The long-awaited merger of two of Canada’s major self-regulatory organizations is finally on the verge of completion.
A proposed deal to merge the Investment Dealers Association of Canada and Market Regulation Services Inc. , which will result in the creation of the Investment Industry Regulatory Organization of Canada Inc., is set to close on June 1. All that’s needed to complete the transaction is the approval of the provincial regulatory authorities that invest the SROs with their powers, according to Susan Wolburgh-Jenah, President and CEO of the IDA.
Wolburgh-Jenah, future head of the new IIROC, says the provincial regulators were expected to start putting their recognition orders for the new SRO before their respective commissions for approval starting in April, then issue the orders that will effectively bring the new organization into being. (As of Investment Executive’s press deadline, the commissions hadn’t begun issuing the orders.)
“Once we get those, we’ll be ready to go,” Wolburgh-Jenah says. With that expectation, officials of the new SRO plan to launch at the beginning of June.
A draft recognition order was published earlier this year, spelling out the details of the new group’s proposed structure, governance, and other details for public comment. That publication received only three comments, and they were largely supportive of the plan.
The most substantive comment came from a planned new marketplace, Alpha Trading Systems LP, which is being created jointly by the large bank-owned dealers along with Desjardins Securities Inc., Canaccord Capital Inc. and the CPP Investment Board. Alpha Trading’s comment expressed support for the proposed merger and noted that the corporate governance — particularly the conflict-of-interest provisions — indicate that the new SRO will be operated impartially and independently.
However, Alpha Trading’s comment also raises some concerns with the proposed deal. The comment letter points out that there may be some questions over the new SRO’s authority over certain firms — specifically, firms that trade on markets that belong to the SRO but aren’t themselves members. It also cautions that exchanges and alternative trading systems could end up being treated differently under the planned framework. It stresses that regulatory fees should be allocated neutrally between marketplaces and it recommends that the “buy” side should be represented on the IIROC’s board.
The IDA has responded to these and the other comments it received, which were from the Investment Funds Institute of Canada and egX Canada Inc. , Wolburgh-Jenah says. She expects the final recognition orders from the provincial regulators will not be substantially different from the draft order.
There was surprisingly little comment from the industry on this SRO merger, given the outcry that usually results from anything as potentially sensitive as regulatory jurisdiction.
But Wolburgh-Jenah says she wasn’t surprised by the quiet response for two reasons: the industry was kept well informed of the IDA’s plans, so nothing really came as a surprise to most firms; and many on the Street just want to see the deal done.
Indeed, when these approvals are finally cemented, the merger of the IDA and RS will represent the culmination of several years of toil. The transaction has taken far longer to negotiate and to carry off than any corporate merger would ever take.
By the time the merger closes, three years will have passed since the push began to get this deal done. Former IDA president and CEO Joe Oliver proposed the creation of a single, national SRO in a speech in late June 2005, and the idea had been kicking around for some time before that.
At the time, Oliver was hoping the Mutual Fund Dealers Association of Canada would also be part of the combination. While that may yet happen, the MFDA resisted the initial overture, leaving the IDA and RS to put together a simpler, two-party deal.
Yet, combining the two entities has proven to be anything but simple.
Wolburgh-Jenah is pleased that the merging SROs haven’t been too distracted by the long, drawn-out merger process, and that they have been able to carry out their day-to-day responsibilities while all of the merger-related work has been underway.
The long-term benefits of combining the two organizations, as originally imagined by Oliver — generating synergies, increasing operational efficiency, the elimination of regulatory gaps and overlaps, increased investor confidence and a more secure role for self-regulation — may be some time away yet.
@page_break@But, Wolburgh-Jenah says, some benefits are already apparent: “A lot of good has already come out of it. There have been improvements for both organizations just going through this process.”
She points to an improved governance model and infrastructure. And, she adds, staff codes of conduct have been developed as part of the merger, which improves the organizations.
The benefits of the combination will likely take some time to trickle down to the firms, however, as the integration at the operational level takes shape in the combined SRO. Wolburgh-Jenah says the new SRO is already considering how it may be able to do things better under the new structure.
For example, she suggests, it could streamline the audit process by sending out teams to carry out financial, sales compliance and trade-desk reviews in one visit rather than doing these reviews on three separate occasions.
“These are some of the things that we’re going to be exploring, and trying to implement,” she says. These sorts of improvements should start emerging in the first year of operation, she adds.
In the meantime, the final touches are being put on the deal. And, until the new SRO actually launches, nothing is certain. Even the new name isn’t 100% definite.
Nevertheless, the IDA has issued a notice that outlines how firms that are currently members of the IDA and their individual registrants will become members of the new IIROC. Existing IDA members will go through an abbreviated application process, which is intended to ensure that the new IIROC enjoys continued jurisdiction over its dealer members. Individuals will be automatically subject to the IIROC’s jurisdiction on June 1, when their dealer becomes a member of IIROC.
Yet that won’t be the end of the IDA, either. To ensure that nothing slips through the cracks when the new SRO comes into being, its jurisdiction over dealers and reps will cover activities that were under IDA jurisdiction prior to the combination.
The IDA will also remain in existence to carry out investigations and enforcement proceedings that are based on events that occurred before the merger. Once the board is confident that all of such cases have been dealt with — which is expected to be about five years — the IDA will finally be wound up.
It seems the very long wait for this SRO merger to wrap up should finally be over before the start of summer. IE
Long wait almost over for merged regulator
Five years in the making, deal to merge IDA and RS needs only provincial approval
- By: James Langton
- April 28, 2008 April 28, 2008
- 14:11