Industry seeks clarity on MFDA proposal regarding discretionary trading

On Wednesday, PMAC submitted its comments on the proposal, seeking clarity on a number of issues, including the amount of discretion MFDA dealers would have in such an arrangement, and what proficiency requirements and standard of care would apply.

“We’ve got to keep the standards high,” PMAC president Katie Walmsley told Investment Executive.

The MFDA proposal, for example, would require members to either register as restricted portfolio managers to engage in discretionary trading or be granted an exemption. PMAC questioned what that registration would entail, what the proficiency requirements would be and when exemptions would be granted.

“From an investor protection point of view, PMAC is concerned about MFDA Members and their Approved Persons not having the same proficiency and regulatory obligations of restricted portfolio managers while still being permitted to manage client assets on a discretionary basis,” PMAC wrote in its submission.

PMAC also called for all MFDA members engaged in discretionary trading to be registered either as associate advising representatives (AARs) or advising representatives (ARs).

“We respectfully submit that the current proficiency requirements for registration as a dealing representative of an MFDA Member are objectively considerably less stringent than those required for ARs and AARs,” the association said in its submission.

In addition, PMAC questioned whether the MFDA intended to impose a fiduciary standard of conduct on members involved in discretionary trading, since the proposal says such members would be subject to the “portfolio manager standard of care in respect of any discretionary trading.”

If it is the MFDA’s intention to impose a fiduciary standard, PMAC asked, would that duty apply only when a member was engaging in discretionary trades?

“Our view is that when you have a fiduciary duty as a professional, it governs all your actions in working with your clients,” Walmsley said. “It’s hard to just turn it on and shut it off, like a transactional fiduciary duty. We wanted to understand the parameters around that and how that was going to work.”

If the proposal were to move forward, it would be essential for a client to understand the nature of their relationship with their advisor, Walmsley said. Questions she would like addressed include, “Is it a discretionary arrangement? Is it a dealer arrangement? Is there some discretion under different circumstances, and does the client understand that? What are the parameters or boundaries that exist within that discretion?” Read PMAC’s submission here.

Firms supportive, investors wary

Comments also came in from MFDA members, including Toronto-based Assante Financial Management Ltd., Winnipeg-based Investors Group Inc., Mississauga, Ont.-based Investment Planning Counsel and London, Ont.-based Quadrus Investment Services Ltd.

Member firms supported the proposal, saying that allowing MFDA members to engage in limited discretionary trading would improve the customer experience, reduce the regulatory burden and reduce costs.

They also brought up the issue of proficiency standards, as well as the expectations for supervision of discretionary trading.

“As MFDA dealers have not had to provide oversight of discretionary asset management, we believe it is important for the MFDA to clearly identify the minimum educational and/or experience proficiency requirements of individuals responsible for supervising this activity,” wrote Sean Etherington, president of Assante Financial Management, in his letter.

For its part, the Ontario Securities Commission’s Investor Advisory Panel (IAP) asked for more clarity on the details of the proposal, including how a fiduciary duty would apply to MFDA members performing discretionary trading.

“We believe this uncertainty can be eliminated by expressly restricting discretionary rebalancing to registrants who are subject to a statutory or regulatory fiduciary standard,” wrote Neil Gross, chair of the IAP. “Short of this requirement, the IAP would have concerns that the Proposed Amendments could result in situations where discretionary trading may not always be conducted in the best interests of the portfolio’s investors.”

The Canadian Council of CFA Societies offered support for the proposal, but questioned the extent to which MFDA members would be permitted to change asset allocations within a client’s portfolio.

“For example, tolerance around strategic asset weights in the range of +/-2% might be appropriate, while more substantial changes could be more problematic,” it wrote. “We believe that additional constraints on a Member’s discretion might be warranted.”

The Investment Funds Institute of Canada (IFIC) commended the MFDA on its “efforts to be flexible and responsive to the needs of its Members and for taking steps to encourage innovation.” But, like PMAC, IFIC said it would “appreciate clarification regarding the proficiency and experience requirements that will be required for advising representatives.”