatory burden by sending in a single co-ordinated team.”

That said, Reszel says, the CIPF and the IDA have discussed the idea of the CIPF shifting its focus to a “broader test of controls at the IDA level, and key IDA processes, such as the member approval process.”

Reszel also disputes the IDA’s other arguments. She admits that the CIPF may have different powers compared with contingency funds that exist in markets such as Britain and the U.S., but, she maintains, these systems are fundamentally different in ways that the IDA’s argument ignores.

She says the CIPF’s prudential oversight responsibilities are “an integral part of the risk-management process,” and that the number of SROs doing member regulation is irrelevant to the need for risk management. She also defends its role in policymaking.
“There does not appear, to the CIPF, to be a case for changing its role, particularly if the objective is to prevent duplication, unnecessary cost and regulatory burden to members,” she insists.

Given the CIPF’s opposition to a fundamental realignment of prudential responsibilities and the lack of SRO merger talks, it appears that, even if the IDA goes ahead and spins off the trade association, a comprehensive rationalization in self-regulation is not a slam dunk. Still, it’s almost certain that this rationalization won’t occur as long as the
IDA’s dual function persists. IE