The Investment Dealers Association of Canada and Market Regulation Services Inc. have enjoyed a very long engagement to one another. Now, the children of their proposed union, the IDA members, are finally going to have their say.

The merger of the IDA and RS has been in the works for a few years now. The self-regulatory organizations’ respective boards agreed to a deal in early 2006, and they’ve been hammering out the details ever since. The process has taken much longer than anyone expected, but it finally appears close to consummation.

In mid-November, the IDA published an information circular that sets out the terms of the planned merger. A meeting is scheduled for Dec. 17 in Toronto to consider the proposed deal and to give IDA members a chance to vote on it. To gain approval, the transaction requires support from 75% of the votes.

Although the approval of IDA members is a necessary condition of the deal, that still doesn’t make it a sure thing. Beyond that, the deal still requires regulatory approval by the various constituents of the Canadian Securities Administrators, as well as a public comment process. It remains to be seen how those will go. But, barring any major bumps in the road, the hope is that the merged SRO will finally come into being by the end of the first quarter of 2008.

Of course, there’s no way to predict whether the merger will encounter any major bumps. The CSA could yet raise a critical objection that derails the whole process. Or the IDA membership vote could go against the deal.

In a recent speech, the IDA’s new president and CEO (and, presumably, the head of the merged SRO), Susan Wolburgh Jenah, spelled out some of the challenges the IDA has faced in working through the merger process, including: crafting the right governance model; addressing potential conflicts of interest; and ensuring that the costs of regulation are fairly allocated between dealers and markets and among the various firms within each group.

“In developing the governance model for the new SRO,” Wolburgh Jenah says, “our objectives are to create a governance framework and operational structure that is independent but still preserves the ‘self’ in self-regulation, is diverse and regionally representative, and reflective of dealer member and marketplace knowledge and experience.”

The circular indicates that, if the deal is approved, the new SRO will be a non-share capital corporation with two classes of members: dealers and marketplaces. Both classes will have the same rights, and each member will have one vote. The board of the new organization will consist of 15 directors: five directors representing the dealers, two representing the marketplace members, seven independent directors and the CEO. In addition, TSX Group Inc. will have the right to nominate one director to the board as long as its markets represent at least a 40% share of the overall market; the other marketplace director must come from outside the TSX.

A preliminary board has been appointed. This had to be done without an established corporate governance structure, the circular notes, so the steering group that has been handling the merger was designated to act as an ad hoc corporate governance committee to find the first directors for the new SRO.

Along with Wolburgh Jenah, the initial board includes Ron Lloyd, chairman and CEO of Credit Suisse Canada and chairman of the IDA, and Bill Moriarty, vice chairman of RBC Capital Markets Inc. and chairman of RS. Both the latter count as dealer directors. Other dealer directors are Roger Casgrain, executive vice-president of Casgrain & Co. Ltd. ; Brian Porter, executive vice president and chief risk officer of Bank of Nova Scotia; and Robert LeSourd, a founding partner of J.F. Mackie & Co. Ltd. of Calgary and newly appointed to an SRO directorship.

The directors hailing from the market side include Richard Nesbitt, CEO of the TSX; and Wendy Rudd, CEO of TriAct Canada Marketplace LP.

The independent directors will be Kerry Adams, former commissioner of the Ontario Securities Commission, and David Denison, president and CEO of the Canada Pension Plan Investment Board, both of whom are new SRO directors. They join existing independent directors Daniel Muzyka, dean and a professor at the Sauder School of Business at the University of British Columbia; Gerry Rocchi, a financial consultant; Grant Vingoe, partner at New York-based Arnold & Porter LLP; Michael Grandin, chairman and CEO of Fording Canadian Coal Trust; and Daniel Leclair, a retired business executive.

@page_break@Apart from finding an acceptable board and governance structure, the other big challenge for the merged SRO will be the allocation of fees. RS has recently been reforming its fee model — an exercise that has proven very controversial with some firms. The circular notes that its work is ongoing and, if RS gets regulatory approval for a new fee model before the merger is approved, it will implement it. Whatever fee models of the two organizations are in place at the time of the merger, they’ll initially be maintained by the new SRO.

