The Mutual Fund Dealers Association of Canada’s long-running search for a governance model that suits its own needs and also satisfies those of its members and the provincial securities commissions continues to drag on.

Following almost two years of debate over the MFDA’s procedures for electing directors, including a sharp rebuke by the British Columbia Securities Commission in January of this year, the Canadian Securities Administrators have weighed in with their own assessment. And while the CSA’s take is more moderate, it clearly calls on the MFDA to make some changes to the way the MFDA elects its directors.

In early July, after a long delay, the CSA released its recommendations within the governance portion of the CSA’s extensive review of the MFDA. The section of that review that deals with governance — which was carried out by the MFDA’s principal regulator, the BCSC — examines the MFDA’s corporate governance practices and procedures from mid-2005 to the end of 2008. (The rest of the review, dealing with issues such as compliance and enforcement, was released in July 2010.)

The governance section of the report had been held back pending the results of a separate hearing that was conducted by the BCSC in 2010. That hearing dealt with a complaint against the MFDA made by Regina-based Partners in Planning Financial Group Ltd. (since acquired by Mississauga, Ont.-based Investment Planning Counsel Inc. ) about the way the MFDA handled proxy votes for a special meeting called in October 2009 to approve proposed governance bylaw changes. That complaint, which received wide attention in the financial services industry, raised questions about both the fairness of the MFDA’s process for reforming its bylaws and governance in general.

Yet, it took until now for the rest of the CSA report to see the light of day. Overall, the CSA report says, the regulator is generally satisfied with the MFDA’s corporate-governance framework, but still has a variety of recommendations for improvement.

For example, the report indicates that the regulators found that, while the composition of the MFDA board complied with its requirements for diversity of industry and regional representation, it did not comply with the requirements for public director representation due to delays in filling occasional vacancies.

Essentially, the review concluded that lengthy delays in filling public director vacancies send the wrong message to the industry — even though those delays did not actually compromise the functioning of the MFDA.

Specifically, the CSA report says, the review “did not find any evidence indicating that a prolonged public director vacancy negatively affected or influenced the board’s decision-making or oversight activities. However, this continued breach of the [recognition order] is a reputational risk and may undermine stakeholders’ confidence in the board’s ability to discharge its oversight responsibilities.”

The MFDA’s response, included in the CSA’s report, acknowledges the requirements concerning board composition and indicates the MFDA both is currently in compliance with them and pledges to remain in compliance.@page_break@It was the problem of public director vacancies that ultimately led to the BCSC hearing on the PIP complaint in the first place. The events leading up to that hearing began unfolding at the MFDA’s annual meeting in 2008, when the MFDA sought to make changes to its governance rules to allow a couple of public directors to extend their terms on its board, among other things.

Those changes weren’t approved by the members, so the MFDA decided to extend the terms of the two directors while it worked on further governance reforms. Once the MFDA had settled on proposed reforms, it called a special meeting to put its proposals to a vote in October 2009. But the proxy solicitation that took place in advance of that meeting sparked the complaint from PIP.

Although the complaint was eventually withdrawn, the BCSC, in a highly unusual move, decided to go ahead with a hearing.

In its January decision, the BCSC scolded the MFDA for its handling of the proxy solicitation process in advance of the October 2009 special meeting. The BCSC ordered the MFDA to make changes to its proxy solicitation procedure to correct the problem, and also stopped the MFDA from proceeding with its plan to adopt its proposed changes to its governance bylaws dealing with the election of public directors.

At the time, the MFDA said it didn’t agree with some aspects of the BCSC’s January decision but decided not to appeal. Instead, the MFDA pledged to refine its proxy solicitation processes in accordance with the BCSC decision.

The CSA review also highlights several other areas of difference among the regulators. For example, the CSA recommends that the MFDA develop a pool of potential candidates that could meet its director eligibility criteria in the short run in order to reduce potential delays in filling future unexpected vacancies.

The MFDA agrees it’s necessary to fill board vacancies promptly; however, it maintains, a formal pool, or “evergreen list” of candidates is not practical.

The CSA report also recommends that the MFDA improve its governance committee’s documentation of the board nomination and selection process.

The report notes there was no record of how the committee chose among qualified candidates — and no rationale for the committee’s decisions was provided to candidates who weren’t selected.

The MFDA agrees that aspects of its process can be better documented, and says that it’s now doing that. However, the MFDA points out, there is no “check-the-box” threshold for board eligibility; and it insists that unsuccessful candidates for the board are not owed an explanation.

The CSA report notes that since the review took place, the MFDA has addressed some of the CSA’s concerns; the CSA pledges to continue to engage with the MFDA as it revises its governance processes.

Now, two and a half years after the MFDA 2008 annual meeting, the MFDA is still working on its governance reforms.

MFDA president and CEO Larry Waite says possible bylaw changes will be considered at the MFDA’s board meeting at the end of September.

However, if the board decides to proceed with those changes, they likely won’t be made this year because they will still have to go through the CSA approval process and a public comment period. IE