Consolidation is always a good idea — or is it? It depends on timing and synchronicity.

I hesitate to bother readers with the introspective world of trade associations, but the mention of an SRO merger, raised recently at the Investment Dealers Association of Canada’s annual meeting in Banff by IDA president and CEO Joe Oliver, deserves at least a preliminary comment. Under his scenario, three SROs would amalgamate: the IDA, the Mutual Fund Dealers Association of Canada and Market Regulation Services Inc.

Generally speaking, consolidation — whether of services, companies or products — has benefits. It’s supposed to create economies of scale, increase productivity and make businesses and associations more streamlined, more efficient. And it’s supposed to reduce costs for consumers and investors.

Harmonization is a consolidation concept that the Investment Funds Institute of Canada has been promoting for years. But IFIC’s view of harmonization is based on the idea that similar products should have similar rules — as we hope will be the case one day with mutual funds and segregated funds — or that all provinces should have the same mutual fund rules, a goal accomplished with the creation of the MFDA in June 1998. This is amalgamating similar with similar.

But we should be careful about combining into one structure three regulators whose responsibilities are separate and diverse. It could result in an unsavory mélange of rules and regulations that do not take into account the uniqueness of each product and its clients.

As it now stands, each of these SROs has a distinct mandate. The MFDA regulates sales of mutual funds — the distribution side of the mutual fund industry. The IDA is the SRO and trade association for investment dealers. It monitors the conduct and financial adequacy of its members, and also represents their interests before government and other regulators. Its members do sell mutual funds — but other products as well. RS is an independent regulator that monitors Canadian equity markets, watching trades to ensure market integrity.

IFIC has always maintained that the IDA’s responsibilities and business risks are broader and reach into more complex businesses than the mutual fund industry alone. The IDA’s mandate includes underwriting, principal trading and primary- and secondary-market trading, certainly very detailed areas of financial services. In fact, even though the mutual fund industry is one of the most highly regulated financial services in Canada, it is a relatively straightforward business compared with the many activities IDA member firms pursue.
Accordingly, many IDA regulations have nothing to do with mutual funds. That’s why the MFDA was created.

There are a number of other major differences between the IDA and the MFDA, including:

> as a trade association, the IDA also has a lobbyist role, while the MFDA is purely a self-regulator;

> because of the higher risks in investment dealers’ business, (the use of “free” cash balances, for example), IDA members must adhere to higher capital adequacy requirements; the fund industry has none of these risks and MFDA members have lower capital requirements;

> IDA members conduct much of their business in nominee or “street” name; fund dealers operate mostly in client name.
Client name segregates client assets from those of the dealer, making the dealer’s financial health less of an issue to investors;

> IDA members deal with point-in-time pricing in their transactions, while mutual funds are priced once a day, at the end of the day.

If a merger of the IDA and MFDA were to happen, it would initially result in a two-tiered system of regulation — one for current IDA members and one for MFDA members. RS could add another layer.

Different businesses require different rules.
There would need to be one set of rules for IDA members, another for MFDA members and a third set for RS. Let’s consider if there are any gains in this. Oliver’s speech invites us to do just that. IE

Tom Hockin is president and CEO of the Toronto-based Investment Funds Institute of Canada.