Distributors fear regulatory changes

By Dean DiSpalatro | June 1, 2011 | Last updated on June 1, 2011
3 min read

A regulatory sea change is on the horizon, but don’t expect it to bring consistency coast to coast, Joseph Groia argued at Advisor Group’s annual Distributors’ Summit.

Groia, principal of Groia & Company Professional Corporation, expects the Supreme Court of Canada will permit the formation of a national securities commission, but argued it won’t make much difference.

“I’m not sure it’s going to extend to the registration of brokers. If it doesn’t, a lot of the compliance function related to the selling of products and other areas [dealers] are concerned about will stay at the provincial level,” Groia said, adding we’re likely to see a national enforcement agency that places more emphasis on dealer liability and responsibility.

Groia noted Quebec certainly will not participate in a national agency, and suggested both B.C. and Alberta will take a pass as well. The result will be a national regulator that “isn’t truly national, and run primarily by Ontario.”

The future of SROs

Both Larry Waite, president and CEO of the MFDA, and Susan Wolburgh Jenah, president and CEO of IIROC, have indicated it’s only a matter of time before the MFDA and IIROC join forces. The argument for merging the MFDA and IIROC into one national SRO is the same as the rationale behind the national securities regulator, Groia explained.

“[With] a combined regulator there would be less confusion with numerous layers of regulation. […] Harmonized MFDA-IIROC rules would [also] reduce compliance costs and ensure more consistency for those firms that are members of both SROs and/or operate in different jurisdictions.”

While merging the MFDA and IIROC makes sense, it’s the wrong issue to focus on. The core priority, in Groia’s assessment, is every dealer of securities-related products in the country should be required to participate in an SRO. He noted at least three out of four consumer complaints are directed either towards dealers who are not members of an SRO, or those who are not dealers and fall completely outside any regulatory framework.

“They exist in a fringe marketplace. The Earl Joneses of this world have existed for a long time, and will continue to exist until there is a simple rule that says if you want to deal with the public in a securities-related product — be it life insurance, hedge funds, any kind of limited-market investment — you have to be a member of an SRO,” said Groia.

“The securities commission doesn’t do a good job of regulating the [Limited Market Dealers] market, and they do virtually no job of regulating the hedge fund market, and these are areas [with] real problems.”

Eliminating this space on the fringes of the marketplace should be the first priority of any national SRO, Groia said. The issue of a national SRO agency is connected to the battle over the proposed national securities regulator. If, as is widely expected, Quebec, B.C. and Alberta don’t sign on, the legal basis for forcing these provinces to participate in a national SRO agency would be all but stripped away, Groia explained.

“If they don’t [join] it means we’re going to see mini-SROs in those provinces dealing with issues of local concern, and there’s a real chance we’ll go back to the ‘good old days’ — the late 1980s, when we still had the wild west of the Vancouver stock exchange and the Alberta stock exchange, and when there was an opportunity to raise high-risk venture capital at a minimum of compliance cost and a minimum of risk.”

The most likely outcome is a not-so-national national securities commission, a not-so-national national SRO agency, and local agencies, with an as-yet undetermined role, for the outliers.

“We’re moving into a period where we’re going to get less clarity,” said Groia. “I hope after a period of real turbulence we’ll end up with a better system. But I wouldn’t put my money on ‘better’ — though I’d certainly put it on ‘interesting.’ ”

Dean DiSpalatro