However, once the new SRO is finally formed, it plans to initiate two new projects. One, to allocate costs between the two types of regulation it will do; the other, to craft a methodology for apportioning fees among dealers for dealer regulation, and among marketplaces for market regulation. The former project is to start immediately after the merger takes effect, with the latter to follow within the first year. The circular notes that developing a new fee model will be a complex exercise and will probably require expert professional advice; implementing it will also involve consultation with firms and be subject to review by the provincial commissions.

Apart from governance and fees, there are other complications. The circular indicates that, even after the merger, both the IDA and RS will continue to exist for about five years, chiefly so that each can take disciplinary action for infractions that occurred before the merger. The new SRO would fund the expenses for any old enforcement action, supply the staff to carry it out and collect any monetary penalties.

Despite these various issues, indications are that IDA members support the merger — or did when the notion was first raised. Since then, nothing has happened that would call the merger’s logic into question, apart from the fact that the process has dragged on.

That said, the IDA’s members don’t appear to be going into this deal with any great delusions that their world will change overnight once dealer regulation and market regulation are married. Firms don’t appear to be anticipating much in the way of cost savings from the IDA-RS deal. Indeed, the information circular includes the results of a survey carried out in the fall of 2006, which finds that firms have pretty low expectations for expense synergies — both for the new SRO and for themselves.

That survey, of 28 IDA members conducted in September 2006 by Compliax Consulting Services Inc. , found: “The overwhelming majority of members do not think that the merger will yield material cost savings in their operations.” Most respondents said that the likely savings would be less than $20,000. None are expecting “significant savings” in excess of $100,000; and, only 18% of firms indicated that they expect to see “moderate savings” of between $20,000 and $100,000. The firms also don’t believe that their compliance budgets are likely to be reduced in the wake of the consolidation.

At best, firms are hoping that they may see some savings because less of their staffs’ time will have to be spent on activities such as dealing with regulatory examinations. Over time, firms suggested, they might see greater savings if the new SRO streamlines its processes significantly. But they aren’t necessarily anticipating much consolidation or cost saving at the new SRO itself, either — largely because, as stand-alone organizations, the IDA and RS regulate very different parts of the market.

The survey does report, however, that IDA firms unanimously agree that the merger will yield benefits; it’s just that cost savings is not one of them. Rather, the survey found that the consensus among firms is that “the primary benefits of the merger will be increased operational efficiency, greater consistency and less duplication from a single SRO.” The top expected benefits include a uniform approach to regulation, a single point of contact for rules and problems, and the elimination of duplication.

Indeed, in an environment of multiple regulators such as the Canadian securities industry, one of the fondest hopes of many firms is for a simpler structure — and a reduction in the number of masters to whom they must answer — the merger is a step in that direction. Even if the rules remain onerous, there’s some benefit in reducing the number of cops on the beat.

The survey found that IDA firms don’t believe that gaps in regulation are a significant issue, but differences in the SROs’ approaches are a concern. They pointed to differences in four notable areas: enforcement policy, guidance and education, risk-based regulation and consultation with members.

The hope is that the new SRO incorporates the best of both constituents: “Generally, members feel that the IDA’s risk assessment methodology is sound and support extending it to market regulation. They also like the IDA’s consultation process and extensive use of member input through committees. Firms see RS’s strengths as providing guidance and education on rules, as well as providing clear answers to questions on rule interpretations.”

IDA firms don’t foresee any long-term disadvantages to merging the two SROs, but the survey did find that more than 40% of them identified implementation risks, “including ineffective implementation of the merger, or the new SRO implementing approaches to regulation that they did not support.” Others suggested that there’s a risk that a single, large SRO with greater regulatory power could lack some of the checks and balances that existed when they were separate.

In addition, almost 30% of IDA firms said that staff turnover at the new SRO is a concern because it decreases regulatory expertise, makes the regulator tougher to deal with and intensifies regulatory risk. IE