It’s a rare tribute to be given the distinction of having “paved the way,” but Mandeville Wealth Services Inc., the first member of the Mutual Funder Dealers Association of Canada (MFDA) to sell exchange-traded funds (ETFs), sloughs off any kind of honorific.
“We don’t think of ourselves as pioneers,” says Frank Laferriere, senior vice president and chief operating officer with Mandeville. “We just think of ourselves as trying to do what’s best for the client and advisors.”
Unlike other MFDA-licensed firms, Burlington, Ont.-based Mandeville has been able to take advantage of the necessary technology and services already used in its other divisions to open the door to selling ETFs by giving the firm’s financial advisors access to a stock exchange.
The lack of access to ETFs for mutual fund advisors is not primarily the result of legal or registration issues, as advisors licensed by the MFDA are registered to sell ETFs; rather, the lack of access is due to the fact that MFDA platforms don’t have the ability to connect with the securities market infrastructure, such as the exchanges and clearing houses. Specifically, Mandeville has leveraged its current back-office relationships with Broadridge Financial Solutions Inc. and Fidelity Clearing Canada ULC.
All MFDA-licensed advisors at Mandeville must be pre-approved and meet the company’s internal requirements. Three Mandeville advisors have been approved and a fourth is making inquiries, Laferriere says. One previously approved MFDA-licensed advisor now is regulated by the Investment Industry Regulatory Organization of Canada (IIROC). All of Mandeville’s IIROC-licensed advisors may sell ETFs.
So far, Laferriere says, ETF sales by Mandeville’s mutual fund advisors amount to 2% of the firm’s total sales. “It will take a while for our advisors to get ETFs positioned in the marketplace,” he says.
The Federation of Mutual Fund Dealers (FMFD) and the Canadian ETF Association (CETFA) are hoping to help put mechanisms in place to enable all MFDA dealers and advisors to sell ETFs.
For more than a year, a joint FMFD-CETFA group has been meeting to deal with this issue with dealers, Canadian Depository for Securities Ltd., National Bank of Canada, FundSERV Inc. and some back-office service providers, as well as a host of regulators, including the MFDA, the Ontario Securities Commission, IIROC and the Autorité des marchés financiers, says FMFD executive director Sandra Kegie.
Howard Atkinson, chairman of CETFA and president of Horizons ETFs Management (Canada) Inc., says the National Bank Correspondence Network (NBCN) has agreed to offer its transaction services to MFDA firms that want to sell ETFs. The NBCN has been testing its system for the past few months.
Key to the project is ensuring that MFDA dealers have access to an exchange and upgrades to their back-office systems to process orders, says Atkinson: “What is significant about this is that each MFDA member could then use its own record-keeping system in conjunction with a provider such as the NBCN.”
Currently, the primary record-keepers and software providers for MFDA-licensed dealers are Univeris Corp. and RPM Technologies Inc. The record-keeping process can be adapted to any system on the MFDA or IIROC sides. Details of the ETF platform project are expected to be announced at the FMFD’s annual conference at the end of April.
Discussions among FMFD-CETFA working group members have led to a set of best practices that have been written for MFDA-licensed dealers. These practices cover business structures, qualifications, business conduct, disclosure documentation, remuneration, supervision, product knowledge and business continuity, Kegie says.
Meanwhile, the MFDA has issued a compliance sheet outlining the issues that MFDA-member dealers need to address if they sell ETFs. These include: ensuring trade processing is executed correctly; training in different order types; understanding specific risks with limit orders; knowing how to provide accurate and timely quotes to clients; the need to record and maintain accurate records, not just of the trades but of client reporting; introducing carrier arrangements; and meeting capital insurance requirements.
As well, a working group of MFDA members has been set up to address proficiency standards because some entry-level courses to trade in mutual funds may not cover ETFs in sufficient detail, says Karen McGuinness, the MFDA’s senior vice president of member regulation, compliance. The MFDA is hoping to complete its analysis of proficiency standards by the spring, then move forward on a policy-development process, she adds.
Several MFDA members became interested in the idea of selling ETFs after Mandeville announced it was able to do so.
“While there has been a lot of interest, it isn’t something people are rushing to implement immediately because there is a material impact to their business and a significant change to the way their advisors operate,” McGuinness says.
CETFA has also been working to make the risk classifications for ETFs homogeneous with mutual funds and to allow MFDA-licensed advisors to make apples-to-apples comparisons, Atkinson says.
“Add all this together,” he says, “and we hope that sometime later this year, we should see one or more firms ready to go.”
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