Although the prospect of a merger between two Toronto-based self-regulatory organizations, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, was left simmering over the summer, the issue should soon be coming to a boil.

Earlier this year, IIROC and the MFDA had engaged in some high-level, preliminary discussions about the possibility of merging the two SROs. Before heading off on their summer holidays, executives at both IIROC and the MFDA had decided to take the temperature of their respective memberships through surveys that, among other things, sought their views on the merger idea.

Now, the results are in — and the SROs are ready to decide whether to press on with merger talks or return them to the back burner for the time being.

According to IIROC, 63% of the member firms that have responded to its survey support the idea of continuing merger discussions “in principle.” (Based on the response rate, that 63% figure represents 51% of the total number of firms that belong to IIROC.) Just 8% of respondents explicitly oppose the notion of a merger, while almost 30% of respondents are neutral on the idea — neither supporting nor opposing it.

With the majority explicitly in favour of a deal — and only a small number of firms outright opposed — it appears that IIROC’s members are certainly open to merging the two SROs.

“At a high level, there does appear to be significant support among IIROC members to continue discussions about a potential merger,” says Susan Wolburgh Jenah, IIROC’s president and CEO. “A total of 63% of those that participated in the IIROC-commissioned survey clearly see value to pursuing exploratory discussions, and another 30% of those that responded were neutral.”

To the extent that firms do see merit in the idea of consolidating the SROs, most of the expected value to be unlocked by such a move would be in streamlining the regulatory system and in cutting costs.

The IIROC survey found that among those firms that support the idea of a merger, the major benefits they’d expect are: more consistent regulation; more efficient regulation; and the elimination of some existing duplication.

Nevertheless, IIROC isn’t ready to jump into bed with the MFDA just yet. Notwithstanding the support for continued merger talks from IIROC’s member firms, says Wolburgh Jenah: “It is premature to make any commitment about next steps. At this point, we are still reviewing and interpreting the results of the survey, which we shared with the IIROC board this week.”

MERGER ON AGENDA

The MFDA also has the results of its survey in hand but is not releasing them before they are presented at its next board meeting, which was scheduled for Sept. 28 (after Investment Executive went to press). That meeting will probably prove to be the key to whether merger talks advance or fizzle out, given that IIROC appears open to pressing ahead.

MFDA president and CEO Larry Waite confirms that the prospect of a merger will be on the agenda at the MFDA’s board meeting: “With respect to a potential merger with IIROC, the MFDA board will consider a number of factors, including the results of the member survey. And it will decide what further steps, if any, will be undertaken.”@page_break@Waite, who has been with the MFDA since its launch in 1998, has long said that a merger between the two regulators makes sense and that he expects it will happen at some point. The question is whether now is the right time or not.

In the past, MFDA firms have shown themselves to be fairly cool to the idea. The last time the MFDA broached the subject of a possible SRO merger (with IIROC’s predecessor, the Investment Dealers Association of Canada, in 2006) with its membership, 38% of fund-dealer member firms were against the idea, another third had said they would support a deal and the remaining 28% had offered no opinion.

In the intervening years, however, attitudes may have softened. The MFDA’s membership has declined, leaving it with more large firms that run both fund dealers and investment dealers.

As these firms would probably see benefits from consolidating the SROs, the tide of opinion may have shifted a bit in favour of a merger. In addition, the ever-rising cost of regulation may have pushed more MFDA member firms into the pro-merger camp.

COST SAVINGS

However, there are still good reasons to resist an IIROC/MFDA merger. As with any prospective combination, the projected cost savings may turn out to be less than expected — and harder to achieve. And, in the meantime, a merger naturally brings uncertainty, which makes it harder for the SROs to retain, recruit and motivate staff.

Moreover, an IIROC/MFDA combination is not likely to be a merger of equals. The MFDA and its dealer members probably would be the junior partners in such an arrangement. So, there may be some fear that they would get lost within a bigger organization. There also remain certain policy and procedural differences between the SROs that could prove tricky, or unpalatable, to resolve.

And even if there is greater appetite now for a merger than there has been in the past, some firms will question whether it makes sense to go ahead now or wait and see what happens with the latest push to create a national securities regulator before moving ahead.

Indeed, the MFDA survey had sought to answer that question, too. It had asked of those who favour a merger whether it should happen before or after a presumed national securities regulator is created.

The outcome of the proposed national securities regulator debate is relevant because it’s not certain which jurisdictions will ultimately join if such a regulator is formed. For now, Ontario, which is IIROC’s principal regulator, is in; but British Columbia, which primarily oversees the MFDA, is out.

Although the various provincial regulators have been able to co-ordinate their SRO oversight within the Canadian Securities Administrators over the years, it’s not clear how that would work within the context of a national securities regulator — or a partial national regulator.

At this point, the Supreme Court of Canada hasn’t weighed in on the constitutionality of a national securities regulator, so it’s difficult to know whether this represents a meaningful obstacle. That question should be resolved once and for all when the SCC finally rules — probably by the end of the year. IE