The Investment Dealers Association of Canada is finally taking the plunge and changing its mandate, sloughing off its lobbying function in order to focus on self-regulation. But if its members are to get behind the change in mandate, they want to see the IDA follow up with the promised SRO mergers.

In late October, the IDA’s board voted unanimously to give up its role as a trade association. The trade association function will instead become an independent, stand-alone agency. Now, says IDA president and CEO Joe Oliver, the plan will go to a vote of the members, tentatively scheduled for Dec. 15.

The outcome of the members’ vote is not a foregone conclusion, but it seems likely to pass. The IDA has consulted widely with its members and, Oliver says, there appears to be strong support for the decision to split its functions. The vote will require only a simple majority, which shouldn’t be a high bar to clear.

The move marks a victory for the power of popular opinion, because the perception that the IDA’s dual mandate presents an intolerable conflict of interest has finally overwhelmed what Oliver calls a “substantive advantage” in having an integrated SRO/trade association.

A couple of industry reports — namely, the Ontario Securities Commission’s regulatory burden task force and the five-year review committee’s interim report — had called for the IDA to separate the two functions.

The association has taken flak from other quarters as well for clinging to both roles, yet it always resisted the pressure to split.
Oliver has always insisted the real conflict of interest is in self-regulation, and there are advantages to the dual mandate that outweigh the perceived conflict. He repeatedly argued that the dual role was purely a problem of optics.

Now, he says, the IDA recognizes that the environment has changed; there is less tolerance for perceived conflicts than in the past. Oliver notes that the decision to split is voluntary, and is not being foisted upon the IDA by regulators or outside forces. Rather, the IDA has decided to deal proactively with the issue.

Although Oliver still believes there are advantages to a dual mandate, he now sees that there will be advantages to a split. It will resolve the optical problem, give the industry a trade association that is unburdened by a “public interest” mandate and may pave the way for a consolidation of SROs. The last step appears to be key to some IDA members.

Rob Jennings, president of Calgary-based Jennings Capital Inc., for one, hopes the trade association spinoff will soon be followed by an agreement to merge the IDA with Market Regulation Services Inc.

IDA members fear the breakup of IDA functions could lead to them funding yet another industry organization, and the best way to avoid higher costs is to merge SROs.

“Our thought is that separation is the correct thing to do,” says Michael Greenwood, president of Vancouver-based Canaccord Capital Inc. “However, we believe that it is paramount to effect a contemporaneous combination with RS; otherwise, there will be additional costs with no corresponding benefits.”

Greenwood says Canaccord will only support a spinoff/merger scenario. If the vote is just on whether to break up the IDA, he says, Canaccord will probably vote against it.

“Nothing would be worse than the members voting against the board, so we will support it,” says Peter Bailey, a former head of the IDA’s trade association arm and now president of Toronto-based Raymond James Ltd. Bailey has argued against a split in the past, but he will nevertheless support the board’s decision. “Now our job is to try to make it robust,” he adds.

Oliver indicates that, although the IDA would like a merger with RS and the Mutual Fund Dealers Association, the spinoff proposal will not be contingent on a merger. IDA will also move governance to 50% public directors, resolving another issue that has been cited as an obstacle to SRO mergers.
Reforms such as these should make mergers of SROs more viable, but not necessarily slam dunks.

IDA chairman Ross Sherwood, who is also president of Odlum Brown Ltd. in Vancouver, heads the steering committee that is working on the spinoff proposal. The committee will present members with a fully formed plan about how the new organization will work, dealing with issues such as its mandate, funding and governance.

@page_break@If the spinoff is approved and mergers are to take place, the first coupling will probably be between the IDA and RS. The MFDA is not interested in a merger right now.

While the IDA was deliberating the future of its dual mandate, the MFDA was holding a board meeting of its own, at which it decided not to entertain the idea of a merger. MFDA president and CEO Larry Waite says the board concluded: “It was not in the public interest to enter into discussions with the IDA at this time.”

In mid-November, the MFDA sent a letter to its members laying out its position for rejecting a possible merger with the IDA.
Among the reasons cited: fund dealers don’t support the idea; the cost savings would be minimal and the benefits are unclear; fund dealers and investment dealers operate under different regimes; the fund industry’s regulatory environment is still evolving; and the trade association spinoff must still be carried out successfully.

“Although the MFDA and IDA perform similar regulatory functions, there is no regulatory overlap,” the letter, signed by Waite, concludes. “The board is of the view that most of the immediate benefits of a merger can be achieved by other means, such as enhanced co-operation and harmonization of activities.”

In short, the MFDA wants to stick to its knitting for now. A merger may make sense in the future, but not just yet. Timing is important for the MFDA, because it appears to harbour aspirations of taking over regulation of fund managers — a development that would surely be hampered, if not killed, if it was also stickhandling a merger with the IDA.

The merger climate over at RS is a bit more balmy. Tom Atkinson, president and CEO of RS, says the IDA is certainly making all the right moves to set the stage for a possible merger. He says his staff has an excellent working relationship with counterparts at the IDA, which would make a merger easier.

Although there are no active talks underway, Atkinson says, the RS board would look at any proposal that could make regulation more efficient and effective. “Eventually, after the trade association is removed, they will come to us [with a merger proposal] and our board will assess that in due course,” he says.

Atkinson says that RS doesn’t have any conditions it wants to see met before a deal can go ahead, although the dual mandate is certainly an obstacle. “We would just want to see what it looks like, and whether it would be a better organization. Everybody sees the benefits at 10,000 feet, so you just have to make sure, as you move through the details, that everything still works,” he says.

“If it is better, I am sure our board would consider it,” he adds. “It is always pushing me to find ways to make our organization more efficient and effective, so I have no idea why it wouldn’t consider something that would further our public-interest mandate.”

Although the trade association spinoff may lead to SRO mergers, some also see it as the continued erosion of the “self” in self-regulation. “True self-regulation is already largely gone,” says Brian Awad, former IDA enforcement counsel who is now a partner with Burchell Hayman Parish in Halifax.

He notes that there is already internal separation of staff functions, particularly in enforcement, and that disciplinary panels are no longer made up of people who are active in the industry. “That is not a peer review system,” he says.

Awad reasons that if the “self” disappears entirely, the rationale for self-regulation will be undermined. “Why have a second tier of regulation at all? Why not just have the securities commissions?” he asks.

The IDA certainly is not looking to incite that debate with its decision to spin off its trade functions. Rather, it hopes this breakup will lead to a couple of happier unions down the road. IE