NIN 2000/25 - Mutual Fund Dealers Association of Canada - Application for Recognition as a Self-Regulatory Organization [NIN - Rescinded]
| Published Date: | 2000-06-16 |
|---|---|
| Effective Date: | 2000-06-15 |
The Commission, together with certain other members of the Canadian Securities Administrators (the “CSA”) is providing information on certain aspects of the Mutual Fund Dealers Association of Canada’s (the “MFDA”) application for recognition, and is advising on how to provide comments during the comment period ending September 15, 2000. The Commission is also advising of the status of proposed amendments to the Securities Rules which will require all mutual fund dealers and securities dealers to become members of a self-regulatory organization (“SRO”).
Background and Recognition Process
The Mutual Fund Dealers Association of Canada (the “MFDA”) was established in June 1998 through the joint sponsorship of the Investment Dealers Association of Canada (“IDA”) and the Investment Funds Institute of Canada (“IFIC”), with the objective of becoming the SRO for mutual fund dealers.
In December 1999, the MFDA applied for recognition in British Columbia, Alberta and Ontario, the three provinces where it proposes to have regional offices as an SRO for mutual fund dealers. The Commission, the OSC, and the ASC will be referred to in this Notice as the “recognizing jurisdictions”.
As part of its application for recognition, the MFDA delivered information about its structure to staff of the recognizing jurisdictions, together with copies of its proposed by-law, rules, policies and forms (the “Draft By-law and Rules”). The proposed recognition criteria, the application and the Draft By-law and Rules are being published for comment by the OSC and the MFDA. Persons wishing to comment should obtain these documents from either the MFDA at www.mfda.ca or from the OSC at www.osc.gov.on.ca. Comments will be accepted until September 15, 2000.
Staff of the Commission will make recommendations to the Commission following a review of the recognition application and any public comments that may be received by the OSC and the MFDA. These recommendations will likely suggest terms and conditions that staff believe should be required for recognition of an SRO for mutual fund dealers, and may contain additional terms and conditions that respond to specific issues arising during review. If staff identify by-law or rule changes or other issues that they believe are important, they may recommend that the Commission impose their future implementation as a condition of recognition, rather than delay recognition until the issues are resolved. After considering these recommendations, the Commission will consider the formal recognition of the MFDA as an SRO for mutual fund dealers with any terms and conditions that it considers appropriate. It is expected that similar recognition criteria will be adopted by each of the recognizing jurisdictions.
The MFDA has requested that its recognition as an SRO for mutual fund dealers occur on or before January 1, 2001.
Staff Review of MFDA By-law and Rules
Since the MFDA submitted its application for recognition, staff of the recognizing jurisdictions have reviewed the Draft By-law and Rules to ensure that they meet the expectations of the recognizing jurisdictions in supporting the establishment of the MFDA. Although staff will be making their final recommendation on the acceptability of the Draft By-law and Rules after reviewing any public comments, the Draft By-law and Rules published with the MFDA application for recognition largely meet the expectations of staff, with four notable exceptions.
Staff of the recognizing jurisdictions asked the MFDA to make three substantive changes to the Draft By-law and Rules and do not agree with the MFDA’s proposed transition periods in respect of the impact of the capital Rules for the various categories of members. The position of staff of the recognizing jurisdictions on the three substantive areas are set out below, along with their position on the proposed transition periods.
Financial Planning
The draft Rules of the MFDA provide that the financial planning business of a registered salesperson does not have to be supervised by a dealer if that business is run through an insurance brokerage (that is, “a person which is regulated by any governmental authority or statutory agency other than a securities commission”). Staff of the recognizing jurisdictions do not agree with this position. The MFDA’s draft Rules contradict the stated position of the CSA in the CSA Distribution Structures Paper1
1 CSA Notice 33-304
that salespersons who provide financial planning services must provide these services as employees or agents of the dealer which sponsors their registered securities activities.
The Notice accompanying proposed Multilateral Instrument 33-107 Proficiency Requirements for Registrants Holding Themselves Out as Providing Financial Planning Advice2
2 NIN #99/46
describes the CSA’s analysis regarding financial planning. The CSA are of the view that where a mutual fund salesperson also offers clients comprehensive, integrated, objective, financial advice that purports to be tailored to a client’s particular circumstances, whether that advice is designated as financial planning or otherwise, that advice is necessarily part of the registrant’s regulated sales and advisory activities. As such, staff of the recognizing jurisdictions are of the view that the activity of “financial planning” for mutual fund dealers and their salespersons cannot be separated from the securities regulatory regime.
In supporting and encouraging the establishment of an SRO for mutual fund dealers, the CSA anticipated that this SRO would take responsibility for all the currently regulated activities of mutual fund dealers and salespeople. The draft Rules of the MFDA split the regulation of MFDA member salespersons between the MFDA and the CSA, such that “financial planning” activities would remain subject to direct CSA regulation. Staff of the recognizing jurisdictions are not satisfied with this result. Furthermore, the CSA expects that the IDA will adopt rules to regulate the financial planning activities of the salespersons of their members. Staff of the recognizing jurisdictions have advised the MFDA that the standards for its members must meet those of the IDA.
