BCN 2003/54 - Notice and Request for Comment - Mutual Fund Dealers Association of Canada Application for Amendment and Restatement of Its Recognition Orders and Application for Consent to Enter into a Co-operative Agreement in Québec [BCN - Rescinded]
The Mutual Fund Dealers Association of Canada (the MFDA) has submitted an application to the securities regulatory authority in each of Alberta, British Columbia, Ontario, Saskatchewan and Nova Scotia (the Recognizing Jurisdictions) to amend and restate the orders of each of the Recognizing Jurisdictions recognizing the MFDA as a self-regulatory organization (the Recognition Orders). The amendments are requested in order to:
(a) reflect changes in the MFDA’s governance structure;
(b) clarify the MFDA’s ability to enter into arrangements with another party to perform certain regulatory functions; and
(c) make housekeeping amendments to streamline the current Recognition Orders.
The MFDA has also submitted an application to the Recognizing Jurisdictions for consent to enter into an arrangement in Québec with the Bureau des services financiers (the Bureau) and the Chambre de la sécurité financière (the Chambre) for these agencies to perform certain regulatory functions with respect to MFDA Members and Approved Persons in Québec.
The Recognizing Jurisdictions (including the Ontario Securities Commission) are publishing for comment both applications of the MFDA and the related documents, all of which are available from the OSC Bulletin through the OSC website. We are seeking comments on all aspects of the applications and related documents. We also request specific comment on certain matters identified below and have highlighted certain important aspects of the applications.
A. MFDA’S CORPORATE GOVERNANCE CHANGES
Under the terms and conditions of the current Recognition Orders, the MFDA is required to review and make changes to its governance structure to ensure that, among other things, there are a reasonable number and proportion of directors on the MFDA’s board to represent the public interest and the different MFDA members. The MFDA Corporate Governance Committee completed its review and submitted a report to the Commission with recommendations for changes to the MFDA’s governance structure.
The MFDA subsequently asked the Recognizing Jurisdictions to approve certain by-laws that adopt the recommendations included in the report of its Corporate Governance Committee. By-laws No. 5 and No. 6 were published for public comment by the Ontario Securities Commission in August 2003 and were not objected to in British Columbia.
As a result of the proposed governance changes, the terms and conditions of the current Recognition Orders with respect to governance will no longer be relevant. The MFDA, therefore, has applied to amend these terms and conditions to reflect the new governance structure.
B. MFDA’S ABILITY TO DELEGATE REGULATORY FUNCTIONS
1. Co-operative Agreement
The MFDA is not recognized or approved as a self-regulatory organization (SRO) in Québec and is not able to conduct its regulatory activities in respect of its Members in Québec on the same basis as it does in other provinces and territories. In order to ensure that MFDA Members and their Approved Persons operating in Québec are properly regulated, the MFDA has struck an agreement with the Bureau and the Chambre, who have jurisdiction over mutual fund dealers and salespersons operating in Québec, to co-ordinate their regulation (the Co-operative Agreement).
The objectives of the Co-operative Agreement are to avoid regulatory inefficiencies and to preserve and enhance the respective separate mandates of the Bureau, the Chambre and the MFDA. Under the Co-operative Agreement, the Bureau, the Chambre and the MFDA will co-ordinate the various regulatory functions in the following manner:
(a) Prudential regulation, including capital and insurance requirements
- the MFDA can assist the Bureau in conducting prudential examinations
- the MFDA can take enforcement actions against a Member operating in Québec in respect of prudential matters
(b) Business conduct and sales practices regulation
- Members and Approved Persons operating in Québec complying with the regulations of the Bureau and the Chambre relating to business conduct and sales practices will be deemed to comply with MFDA rules relating to the same subject matter
- the Bureau and the Chambre will conduct business conduct and sales practices examinations, and the MFDA can request to assist in these examinations only under certain special circumstances described in section 3.3.1 of the Co-operative Agreement
- only the Bureau or the Chambre will take enforcement actions against a Member or an Approved Person operating in Québec in respect of business conduct and sales practices matters
(c) Complaints Handling
- the MFDA will refer complaints regarding conduct of its Members and Approved Persons in Québec to the Bureau and the Chambre
- the Bureau and the Chambre will refer complaints regarding conduct of MFDA Members and Approved Persons outside Québec to the MFDA
(d) Policy development
- the Bureau, the Chambre and the MFDA will keep each other advised of the development or proposed development of new or amended regulations, and consult with each other to ensure rule harmonization.
In practice, MFDA Members will be required to comply only with the regulations of the Bureau relating to business conduct and sales practices in Québec. Approved Persons acting only in Québec will be required to comply only with the regulations of the Bureau. The Co-operative Agreement also provides for a Coordination Committee, made up of staff of the MFDA and the Bureau, that will:
- develop similar compliance examinations, and
- work towards consistent and harmonized rules.
The Co-operative Agreement also provides for the sharing of information among the Bureau, the Chambre and the MFDA with respect to the status and conclusion of complaints, among other things.
Under the current and proposed Recognition Orders, the MFDA must receive consent from the Recognizing Jurisdictions to make arrangements with another party to perform certain of its regulatory functions. The MFDA, must receive the consent of the Recognizing Jurisdictions to enter into the Co-operative Agreement before the agreement can become effective.
We are requesting comment on the arrangement under the Co-operative Agreement, specifically with respect to the following:
Question 1: Would the arrangement under the Co-operative Arrangement create risk to:
- the MFDA,
- the MFDA Investor Protection Corporation or any other compensation fund approved for mutual fund dealers,
- the mutual fund dealer industry in general, or
- the investing public?
Question 2: If so, how could the risk be mitigated?
2. MFDA’s Ability to Delegate Enforcement Function
The Recognition Orders allow the MFDA to make arrangements to have its compliance function carried out by another party; however, the MFDA cannot delegate its enforcement function to another party. The Recognition Orders also do not contemplate a situation where the party performing the compliance and enforcement functions will be monitoring and enforcing compliance with the party’s own rules rather than with the MFDA rules. The MFDA has applied to amend the terms and conditions of its Recognition Orders in this respect.
We are requesting comment on the delegation of regulatory functions by an SRO to another party, specifically:
Question 3: Under what conditions should an SRO be allowed to delegate its enforcement function?
C. HOUSEKEEPING AMENDMENTS TO THE TERMS AND CONDITIONS OF RECOGNITION
In its application for amendment and restatement of its Recognition Orders, the MFDA has also proposed to remove certain terms and conditions that were transitional and have already been satisfied by the MFDA. In addition, the provinces of British Columbia, Saskatchwan and Ontario proposed to extend the suspension period for MFDA Rule 2.4.1, Remuneration, Commissions and Fees - Payable by Member Only to December 31, 2006 to allow those Recognizing Jurisdictions sufficient time to consider all issues relating to this rule, and to approve any resulting legislative amendments.
In British Columbia, BCI 32-503, Registration Exemption for Salespersons' Corporations sets requirements for paying commissions to corporations that are not registered.
D. COMMENT PROCESS
You are asked to provide your comments in writing and delivered on or before January 12, 2004, addressed to the attention of the Secretary of the Ontario Securities Commission, 20 Queen Street West, 19th Floor, Box 55, Toronto, Ontario M5H 3S8.
We request that you submit a diskette containing an electronic copy of your submission. We cannot keep submissions confidential and we will publish a summary of written comments we receive during the comment period.
Questions may be referred to:
Legal Counsel, Market Regulation
Senior Accountant, Market Regulation
December 12, 2003
Douglas M. Hyndman
This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.