Omnibus ban seen having minimal impact on MFDA firms

(November 30, 2004) A decision by Ontario’s securities regulator to ban omnibus or joint service accounts will have little effect on most mutual fund dealer firms, the MFDA says.

Citing investor protection concerns, the Ontario Securities Commission last week ordered MFDA firms to unwind certain business arrangements between MFDA and IDA firms by October 31, 2005. Such arrangements 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.

However, MFDA compliance director Karen McGuinness says an internal MFDA investigation found only 16 such accounts, some of which were already in the process of winding down.

“It’s not a widespread industry problem,” she said in a recent interview. “But it does mean that fund dealers with these arrangements will have to restructure them.”

In its decision, the OSC suggested 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.

“We had a committee that looked at this and had a couple of other recommendations that don’t exist in the industry today. But that would require restructuring,” McGuinness says. “The existing arrangements will have to change, there’s no getting around that.”

In its discussion paper, the OSC also introduced a far more contentious topic: asking 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.

McGuinness is a stauch defender of the fund-only registration category. “If you look at some of the people who are selling mutual funds, it’s the perfect product for them. These are bank tellers, dually-licensed insurance reps, people who don’t have time to provide active management, which is why mutual funds are ideal for them because it’s already a managed product.”

“To ignore that segment of the industry, or to assume it’s redundant, I don’t know where that idea is coming from,” she adds, noting that the MFDA continues to receive applications for new members. “So if it’s not a viable option, why aren’t we seeing a mass exodus to the IDA? Why are we seeing new requests for registration?”

McGuinness thinks the OSC is simply considering alternatives to the current regulatory structure. “If you try to wipe it out, there’s going to be a backlash,” she warns. “The industry is going to stand up if their way of life if going to be terminated.”

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