MFDA rewrites compensation rule

Advisors who receive their commissions through a corporation not registered with the Mutual Fund Dealers Association could see this arrangement formally accepted by the SRO, which has technically banned such arrangements until now.

The MFDA has published for comment a proposed amendment to Rule 2.4.1, which requires that commissions be paid to the member firm, which in turn pays the advisor directly.

While this rule is on the books, it has been suspended by most provincial securities regulators for years, which has allowed dealer firms to direct commissions to non-registered corporations owned by the advisor, rather than directly to the advisor as an individual.

“The proposed amendments will allow members and their approved persons an appropriate degree of flexibility in how they structure their business affairs by permitting remuneration to be directed to unregistered corporations, provided that certain conditions are satisfied,” the MFDA said in its notice. “These conditions address investor protection concerns that might arise in connection with approved persons directing commissions to unregistered corporations.”

The suspension of Rule 2.4.1 by the securities commissions of British Columbia, Saskatchewan, Ontario and Nova Scotia applied to roughly 75,000 approved persons, of which 40,000 were in the non-bank channel and relied on its suspension for their business model.

“Despite these large numbers and the fact that the suspension has been in place for several years, the MFDA has not identified any regulatory concerns, including the liability of approved persons arising from the payment of commissions to corporations,” the MFDA says in its notice. “In this regard, the protections expected for investors under current legislation are maintained.”

Under the proposed amendment, dealers will be allowed to pay commissions to an unregistered corporation if such an arrangement is not forbidden by the securities legislation or securities regulatory authorities of that province.

There must be a written agreement between the dealer, the advisors and the unregistered corporation, which affirms both the dealer and the advisor will adhere to MFDA by-laws and rules, and that these two parties, rather than the corporation, will be liable to clients for any wrongdoing.

This agreement also ensures the dealer will supervise the advisor and the corporation to ensure regulatory compliance, and that both the advisor and his or her corporation will provide access to all books and records.

The recipient corporation must be incorporated under the laws of Canada or a province or territory.

To read the proposal, please click here.