MFDA ordered to unwind contentious business arrangements

(November 22, 2004) The Ontario Securities Commission has decided to put an end to certain business arrangements between MFDA and IDA member firms, known as omnibus or joint service accounts. The agreements allow clients of mutual fund dealers to purchase other products, such as equity and fixed income, through special arrangements with investment dealers.

Under omnibus arrangements, fund dealers maintain an account at an investment dealer to hold non-mutual fund securities. With joint service, fund dealers and investment dealers jointly service and maintain an account at a securities dealer.

Such agreements are contrary to regulatory requirements and must be unwound by October 31, 2005, the commission said in a decision released late last Friday.

“Mutual fund dealers should not trade in, provide advice on or act in furtherance of trades in prohibited securities,” the OSC said. “Dealers should notify their clients of changes to the omnibus account and joint service arrangements, impact to their clients, and options available to minimize or eliminate any potential adverse consequences to their clients.”

The OSC issued a consultation paper on the issue in June and invited comments from industry participants. About 20 responses were received.

In its final decision, the OSC noted that a number of dealers have found alternative solutions to omnibus and joint service accounts, such as referral arrangements, or a model under which responsibilities to service clients are divided among a trust company, a mutual fund dealer and an investment dealer.

“Referral arrangements and the trust company/financial intermediary model can be utilized to address client needs without dealers being offside current regulatory requirements,” the OSC said.

Another proposed solution — the creation of an introducer/carrier model between MFDA and IDA firms — is impractical at this time, the OSC said, since it would require the MFDA to become a member of the Canadian Investor Protection Fund (CIPF).

Last month, after years of discussion, the MFDA decided to set up its own $30 million investor protection fund, opting out of joining the CIPF, at least for the time being.

The OSC’s discussion paper provoked a storm of controversy when it also asked whether “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.”

In its response letter, IFIC said the 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 Investments, 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.

It appears, however, that the OSC will take no immediate action on this particular issue. There’s no mention of eliminating the fund dealer registration category in the recommendations released last week. In fact, the OSC, in summarizing the comments it received on the discussion paper, states that “the mutual fund dealer registration category continues to be appropriate at this time, and addresses the needs of certain clients.”

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