Almost since the birth of the Mutual Fund Dealers Association of Canada in 1998, the prospect that a single self-regulatory organization would one day be created has hung in the air. Now, the SROs are broaching the idea with their members.

Talk of a possible merger between the MFDA and the Investment Industry Regulatory Organization of Canada, both based in Toronto, has ramped up in recent months amid the latest push to consolidate provincial regulation into a single national regulator — and in the wake of a financial crisis that has put regulatory costs under greater scrutiny. Against that backdrop, the MFDA and IIROC are surveying their members to find out whether they would find a merger appealing.

The last time the MFDA put this question to its membership, in a similar survey in 2006, the fund dealers were ambivalent. At that time, about one-third of member firms said they would support a merger with IIROC’s predecessor, the Investment Dealers Association of Canada. A few more, 38%, were against such a merger, while 28% offered no opinion.

At that time, those who favoured a merger between the two SROs thought such a deal made sense primarily because of the potential to save on costs and to simplify member firms’ compliance obligations.

Those who opposed a merger argued that firms in the fund dealer world and the investment dealer world have very different business models — and merging the two SROs could unnecessarily strain smaller fund dealers.

Of course, the business landscape has changed substantially since 2006. The entire financial services industry has weathered an unprecedented financial crisis as well as a significant recession. Although fund dealers have come through this tumultuous period better than some other sectors of the industry, business has suffered.

For one thing, many of those smaller fund dealers have already disappeared. In 2006, the MFDA had 175 members, representing about $276 billion in assets under administration. Now, it’s down to 136 members, with another seven in the process of resigning (although their collective AUA is up to $316.4 billion). Still, there has clearly been some significant attrition among the smaller firms.

At the same time, regulatory costs continue to grow. In 2006, total membership fees collected by the MFDA were about $18.5 million, and its expenses for the year came in just shy of $18 million. In 2010, fees topped $24.7 million, while total expenses were $26.3 million; this was after the regulator cut expenses by about $1 million by freezing salaries, cutting senior executives’ pay, restricting travel and deferring some technology spending.

However, those cutbacks can’t be maintained without inviting greater employee turnover and compromising the quality of regulation. So, the MFDA forecasts its expenses will increase to $29 million for fiscal 2011.@page_break@Over at IIROC, costs are rising sharply as well. In 2010, it spent $72.7 million regulating its members ($48.6 million of that on the dealers; the rest on marketplaces). For fiscal 2011, that is expected to rise to slightly less than $86 million, primarily driven by the flourishing of multiple markets and the need to bolster the SRO’s market-surveillance capabilities.

With these financial pressures facing the dealers, a merger may look more appealing now than it did five years ago — particularly if such a merger can generate cost savings. Also, IIROC now has some experience with the tricky task of merging regulators, having been created through a merger between the IDA and Market Regulation Services Inc. in 2008.

The big question is whether the member dealers now think a merger is a good idea, which is why the SROs are canvassing their members for their opinions.

“My goal in doing this,” says Susan Wolburgh Jenah, IIROC’s president and CEO, “is to get a sense of the views of the members as to the desirability of going down this road, and to explore the drivers of support — or lack of support [for a merger].”

The MFDA is undertaking a similar survey of its own, which asks not only whether member dealers support a merger but how the combined SRO should look if such a merger were to take place.

Specifically, the MFDA survey aims to explore: which policies should be harmonized, and whose standard should be adopted (MFDA or IIROC) in a variety of areas; how should the merged entity be structured and governed (for example, should there be a separate division for fund dealers within IIROC); and how the board should be structured. The MFDA survey also seeks input on timing and asks whether it makes sense to wait until a national regulator is established.

The last time the MFDA asked its members about a possible merger it was a Yes/No question. This time, says Larry Waite, president and CEO of the MFDA, the SRO is seeking a more detailed response.

Most important, though, is whether the level of support for a merger has changed in the past five years. Two-thirds of MFDA members would have to support a merger for it to go ahead.

“Unless there is a strong majority of our members in support of a merger,” says Waite, “my view is we shouldn’t spend any more time and resources on the issue now. This is something the industry should decide it wants to do, and then the MFDA board and the [Canadian Securities Administrators] would determine if it is in the public interest.”

If the surveys reveal a high level of support for a merger among both IIROC and MFDA members, adds Wolburgh Jenah, “I expect we would undertake exploratory discussions — with each other and with our respective boards. While I see pros and cons of going down this road, there is certainly a rationale to support it.” IE