For regulators, as for many organizations, hiring and hanging onto quality employees is a challenge. Indeed, that chore appears to be at the heart of the biggest problem regulators have in carrying out their responsibilities.

In mid-January, the Canadian Securities Administrators published a report detailing the outcome of its most recent oversight review of the Investment Dealers Association of Canada. These reviews focus on whether a self-regulatory organization such as the IDA is doing an adequate job in carrying out the duties that have been delegated to it by the provincial regulators. In such a review, the CSA examines, among other things, the SRO’s regulatory processes to verify that they are efficient, effective and fair; that the SRO has adequate resources; and that it is in compliance with the terms of its recognition order.

The latest review of the IDA, carried out in the fall of 2006, focused on its registration, enforcement and sales compliance functions. The CSA didn’t look at the IDA’s governance or regulatory policy functions, citing its pending merger with Market Regulation Services Inc. That’s because governance will certainly be altered by the merger, and policy-making may be as well.

The merger of the IDA and RS continues to chug toward completion. IDA members approved the proposed combination in December; now the deal needs only the blessing of the Province of Ontario, which is expected to publish a proposed recognition order for comment sometime this month for either a 30-day or 45-day comment period.

The IDA is hoping that it can get this final seal of approval by April 1, but concedes that the process may run a bit longer, depending on whether meaningful comments are submitted on the CSA publication.

In the meantime, the CSA has declared that it is “generally satisfied” that the IDA is fulfilling its function. There are, however, some areas in which improvement is needed. The CSA raises a variety of issues — including the odd bylaw amendment, procedural changes and assorted other tweaks — that crop up in one or two provinces.

But one issue that seems to pervade all of the jurisdictions is whether the IDA’s sales compliance department is doing enough, particularly in terms of the number of reviews of firms’ branches it is doing. For example, the Ontario Securities Commission recommended: “The IDA should reassess whether its processes for assessing a member’s compliance at the branch level are adequate, including whether it has conducted an appropriate number of branch reviews.”

In most cases, this concern can be traced back to either staffing shortages or a perceived lack of productivity by the staff that are on hand. For example, in Quebec, the Autorit» des march»s financiers found that the IDA needs to add a new compliance officer and improve training. It also reported that the enforcement department faced staffing issues because of a maternity leave, a sick leave and two departures from the department.

Similarly, the B.C. Securities Commission called on the SRO to determine the underlying reasons for the diminished productivity of its compliance department.

The OSC added that the regulator needs to persist in its efforts to hire and retain experienced compliance officers. It also notes that once the IDA has beefed up staff, it should reassess its branch review procedure.

In each case, the IDA agrees with the recommendations of the CSA, but notes that there seems to be a shortage of qualified compliance personnel. According to IDA president and CEO Susan Wolburgh-Jenah, one reason for this is simply that the brokerage business has been so busy. The IDA typically recruits compliance personnel from firms on the Street, and when it loses them, the personnel return to the Street. So, when business is good and staff is in high demand at firms, it becomes that much harder to lure them away and it is also easier to lose them.

This situation is particularly acute in Alberta, where the brokerage business has been riding the oilpatch boom for several years now. And, not surprising, the Alberta Securities Commission found plenty of staffing issues, too.

While the ASC carried out its review along with the rest of the CSA regulators in the fall of 2006, it also decided to issue its own report this past summer, on the basis that the IDA has different powers in Alberta and the ASC takes a different approach to routine oversight of the IDA.

@page_break@High Turnover

So, the “consolidated” CSA report covers the reviews carried out by regulators in British Columbia, Ontario, Quebec, Saskatchewan and Nova Scotia.

(So far, the CSA hasn’t produced consolidated reports of its reviews of either the Mutual Fund Dealers Association of Canada or RS. But Laurie Gillett, manager of public affairs at the OSC, says that future reviews of other SROs will be consolidated and made public.)

As for the IDA in Alberta, the ASC found a high level of turnover at the Calgary office, and indicated that this affected the IDA’s performance across all departments.

Again, sales compliance was particularly hard hit, losing two compliance officers and two managers during the review period.

The enforcement department saw two case assessment officers leave the IDA, two others went on maternity leave and one transferred to another department. As a result, the most senior officer had been with the IDA only for eight months. Additionally, one of its two enforcement counsel left during the period.

Although the tough job market in Calgary and the strength in the brokerage industry generally has made recruiting and retention tougher, Wolburgh-Jenah says, another factor is the increasing importance of regulation (and compliance) generally. As regulatory demands continually intensify, compliance expertise and experience is in even greater demand.

Staff turnover is not just an academic concern; it has a real impact on a regulator’s ability to do its job. That’s why it’s one of the SROs’ requirements for recognition. It’s also an issue for industry members, because it can disrupt their businesses when they are being subjected to a review or an investigation.

Indeed, a survey of IDA members on their views of the proposed merger with RS identified the threat of increasing staff turnover as one of the most significant concerns. Almost 30% of firms say that increasing staff turnover at the merged SRO is a worry, because it will decrease the regulatory expertise at the SRO, make the regulator tougher to deal with and, thereby, intensify regulatory risk.

Wolburgh-Jenah agrees that excessive employee turnover is a concern, but, she adds, the IDA’s problem in that area is largely in the past. She reports that the IDA did experience a spike in overall turnover a couple of years ago — with voluntary employee turnover jumping to 13.5% in 2006 from almost 11% in 2005 and less than 5% in 2003. It was even higher in the sales compliance department, coming in slightly more than 18% in 2006 and almost 15% in 2005.

However, by 2007, overall turnover was back down to slightly less than 6%, thanks to a combination of increased compensation and a reallocation of support resources.

Compensation at the IDA is also getting another look as part of the process of merging with RS. That chore has been underway for a couple of months, and Wolburgh-Jenah expects it to take another four or five months to complete.

Once the merger is complete, not only should the compensation grid be sorted out, Wolburgh-Jenah points out, but also the merged organization will have other attributes that should enable it to attract and retain good workers. As a larger organization covering a more diverse set of responsibilities, it will be able to offer prospective employees a greater variety of challenges and opportunities. That may, in turn, give the merged SRO greater value as a career destination.

That’s not to say that the merged SRO’s goal will be or should be zero turnover. Wolburgh-Jenah says that some degree of turnover is healthy, but she’d prefer it remain in single digits.

Indeed, organizations that can turn themselves into appealing places to work can benefit from the effort. According to a recent academic research paper, entitled Does the Stock Market Fully Value Intangibles? Employee satisfaction and equity prices, companies with happier employees tend to enjoy greater corporate performance. The paper, published in December by Alex Edmans, assistant professor of finance at the University of Pennsylvania’s Wharton School, reports that employee satisfaction is positively associated with shareholder value.

If being a good place to work creates superior returns, it’s fair to assume that it also makes for a better regulator, although regulatory organizations don’t face the same pressures as companies operating in a competitive market; SRO customers who don’t like the service can’t just go elsewhere.

That makes cultivating and motivating talent an even trickier task for regulators — and it makes oversight reviews an important check on SRO performance. IE