Two years of CIRO: enforcement, harmonization and what’s next

It has been nearly two years since Canada’s two capital markets self-regulatory organizations (SROs) — the Mutual Fund Dealers Association¹ and the Investment Industry Regulatory Organization of Canada — integrated to form the Canadian Investment Regulatory Organization (CIRO). Sufficient time has now passed to allow us to reflect on some of the growing pains experienced by the amalgamated organization. As we look to CIRO’s accomplishments and actions to date, there are clear signs of what is likely to come in the future as the capital markets continue to adjust to the new regulator.

Continued efforts to move forward with enforcement and regulatory harmonization will remain core priorities for CIRO in the years to come. These trends will have ongoing impacts on compliance activities and ongoing operations of investment dealers, mutual fund dealers, dual-registered firms, and broader capital markets participants. It will be important for interested parties not only to pay attention to these developments, but also to provide their feedback and commentary on the general progression of dealer regulation.

Regulatory harmonization is progressing

From the outset of the amalgamation project, rule consolidation has been one of CIRO’s highest priorities. Consolidation of the rules governing investment dealers (IDPC Rules) with those governing mutual fund dealers (MFD Rules) began in October 2023. CIRO is considering comments it has received on Phases 1 to 3 of the rule consolidation project. It published for comment Phase 4 of the proposed rules in October 2024, providing a longer, 90-day period for stakeholders to provide comments. Phase 4 encompasses rules that have been assessed as having a material impact on stakeholders and that are mostly unique to the IDPC Rules or MFD Rules.

Phase 5 of the proposed changes will be published in the winter of 2024 and 2025 and will address rules that are common to both sets of rules, and that have been assessed as having a material impact on stakeholders. Following the comment periods for all five phases, CIRO has agreed to publish a comprehensive volume of proposed rules and has indicated that it is targeting the winter of 2025 and 2026 for publication of this consolidation. As a result, stakeholders will have another opportunity to review the consolidated rules holistically.

These assessments, consultations and efforts to achieve rule consolidation are expected to move the needle significantly in realizing CIRO’s vision for harmonization of its rules and regulatory approach. Achieving this goal is expected to assist CIRO in building a more efficient and responsive regulatory framework across Canada. For dealers, it is hoped a consolidated rulebook will assist in easing the compliance burden arising from the previous environment in which there were two different sets of rules and, in some cases, differing approaches to regulation.

CIRO enforcement trends

In its recently released 2023–2024 Enforcement Report, [PDF] CIRO highlighted its enforcement activity over the last year and signalled its enforcement priorities for the future. CIRO noted that its regulatory efforts will allocate resources to cases with the most deterrent value.

The Enforcement Report highlighted key cases prosecuted in the last year and the regulator’s progress towards enhancing its legal authority. Interestingly, 2023–2024 saw a decrease in enforcement activity, both in the number of enforcement decisions rendered and in the number of investigations completed by CIRO compared to the prior year. In 2023, CIRO imposed more than $25 million in fines, costs, and disgorgements. Comparatively, in 2024, CIRO imposed only $14 million in fines, costs and disgorgements, representing a 44% decrease from the prior year. While these financial orders have declined, significantly more of CIRO’s hearing panel orders issued in 2024 have included suspensions and permanent prohibitions against individuals, as opposed to solely focusing on orders against firms. We may see an increase in individually imposed sanctions and penalties in the coming year.  

Continued efforts to move forward with enforcement and regulatory harmonization will remain core priorities for CIRO in the years to come.

The Enforcement Report also highlighted CIRO’s efforts towards unified enforcement decision-making across investment dealer and mutual fund rule cases. The goal is to promote consistency in the cases taken forward from investigation to formal proceedings. In this regard, CIRO adopted harmonized Sanction Guidelines and Enforcement Staff Policy Statements this year, replacing all previous versions for investment dealers and mutual fund dealers.

Another controversial issue under consideration is the use of disgorged funds obtained from those found to have been wrongful actors. CIRO has recently announced a consultation over the use of disgorged funds, including whether, how and under what circumstances they could be returned to aggrieved investors.

