MFDA challenge rests in the OSC hands

The Independent Financial Brokers (IFB) must now wait to see if its legal challenge to the hearing process of the Mutual Fund Dealers Association (MFDA) will be granted by the Ontario Securities Commission (OSC). At stake is the ability of third-party organizations to challenge the validity of SRO bylaws.

For almost a year now the IFB has been trying to obtain a hearing panel before the MFDA to challenge amendments to the MFDA’s Bylaw 1. In August, the MFDA approved and amended Bylaw 1, section 24.3, which allows a hearing panel to impose penalties on an approved person if that person is found to have mental incapacity issues, “with or without notice.”

The IFB has taken particular exception to the “without notice” part, arguing the MFDA could impose penalties based on a complaint and remove an advisor’s MFDA license without the right to defend themselves at a hearing panel.

The problem is there is no formal way of challenging an MFDA bylaw, according to John Whaley, the IFB’s executive director. The only legal recourse they found was to challenge the MFDA before an OSC hearing panel to obtain the right to a hearing on behalf of their advisor members.

“What happened is we challenged the bylaw, particularly parts of the bylaw. The MFDA took the position that those couldn’t be challenged because securities legislation didn’t give [us] any right to challenge the MFDA,” Whaley tells Advisor.ca. “The MFDA further took the position that if anybody could challenge it, it wasn’t us; you had to be an advisor charged under the section to raise the issue.”

The IFB argued before the commission hearing panel on Friday, that an MFDA challenge by a single advisor is an onerous undertaking, and that as an organization representing a large contingent of MFDA registrants, the IFB had the right to make a challenge on behalf of its membership.

According to an IFB release sent out on Friday, the OSC didn’t seem keen to rule on MFDA procedure.

Both the MFDA and OSC argued that IFB does not have standing to bring forward this challenge because it is not “directly affected” by the bylaw amendment. Alistair Crawley, the legal counsel for IFB, rebutted this argument and asked the OSC to consider the wider public policy reasons for the IFB challenge.

“We do think we represent advisors. To say organizers can’t bring these before regulators to be reviewed seems to us to essentially be saying that organizations such as ours have no place in the regulatory process,” Whaley says. “In our view it is crucial that associations such as ours, which represent advisors that the MFDA regulates, be able to bring forward such concerns on their behalf. To expect complex and expensive challenges like this to be brought forward by an individual advisor while under an enforcement order is neither practical nor realistic.”

If there’s good news for the IFB, it’s that the OSC didn’t rule out the idea of letting it intervene on behalf of advisors at the time of an MFDA enforcement action. At the conclusion of the hearing, the commissioners announced their intent to reserve judgment and will issue a written response in due course, Whaley says.

If the OSC sides with the MFDA, Whaley say the options for the organization to challenge the bylaw directly are likely exhausted.

“If we challenged this through the courts, they would likely take the same position as the MFDA, that the courts would have no standing to rule on this. Going through the OSC was what we thought, and what our lawyer thought, was going to be the best route for us to challenge [the bylaw].”

(06/08/09)