The investment dealers Association of Canada’s move to abolish its dual mandate can work very well on two levels. One is already in the works and the other will come only with time.

The quick win would be securing a merger deal with Toronto-based Market Regulation Services Inc. , which would streamline the self-regulatory system and enable the merged entity to wring out some savings. Now that the IDA has separated the trade association from the self-regulatory organization, the IDA and RS are actually talking.

A four-person committee has been formed to weigh the prospects of an IDA/RS combination. Bill Moriarty, chairman of RS and managing director at RBC Capital Markets Inc. , and Eric Kirzner, professor at the University of Toronto’s Rotman School of Management, represent RS. Brian Porter, past chairman of the IDA and chief risk officer at Bank of Nova Scotia, and Don Black, CEO of Greystone Managed Investments Inc. , are there on behalf of the IDA.

Whether their deliberations will lead to a deal is impossible to say. “They’re talking, and we’ll see how that goes,” offers Joe Oliver, president and CEO of the IDA.

He refuses to name a deadline for the talks, but suggests they will probably reach a conclusion sooner rather than later. “We’re not talking years here,” Oliver says. “Well, it might be years. But if it’s years, it’s because it didn’t work in months. You can’t have discussions going on endlessly.”

To those who see an IDA/RS merger as a necessary and inevitable cost-saving move, now may be the ideal time to merge the two organizations. Indeed, Oliver suggests, of the 12% of IDA members who voted against the decision to drop the dual mandate, many did so because they want the split to be concurrent with a merger with RS. Many others who voted in favour of the split presumably also would like to see a merger deal sooner rather than later.

“We believe that RS and the [SRO side of the IDA] must combine in order for all participants of the system to benefit — investors, issuers and member firms,” says Michael Greenwood, president and chief operating officer of Canaccord Capital Inc. in Vancouver. “There is too much overlap, and it frankly does not make any logical sense from an enforcement and effectiveness perspective.”

Doing the deal now also makes sense from an organizational point of view. When the formal breakup of the IDA takes place, the trade association side will be keeping the IDA name and moving out of its present office space to a different location — leaving the SRO with empty offices to fill, no name and no brand. If there is to be a merger, cost-conscious firms would rather see the regulators get together now and come out with a unified brand rather than going through the expense of renaming the SRO, then doing it all over again in a year or so, if and when the two do finally come together.

The actual split of the SRO and the trade association is expected to occur after the end of the IDA’s fiscal year end, March 31. So the two sides have a couple of months to work out the details of a deal.

Whether or not the merger with RS comes to pass, the decision to split the IDA’s mandate could have a salutary effect on securities industry self-regulation. Now that the IDA has given up its role as the industry’s SRO, provincial regulators may, over time, feel more comfortable putting increased responsibility in the hands of the SRO. That could lead to faster, more effective rule-making, more credible enforcement and more responsiveness to public concerns, given that its sole focus will be the public interest.

As an example, all of the SROs have sought more enforcement powers from the securities commissions — including greater ability to enforce their decisions and actually collect the penalties they levy. Oliver has admitted the lack of these powers undermines the IDA’s authority as a regulator. The SRO has also offered to take over administrative chores from the securities commissions, such as registration.

Once the SRO is serving only the public interest, it may have a stronger case for greater powers and more responsibility. “If [the splitting of the dual mandate] enhances credibility [with the regulators], and helps us achieve some of those objectives, it will be a very good thing,” Oliver says.

@page_break@Greenwood has a slightly grander vision for a reformed SRO: he suggests the provincial authorities could outsource industry regulation to it on a national basis. “What is exciting, if properly constructed, is that the regulated organization could become the virtual national securities commission, or the operating vehicle for the 13 [Canadian Securities Administrators] members,” he says.

While there are compelling regulatory outcomes that could result from the IDA’s changing mandate, the prospects for the trade association are less clear. As membership will be voluntary, it will have to demonstrate its worth to members.

Peter Bailey, former head of the IDA’s trade association arm and president of Raymond James Ltd. in Toronto, says the trade association “will have to sort out where the value-added is and what issues it can address effectively on behalf of the members.

“A great deal of work needs to be done,” Bailey adds. “I think the initial challenge for the trade association will be to determine how to use the resources of the existing IDA member committees for trade association matters. For example, the retail sales committee probably spends the majority of its time on non-self-regulation matters. It is going to be unrealistic to have the trade association create replica committees across the board, as there are not enough industry volunteers to staff them.”

Greenwood echoes some of these concerns: “Most trade associations derive their influence from setting professional standards and maintaining these standards through continuing education. Think of the Law Society. Exactly what in this arena will the trade association have as a responsibility?”

With the SRO already doing this work, the trade association probably won’t have a role in establishing best practices or codes of conduct. The SRO will also continue to operate all of its industry committees. “What self-regulation brings to the party is our closeness to the marketplace — that’s where we are useful to the commissions: in policy development,” Oliver says. He notes that the challenge for the stand-alone SRO will be in keeping the industry engaged.

That leaves the trade association to lobby on behalf of the industry and to conduct research. Oliver indicates its work will include commenting on fiscal and monetary policy, and making industry-focused submissions on regulatory policy.

Time will tell if this is enough to persuade dealers to join. Initially, the trade association will probably receive start-up funding from the current IDA. This has to be sorted out. Its board is meeting in late December (after Investment Executive’s deadline) to discuss this, along with issues such as timing of the split and a name for the SRO. But Oliver insists this money won’t come from the large market-timing settlement secured in late 2004, or other penalties it has collected that are to be used for public-interest purposes.

According to the document circulated by the IDA ahead of the vote, the new trade association would have a budget of $5.1 million for the coming year, which includes $2.9 million in compensation to its 21 staffers; $1.5 million in general costs such as travel and office space; and $800,000 for policy initiatives, meetings and events. Another $1.25 million in start-up infrastructure costs are also projected.

While the current IDA is expected to provide start-up funding, the group’s members will also face fee assessments on top of their SRO fees. The big integrated dealers will probably pay the freight — it’s projected that these nine firms would be asked to ante up, on average, $303,000 each, or more than half the organization’s estimated annual budget. Specialist institutional and retail firms would pay much less, with small institutional players paying only about $1,000 each.

Oliver indicates that spinning off the trade association should lop about $3.5 million from the SRO’s annual budget, primarily due to head count reductions as trade association staff leave. But, it’s not yet clear how much, if any, of the savings will be passed on to firms. “We’ll have to analyse our budget for the next year, and look at what our responsibilities are in the total context,” he says.

Greenwood suggests the IDA’s educational arm, the Canadian Securities Institute, which is up for sale, either should be sold to the trade association so it can depend on CSI cash flow for funding or that the proceeds of a sale to a third party should be dedicated to start-up funding for the trade association.

Given the trade association’s voluntary nature, and the possibility of free riders, it will have a chore to prove its worth to prospective members. Firms that are concerned about their costs may be reluctant to pony up for its services on top of their SRO fees. Much may depend on the markets, too; as long as markets are booming, firms will hardly notice the costs. But when the markets turn, firms tend to become cost-conscious.

One possible source of members for the new trade association could be fund dealers. Officially, the Investment Funds Institute of Canada serves as their lobby group; but it hasn’t been much in evidence on the issues of concern. It has no representatives on the committees dealing with implementation of the fair-dealing model, for instance, nor did it publicly defend dealers over their involvement in the Portus Alternative Asset Management Inc. scandal.

Fund dealers could use a good lobbyist. And the cessation of the IDA’s dual mandate could lead to a materially more efficient regulatory regime. From this point forward, it’s all about execution. IE