Industry defends fund-only registration

(September 24, 2004) The Canadian mutual fund industry has come out swinging in response to a suggestion from Ontario’s securities regulator that the fund-only registration category may have outlived its usefulness.

In a discussion paper released this summer citing investing protection concerns regarding certain business arrangements between MFDA and IDA dealer firms, such as omnibus and joint service accounts, the Ontario Securities Commission asked if the restricted fund dealer registration category “continues to be appropriate in the current business environment where clients want to have one consolidated account and be serviced by one sales representative.”

Leaving aside the omnibus/joint service account argument for a moment, that single sentence in the OSC draft provoked several strong retorts from the fund industry. “We do not believe that the elimination of the restricted dealer category of registration is warranted in the absence of evidence of abuse,” IFIC said in its response to the OSC draft. “In our view, the restricted dealer category continues to serve an important need by providing investors with cost effective access to diversified mutual fund products.”

Investors Group senior vice president Terrence Wright argued that eliminating the fund-only registration category would be “disastrous, detrimental to the interests of the industry and the investing public,” and would essentially put the mutual fund dealer industry out of business.

Edgar Legzdins, president of BMO Invesments, noted that ending the fund registration category would likely mean “skyrocketing” costs for the average Canadian investor, due to the significantly higher fees involved in maintaining full-service dealer accounts.

The OSC paper focuses mostly on omnibus and joint service accounts, which allow clients of mutual fund dealers to purchase other products, such as equities and fixed income, through special arrangements with investment dealers. Again, the fund industry went on the defensive, with IFIC noting that “long-standing relationships between mutual fund and investment dealers have allowed fund dealers to provide affordable services to lower income segments of the investing public and have been of no demonstrable harm to the interests of Canadian investors.”

Besides, IFIC added, there’s little evidence that the practice is widespread within the industry, citing MFDA figures showing that only 19 dealer firms have either omnibus or joint service account arrangements. There are currently nearly 200 MFDA dealer firms in Canada. “It is unwarranted to categorize the holding of non-mutual fund securities within registered plan portfolios as an industry trend,” IFIC said.

Industry veteran Tom Rice, founder of Rice Financial and now a board member at Jovian Capital, was particularly upset over what he feels is an assumption by the OSC that all MFDA members have omnibus or joint service accounts in place and are therefore allowing their reps to operate in a manner that is “incorrect and offside.”

“The cataloguing of everyone together in one blanket is unfair and unjustified in damning those who have take proper cautions and steps and are not endorsing or practising the activity,” Rice said in his response.

Wright says Investors Group believes there is nothing wrong with a mutual fund salesperson providing advice on an account that contains mixed securities, provided that the fund salesperson confines trading activity to only those securities that are within the scope of the salesperson’s registration.

“We do not feel that the mutual fund salesperson should service the investment dealer account unless there is dual registration,” he stressed.

IFIC also expressed concern with the limited amount of time the OSC has devoted to the issue. The draft was issued on June 11, with responses asked for by July 15. In addition, the regulator said it would consider “winding down” omnibus and joint service accounts by the end of the year if no solutions can be found.

“Given the short comment period, we are concerned that the OSC may have already made a determination with respect to the winding up of joint service and omnibus account arrangements and is engaging in its process of industry comments and consultation as a formality,” IFIC said.

At this point, the commission won’t respond directly to such criticisms, with OSC spokesperson Eric Pelletier saying only that the regulator is currently looking at the comments and preparing a response, “hopefully for sometime in the fall, or before the end of the year.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com