Staff will continue to discuss these issues with the MFDA during the comment period. The CSA Distribution Structures Paper and the CSA financial planning initiative are aimed at addressing investor issues raised by the public and the industry and in staff’s view, an SRO for mutual fund dealers cannot fulfil its mandate without adherence to the positions taken in these two initiatives.
Client Account Statements
The draft Rules provide for a distinction between Member’s client accounts that are held in “nominee” name (that is, in the name of dealer) with fund companies and those that are held in “client” name with fund companies. With respect to client name accounts, the draft Rules require that statements only need be sent to clients once every twelve months. For nominee name accounts, the draft Rules require statements to be sent to clients either monthly or quarterly depending on the level of activity in that client’s account with the Member. The Recognizing Jurisdictions are of the view that statements which contain the information set out in the draft Rules, must be sent by dealers to clients on a monthly or quarterly basis (depending on the level of activity) regardless of how those accounts are registered with a mutual fund company.
Staff of the recognizing jurisdictions will continue their discussions with the MFDA on this important investor protection matter. Regular client statements are necessary to ensure that an investor receives information on the status of his or her activities with the dealer and as a form of control mechanism for both the client and the dealer. Staff are of the view that this position is consistent with the current securities law requirements and the rules of the IDA.
Performance Data for Individual Accounts
Staff have indicated to the MFDA that the Rules should either mandate a specified format for Members to use when purporting to provide clients with individualized performance data, or prohibit the provision of this performance data until guidance can be given. The MFDA have not so provided in the draft Rules. Staff expect to continue to discuss this issue with the MFDA and will make a final recommendation once all public comments have been reviewed.
Transition Periods for Capital
The MFDA describes in its application how it proposes to phase in the increased capital requirements for Members - essentially over a three year period so that all Members must meet the relevant capital requirements set out in the draft Rules by the end of the third year after recognition of the MFDA as an SRO. Staff believe that the proposed transition period is too long having regard to the widely held concerns amongst the industry and the regulators that current capital levels for mutual fund dealers are too low and must be increased in order to achieve increased levels of investor protection. Commission staff note that in British Columbia, the minimum capital requirements for mutual fund dealers under securities legislation is $25,000 where no client funds are held, and $75,000 where client funds are held3.
3 See section 19 of the Securities Rules
Mutual fund dealers should note that notwithstanding that the MFDA may provide a transition for Level 1 dealers, unless an exemption is sought and obtained, the capital requirements set out in securities legislation will continue to apply.
Staff of the recognizing jurisdictions will continue to discuss their concerns about the transition periods with the MFDA during the comment period and encourage any dealer located in British Columbia who may have concerns with the transition periods to make submissions as described at the OSC and MFDA websites as to the practical need for the transition proposed by the MFDA.
Dual Licensees
The draft Rules do not provide for any particular treatment for salespersons who are registered with the Commission (or the other recognizing jurisdictions, as applicable) and who are also licensed to sell insurance products. The recognizing jurisdictions acknowledge that MFDA membership may impact on dually licensed salespersons in a unique way and have committed to work with the Canadian insurance regulators to achieve a mutual understanding and resolution to the issues.
Continued Applicability of Securities Legislation
Mutual fund dealers and their salespersons should note that even after they become members of the MFDA they will also be required to continue their registration with, and comply with all applicable laws and requirements of the recognizing jurisdictions, as applicable, including the capital and notification requirements of securities legislation.
Related Initiatives
In July, 19984,
4 NIN#98/39
the Commission published for comment proposed amendments to the Securities Rules to require all mutual fund dealers and securities dealers to become members of a recognized SRO. The Commission anticipates publishing the proposed amendments for a second comment period in late July, 2000. The proposed amendments will require all mutual fund dealers to apply to become members of the MFDA by February 1, 2001, and to obtain membership by early 2002. Securities dealers, depending on the registration they wish to maintain, will be required to become a member of either the Investment Dealers Association of Canada (“IDA”) (if they wish to be able to trade in the types of securities their current registration would permit), or the MFDA (if they wish to restrict the securities they can sell to mutual funds).
The proposed amendments are expected to come into force on the same date that the Commission recognizes the MFDA as an SRO. That date is anticipated to be January 1, 2001.
Request for Comment
We refer you to the OSC website at www.osc.gov.on.ca or the MFDA website at www.mfda.ca for the full text of the Draft By-law and Rules, and for details on how to submit your comments. Comment is also invited on the recognition criteria staff propose to use to assess the application of the MFDA in determining whether to recognize it as an SRO for mutual fund dealers. These criteria are also set out at the web addresses provided above.
The OSC has advised that comments on the MFDA response to the proposed Recognition Criteria or on the Draft By-law and Rules of the MFDA will be passed on to the MFDA by the OSC for response by the MFDA
DATED at Vancouver, British Columbia, on June 15, 2000.
Stephen Wilson
Executive Director
Ref: CSA Notice 33-304
NIN#99/46
Section 19 Securities Rules
NIN#98/39
This NIN refers to other documents. These documents can be found at the B.C. Securities Commission public website atwww.bcsc.bc.cain the Commission Documents database.