The Canadian Securities Administrators have published a report reviewing their oversight of self-regulatory organizations. It makes a number of recommendations for improving self-regulation, and its oversight of SROs.

The CSA SRO Oversight Project Committee focused on issues related to the current regulatory system and was not intended to be a broader review of self-regulation. It notes that as a general principle, the committee believes that the CSA should increase the degree of reliance on SROs and market infrastructure entities, “where they can clearly demonstrate that they meet their public interest mandate and the high level standards in their recognition orders and related documents.”

“Increased reliance might entail, for example, a less hands-on approach to oversight generally or less detailed analysis by the CSA of decisions and submissions (such as rules developed) of SROs and market infrastructure entities,” it says.

The report notes that the SROs indicated that they currently do not have sufficient enforcement powers. They have sought various additional powers such as: the authority to file disciplinary decisions with the courts; the power to compel third parties to cooperate with investigations; statutory immunity; jurisdiction over non-registered employees of members, and over firms and employees that leave the SRO.

The CSA committee unanimously supports the granting of the authority to file disciplinary decisions with the courts. And, it notes that although B.C. doesn’t support the granting of statutory immunity to SROs, the rest of the committee does. “In BC, statutory immunity already extends to the exercise of statutory functions authorized by the BCSC,” it adds. Apart from that, the committee does not recommend that the SROs receive any additional statutory powers.

The committee also calls for increased cooperation among SROs, and enhanced transparency regarding their roles and responsibilities. It notes the possibility of SRO consolidation, and recommends that any merger proposal assess the expected benefits of the merger against its anticipated costs and explain how the merger is in the public interest. In addition, to help guide CSA decisions on mergers, it proposes a number of evaluation criteria.

The committee also recommends a more streamlined rule review process, where the CSA would limit their review to “material rule proposals”. The CSA and SROs would need to agree on criteria for what is “material” and to set out expectations on how the entities would assess and self-certify whether proposed changes to an existing rule or proposed new rules are material, it says. “The non-material rule proposals would be deemed approved at the end of a public comment period and there would be a process in place for periodic review of the appropriateness of the classification criteria and procedures,” it explains.

The report concludes that it may be appropriate for securities commissions to put more reliance on SROs, “The challenge, however, is achieving a proper balance between reliance and oversight,” it says. “To the extent that these entities demonstrate effective performance of their respective regulatory mandates, the CSA should take this into account in determining the appropriate level of oversight.”

It stresses that SROs, “should always act either in accordance with, or not contrary to, the public interest”. And, that they must meet high-level standards covering areas such as governance, rule-making and membership. Effective governance is a pre-condition to increased reliance, it says.

The CSA also pledges to review and improve their current oversight processes to streamline them and increase their overall efficiency.