Regulatory Capture Of Self-Regulatory Organizations (SROs) In Canada: Do SROs Serve Public Or Industry Interests?

The Canadian securities industry relies heavily on self-regulation, with two self-regulatory organizations (SROs), the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) regulating the industry. The former regulates all investment dealers and trading on Canada\u27s debt and equities markets, while the latter governs domestic distributors of mutual funds, except fixed-income products. As expected in an SRO model of regulation, the structure of both IIROC and the MFDA presents a risk that industry members may influence or capture its operations, advancing industry interests at the cost of its public interest mandate. This Article examines the current regulatory framework of IIROC and the MFDA, including their corporate governance structure and enforcement mechanisms. It finds that the existing structure of both SROs could favor industry interests above investors\u27 (public) interests, as there are few safeguards in place to avoid the conflict of interests that is inherent to adopting an SRO structure. Given the deficiencies in the current regulatory system, this Article assesses the implications of the proposed merger of IIROC and the MFDA into a single new SRO, concluding that it is a positive development. However, to effectively address the public\u27s concerns with the current structure, this Article emphasizes the need for a more investor-focused approach in designing the new SRO regulatory framework and more robust monitoring of the new SRO by the Canadian Securities Administrators