Regulator probing MFDA-IDA business arrangements

(June 28, 2004) Citing investor protection concerns, the Ontario Securities Commission (OSC) has launched an investigation into some contentious business arrangements between IDA and MFDA dealer firms.

The agreements allow clients of mutual fund dealers to purchase other products, such as equity and fixed income, through special arrangements with investment dealers.

OSC chair David Brown says all parties are co-operating in the probe, with the commission recognizing that the arrangements developed from client demands and the preference for a single point of contact for investment products.

“However, they are not in compliance with current securities law and we think there are some significant investor protection concerns,” Brown said earlier this month at the IDA conference in Quebec.

There are several types of MFDA-IDA business arrangements, but the most common are omnibus and joint service accounts, Brown explained.

Under the omnibus arrangements, fund dealers maintain an account at an investment dealer to hold non-mutual fund securities. Brown says those securities are not covered by the investor protection fund and the nature of the arrangements places primary responsibility for the investments with the fund dealer.

“Many clients prefer to receive advice on their entire portfolio, increasing the pressure for the fund dealer and its salespersons to act beyond the scope of their registration,” he says.

The second arrangement is known as joint service, where fund dealers and investment dealers jointly service and maintain an account at a securities dealer. Under that type of arrangement, the division of responsibility for advice and trade suitability is unclear, as is the responsibility for supervising the mutual fund salesperson, Brown says. “There’s a potential gap in liability to clients.”

The OSC has issued a paper soliciting comments on how to solve the problem and is looking for responses by July 15. The paper does point out that some fund dealers have met client demands for securities by setting up referral arrangements, under which clients have two accounts: one for funds and one for securities. In such cases, MFDA firms receive a referral fee from the securities dealer.

A second possible solution outlined by the OSC involves the creation of an introducer/carrier model between MFDA and IDA firms, where the mutual fund portfolio is serviced by the MFDA introducer and the non-fund portfolio is handled by the IDA carrier. The two self-regulatory organizations plan to assemble a working group to consider such a structure, which would be contingent upon the MFDA joining the Canadian Investor Protection Fund.

The OSC’s paper also suggests that the regulator will be looking at wider issues, including the future of the fund-only registration category. “Does a restricted dealer registration category continue to be appropriate in the current business environment where clients want to have one consolidated account and be serviced by one sales representative?” the commission asks.

The OSC is planning to hold an industry round table on the issue in mid-August. If no solutions are found, the OSC says it will ask that omnibus and joint service arrangements be dismantled by year’s end.

In the meantime, the IDA and MFDA have both asked members not to approve any new omnibus and joint service business arrangements. Firms with the plans already in place cannot add new clients after the end of July.

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How does this issue affect you and your practice? Should omnibus and joint service agreements be allowed? Discuss the pros and cons of the OSC’s proposals with your peers in the Talvest Town Hall on Advisor.ca.

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

(06/28/04)

Doug Watt