2002 in review: MFDA begins heavy lifting of compliance and enforcement

(December 31, 2002) After years of preparation, the Mutual Fund Dealers Association got down to the business of regulating dealers in 2002. This was the year the MFDA rolled up its sleeves to commence compliance operations, fielding complaints and enforcing the rules.

The MFDA currently has 187 members, and is processing the applications of another 36 firms. Securities regulators extended the deadline for dealers to join the MFDA until April 1, 2003. The members and applicants have roughly $223 billion in total assets under administration.

“We’re starting to regulate,” said MFDA chief operating officer Larry Waite in a year-end interview with Advisor.ca. “We’re currently out both in B.C. and Ontario doing compliance reviews. We’ve done a couple in Manitoba.”

The MFDA started its compliance reviews in the fall of 2002 and the self-regulatory organization is mandated to review all of its members within three years.

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“Just because the MFDA is in doing a compliance review does not mean in any way mean that there is a problem with that dealer. We’re doing them all,” noted Waite.

“One person actually phoned me up and said. ‘People think I must be very bad because you’re in here [doing a compliance review].’ People should not think like that,” Waite said.

“We look at this first wave of compliance reviews as more educational — educational for our staff and for the dealers.”

Another major job of the MFDA is to deal with complaints about dealers. Securities commissions began referring complaints to the SRO in mid-November. Complaints will also arise from compliance operations. Waite said the MFDA has not yet taken any enforcement actions, and he does not expect any for a while.

When asked about the MFDA’s relationship with dealers, Waite said the days of confrontation are long gone. “If I look back to 1999, there was a lot of frustration in the industry, a lot of unanswered questions. And I think our relationship is now much more positive.”

Indeed, Waite has been given credit within the industry for improving communication between regulators and dealers after the MFDA’s rocky start. For his part, Waite welcomes the cooperation offered by dealers.

“I think people are seeing that we’re doing what we said we would do,” he told Advisor.ca.

Fees are a major issue for mutual fund dealers, and not just MFDA membership fees. Dealers will also be billed fees to fund the MFDA’s investor protection fund, the new National Registration Database of securities regulators and the fledgling ombudsman network for the financial services industry, among others.

“I sympathize tremendously with the pressure that’s on dealers to pay for a lot of this stuff,” said Waite.

In October, the Federation of Independent Mutual Fund Dealers (FIMFD) launched a petition drive in Ontario to muster the support of financial advisors to lobby provincial governments to pay the costs of launching the MFDA. The FIMFD asked advisors to write their members of the legislature and/or provincial Finance Minister Janet Ecker.

Securities commissions backed a $12-million line of credit for the MFDA. That loan is being repaid from the fees charged to members of the SRO. Waite said the MFDA board supports the idea of having provincial governments foot the startup bill. B.C. and Alberta have indicated certain flexibility in offsetting the MFDA costs of dealers, however, Ontario has not responded to the FIMFD on this matter.

“The pendulum has swung to the point where we need to be very careful about the costs associated with regulation. We’re driving our industry into a non-economic model,” said FIMFD chair George Aguiar of Toronto.

“People say to me, ‘What am I getting for my fees?'” said Waite. “You’re getting the reputation of operating in a regulated industry, which wasn’t totally the case before.”

“We ought to be held to a higher standard, with the type of business were involved in,” Aguiar told Advisor.ca. “It is a marked moment for the independent channel that we have our own SRO, so we have reached a crossroads.”

The FIMFD represents 39 independent dealers with more than 14,000 advisors and over $75 billion of assets under administration.

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Filed by Jim MacDonald, Advisor.ca, jmacdonald@advisor.ca.

(12/31/02)