CSA releases review of MFDA

Despite advisor attitudes to the contrary, the Mutual Funds Dealers’ Association processes are efficient, effective, consistent, and fair, according to the Canadian Securities Administrators Oversight Review Report.

“The MFDA’s Compliance and Policy departments continue to guide its maturing membership towards a culture of compliance and are reasonably responsive to emerging industry trends,” the report says.

Based on a review of enforcement files, the recognizing regulators (RRs) determined the MFDA “acted decisively against misconduct” and the regulators found the sanctions imposed to be reasonable.

All the same, the CSA has several high and medium priority recommendations for the SRO. Of particular concern were governance issues, which the BCSC is continuing to review.

The CSA has recommended the MFDA provide more details to its members and the public about its consultation process during policy development, the results of its consultations and its responses to significant comments. Such actions would mane the logic behind decisions more transparent to those affected.

On the enforcement front, the CSA recommended the MFDA maintain better documentation of the details of warning calls to advisors, because these calls are integral to the completion of case assessment and investigation files. The effectiveness of warning letters should also be reviewed.

“The majority of warning calls follow the established script and involve no other material dialogue,” the MFDA said in response. “We do, however, acknowledge that in some cases relevant information can be exchanged in these calls, and while notes are often maintained in those situations, it would be of assistance to maintain a standard procedure for ensuring notes of these calls are maintained in the files. We are revising our procedures accordingly.”

The securities commissions of Nova Scotia and New Brunswick recommended that the MFDA conduct “an appropriate number of New Brunswick and Nova Scotia branch office examinations every year,” deeming this to be a high priority recommendation. The MFDA has agreed.

Another high priority recommendation is that the MFDA provides specific direction to members on resolving suitability issues. For example, one case that was reviewed showed that two clients were using excessive leverage in their portfolios, accounting for 95% and 100% of their net worth, respectively.

While the MFDA did contact the dealer regarding this high level of leverage, it did not provide clear direction to the member as to how to resolve the issue.

“We agree we should try to provide as much direction as possible to members on addressing deficiencies raised in an examination,” the MFDA responded. “In this regard, we have provided extensive training to staff and guidance to Members with respect to leverage suitability, including MR-0069 ‘Suitability Guidelines’, Bulletin #0355-C ‘Common Sales Compliance Deficiencies and Appropriate Corrective Action’ and Bulletin #0431-C ‘Leverage Supervision Guide’.”

The report recommends that the MFDA reassess its three-year cycle for reviewing higher-risk Level 2 or 3 dealers, and subject these firms to more frequent examinations.

The CSA recommended that when a member fails to include certain accounts in a Financial Questionnaire and Report, the MFDA should also consider and comment on the impact of such omissions on the member’s risk adjusted capital or earnings, and on the overall completeness of the member’s books and records.

Click here to read the report.

The review was conducted the regulators of the seven provincial that recognize the MFDA as an SRO: Alberta; British Columbia; Manitoba; New Brunswick; Nova Scotia; Ontario; and Saskatchewan.

(07/09/10)