Regulation: An end to dual-platform firms?

Now, however, the possibility of investment dealers employing permanent mutual fund reps is rearing its head once again. The Canadian Securities Administrators (CSA) has asked the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) to explore this issue with their members.

Both IIROC and the MFDA are surveying their respective dealers online and conducting focus groups to gauge industry opinion. The catalyst for this exercise is a decision that the IIROC board handed down late last year that grants an exemption to a firm that would allow it to employ mutual fund reps without requiring that they ever expand their licences – essentially permitting the firm to field a sales force of mutual fund-only reps.

IIROC is declining to release the details of that decision, on the grounds that it’s not public. However, IIROC survey documents indicate that the decision imposes certain conditions on the firm in question, including: its mutual fund reps can deal in mutual funds only; margin lending isn’t allowed for those reps’ clients; the reps must meet certain proficiency requirements; and those reps can’t use personal corporations, which historically have been allowed in the MFDA world but not under IIROC rules.

In the wake of that IIROC decision and given the potential implications for the industry, the CSA has asked IIROC to suspend the exemption – a move the firm agrees to – so the current consultation can take place.

The basic policy issues are fairly clear. For firms that currently operate on both the IIROC and MFDA platforms, the ability to house their mutual fund reps within a single dealer would clearly be a win in streamlining regulatory compliance and allowing those firms to operate more efficient structures. Currently, there are about 20 firms in this situation.

Conversely, dedicated mutual fund dealers may fear that their regulatory costs would jump dramatically if a large segment of MFDA reps are allowed to migrate to IIROC firms, leaving the costs of funding the MFDA spread over a much smaller number of firms and reps.

In the past, that is pretty much the way the battle lines have been drawn around this issue. In fact, when the provincial regulators most recently considered the question, in 2007, they decided to preserve the restriction on IIROC-licensed dealers, saying that a change would be inconsistent with the existing regulatory system and could undermine the viability of the MFDA if a sufficient number of reps were to shift to IIROC dealers.

The current surveys aim to determine just how many dealers may make such a move if it was available to them. In addition, the surveys seek feedback from dealers about whether this ability should be done through an exemption, a rule change or by some other means.

At this point, the CSA has yet to make a decision on whether to allow mutual fund reps to work for IIROC-licensed firms.

“The Canadian regulatory regime for investment dealers and mutual fund dealers is based on two registration categories and two SROs,” says Bill Rice, chairman of the CSA and CEO of the Alberta Securities Commission. “The model of IIROC dealers employing pure mutual fund dealer reps, and supervision of such reps by IIROC, is not currently contemplated and has implications for the current regulatory regime.

“The CSA is awaiting informed feedback from IIROC, the MFDA and their respective members before either confirming or changing current practice,” Rice notes, adding that the CSA is hoping to identify the interests of firms that would support changing the existing rules and those that oppose it, as well as determine “what alternatives would best support the interests” of all dealers.

For now, both the MFDA and IIROC are staying quiet on the issue.

Meanwhile, the Investment Industry Association of Canada (IIAC) indicates that it stands by the position espoused by the former Investment Dealers Association of Canada (IDA) in 2006, when it argued strongly in favour of lifting the restriction against brokerage firms employing full-time mutual fund-only reps.

At that time, the IDA insisted that there was no real policy reason to restrict brokers from hiring mutual fund salespeople. The IDA’s position was that the concern about the viability of the MFDA was no longer valid and, further, suggested that lifting the restriction would level the playing field between investment dealers and mutual fund dealers as well as allow more cost-effective service to clients. According to the IDA, this could be done without harming investor protection, as these reps would be subject to dealer supervision and regulatory oversight.

However, a letter to the members of the CSA from the Federation of Mutual Fund Dealers argues against allowing IIROC dealers to employ mutual fund reps without restriction, saying it would hurt fund dealers, and investor confidence: “To lift the suspension of the current exemption, and to allow future exemptions would … erode the mutual fund dealer channel of distribution, which would, in turn, negatively impact the investing public’s faith in the securities regulatory system in Canada.”

© 2014 Investment Executive. All rights reserved.