Emergence of dual-registered firms

As early as December 2022, CIRO proposed that a CIRO member could become dual-registered as both an investment dealer and a mutual fund dealer. The benefits of dual registration include, among others, the ability to conduct both types of business within the same legal entity without having to upgrade the proficiencies of mutual funds-only licensed advisors.

In 2024, we witnessed an increasing number of CIRO members applying for this new dual-registration status. We expect this trend will continue as we look ahead into 2025. We also anticipate that some organizations, and in particular those that house multiple registered firms, will continue to explore opportunities to consolidate their registered firms and realize related synergies and operating efficiencies. We are hopeful CIRO’s commitment to supporting diverse business models and serving as an agile regulator will help facilitate continued consolidation and innovation.

Advisor compensation proposals

Earlier this year, CIRO published a Consultation Paper regarding policy options for leveling the advisor compensation playing field. This paper proposed potential amendments to the IDPC Rules to harmonize compensation approaches between approved persons governed by the MFD Rules and approved persons governed by the IDPC Rules. One example of a divergence in approach is those governed by the MFD Rules may, in most jurisdictions, direct that compensation they have earned through their sponsoring firm be paid to an unregistered corporation, whereas those governed by the IDPC Rules may not.

CIRO received significant industry feedback in the first half of 2024 regarding three proposed compensation approaches. The alternatives included an enhanced directed commission approach, an incorporated approved person approach, and a registered corporation approach. CIRO and its members, in their continued evaluation of the potential new model, will need to consider a number of important elements of each proposal, including securities regulatory, tax, employment and operational implications.

In 2025, firms and their approved persons will be tasked with weighing the potential benefits to be realized from implementing the new models against the risks and challenges that could arise from implementation.

Client-focused reforms (CFR) Phase 2 sweeps

In 2022, the predecessor SROs and the Canadian Securities Administrators (the CSA) conducted a detailed compliance review related to the CFR Conflict of Interest requirements that came into effect on June 30, 2021. In August 2023, the CSA and CIRO published a Joint Notice providing the results and guidance arising from this detailed review.

As a follow-up to this project, CIRO, together with the CSA, have undertaken a CFR Phase 2 sweep testing of members’ compliance with and implementation of CFR obligations, including know your client, know your product, and suitability determination requirements. Following this assessment, CIRO intends to review the results with the CSA with a view to publishing a joint final report in the coming year.

Market participants will be watching closely for the outcome of this sweep. The perspectives of CIRO and the CSA regarding the extent to which firms and individual advisors have hit the mark regarding the heightened expectations for these core obligations will be important for market participants going forward.

Looking forward

In its 2023–2024 Annual Report, [PDF] CIRO highlighted six strategic objectives that are expected to guide the organization in delivering on its promise that an amalgamation between the two legacy SROs would be beneficial. These include 1) regulatory evolution, including delivering efficient and cost-effective services 2) access to advice, including increasing accessibility and meeting the changing needs of investors 3) investor research, education and protection 4) registration and proficiency, including modernizing the registration regime and proficiency standards for registrants 5) market regulation, including ensuring effective and appropriate  regulation of capital markets that supports fairness and efficiency and 6) integration. CIRO has stated the strategic plan is intended to be its roadmap through to March 31, 2027.

CIRO’s clear focus on regulatory harmonization dovetails with its stated priorities for 2025. With priorities related to integration, rule consolidation, regulatory delivery and operations, and furthering its strategic objectives, there is a fair amount on CIRO’s plate. Nevertheless, these are critical priorities, and they are expected to allow CIRO to navigate regulatory evolution more nimbly while continuing to serve the public interest and maintain the integrity of capital markets.

Having regard to CIRO’s concerns and priorities is critical for regulated firms to manage their risks and opportunities in the near term. The trends reported by CIRO emphasize the meaningful benefits of ongoing and appropriate enterprise risk management. The amalgamated regulator’s escalating reach will undoubtedly have an effect on its member firms, encouraging them and their personnel to develop, maintain and enhance a culture of compliance.

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1. Osler acted for the Mutual Fund Dealers Association in the amalgamation transaction. ↩︎