The Mutual Fund Dealers Association of Canada has received a black eye from a B.C. Securities Commission hearing panel. The panel has ruled that the proxy solicitation process used by the MFDA leading up to a special meeting of its members was improper. The ruling says that the MFDA should have known that soliciting votes from the firms it regulates could be seen as pressuring firms to vote in a certain way. Moreover, the panel found the self-regulatory organization’s explanations for its conduct to be “weak.”

None of that is good for the MFDA. But the road to reaching this judgment has to be questioned, too. The matter first arose as a complaint by an MFDA firm. That complaint was settled, and the firm, the MFDA and the BCSC’s executive director all asked that the case be dismissed. Yet, the hearing panel decided to proceed anyway, citing public interest issues raised by the initial complaint.

The BCSC considered two issues — whether the MFDA acted properly in keeping two directors on its board after their terms expired amid efforts to amend its governance bylaws, and whether the proxy solicitation process conducted before the meeting to amend those bylaws was appropriate.

On the first issue, the BCSC panel found that the MFDA had acted properly. It could hardly have found otherwise, given that the BCSC and the rest of the securities commissions were apprised of its actions and tacitly approved them. But the panel found the proxy solicitation to be problematic. And, while it’s easy to find fault with the process in retrospect, the MFDA was acting with legal and corporate governance advice and following processes it had used in the past without raising objections.

While the BCSC panel insists that its findings relate only to the governance issues and aren’t meant to impugn the credibility of the MFDA as a regulator, those findings can’t help but do that.

Ironically, the panel decided it had to hold this hearing because it had feared that leaving unanswered questions could undermine the credibility of the MFDA, and of the regulatory system overall. In this case, answering those questions has had much the same effect.