OTTAWA — Talks about the proposed merger between two Toronto-based securities industry self-regulating organizations are hiccupping along.
The idea of merging the Investment Dealers Association of Canada and Market Regulation Services Inc. was raised last spring (InvestmentNews, June 5, 2006).
On Dec. 20, the IDA and Market Regulation Services, known as RS, jointly announced the appointment of Susan Wolburgh Jenah, vice chairman of the Ontario Securities Commission in Toronto, as president and chief executive of the proposed new SRO. But tellingly, on July 3, the IDA announced her appointment as its president and chief executive, effective July 1, without mentioning RS.
In December, Ms. Wolburgh Jenah made the case for the merger.
“Combining member and market regulation into a single entity makes a lot of sense. This is a unique opportunity to build on the considerable depth of knowledge and expertise that resides in each of the merging organizations to further enhance the high quality of the regulatory system in Canada,” she said in a statement.
Others, notably the burgeoning alternative-trading-system sector, beg to differ with Ms. Wolburgh Jenah’s assessment.
Last November, RS issued initial plans for overhauling its fee structure.
In response to the initial proposals, four alternative-trading systems jointly submitted a comment letter. “The fee proposal is seriously flawed, violates the principles of fairness, transparency and accountability, and should be withdrawn,” Toronto-based Canadian Trading and Quotation System Inc., said in the letter.
“It replaces a relatively straightforward model with a highly complex and opaque one,” it said. “There is no analysis or justification provided for a complete change in the way RS recovers its costs, which makes it impossible for the affected marketplaces to respond fully and to calculate the impact.”
The issue of conflict of interest also was raised. RS is 50% owned by Toronto-based TSX Group Inc., the Toronto Stock Exchange’s parent.
“While RS’ recognition order requires, among other things, equitable allocation of fees, neutrality among marketplaces and mitigating barriers to entry, we believe that this proposed fee model creates an uneven playing field that favors the incumbent TSX over new entrants,” commented TriAct Canada Marketplace LP, which is wholly owned by New York-based Investment Technology Group Inc. “We would suggest that it would have the net effect of discouraging competition in Canada.”
The potential conflict of interest is made greater by the advent of a new ATS, Alpha (InvestmentNews, May 14). Alpha’s backers primarily are the brokerage arms of banks — including
BMO Capital Markets Corp.,
CIBC World Markets, RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc., all of Toronto, and Montreal-based National Bank Financial Inc.
One securities dealer, Canaccord Capital Inc. of Vancouver, British Columbia, also is involved. Together, Alpha’s backers control about 65% of share trading in Canada.
“We took a [deep] breath when that announcement [about Alpha] was made,” Ms. Wolburgh Jenah told the Globe and Mail of Toronto on July 4.
“We thought about implications of it from a governance perspective and a conflict perspective,” she said. “But we decided it still made sense in terms of the underlying principles and rationale for the merger to go ahead.”
The IDA has other problems.
Fearing a precedent that could spread nationwide, the association is appealing a decision of a Saskatchewan Financial Services Commission panel which doesn’t recognize the association’s power to discipline its former members after they have left the industry (InvestmentNews April 3, 2006).
On June 20, the Saskatchewan Court of Appeal ruled against the IDA, stating: “We accordingly find that the IDA is barred by bylaw 20.7 from proceeding with discipline proceedings against Mac Bain and Neufeld. Its appeal is dismissed with costs to be taxed.”
Nonetheless, the proposed merger keeps chugging along.
The IDA and RS held a joint board meeting in late May to reaffirm unanimously their commitment to the deal.
But many obstacles remain.
Seventy-five percent of IDA member firms must vote in favor of the deal for it to proceed.
Ultimately, securities regulators must give the deal final approval.
But first they have to make up their minds about criteria.
In December, the Canadian Securities Administrators, a Montreal-based forum for provincial regulators, published a report that makes a number of recommendations for SROs. Other SROs include the Canadian Depository for Securities Ltd., Canadian Investor Protection Fund, the Mutual Fund Dealers Association and TSX Group, all of Toronto, the Bourse de Montréal and the Winnipeg (Manitoba) Commodities Exchange.
The report also proposes criteria on which the CSA could evaluate a merger transaction, including the continuing adequacy of a merged SRO, the quality of governance, cost/benefit considerations, SRO staff proficiency, regional accountability, and the impact on competition and market structure.
