The Investment Funds Institute of Canada has come to the defence of fund dealers.

In a letter to the Ontario Securities Commission, IFIC takes issue with an OSC staff notice, issued in mid-June, which fretted about the use of so called joint-service arrangements between fund dealers and investment dealers, and omnibus accounts that may allow fund dealers to trade beyond their licenses on behalf of clients.

The OSC gave the industry until July 15 to come up with a response and threatened to force firms to unwind these arrangements by the end of the year if no solution to the problem can be found. IFIC struck a working group to consider the paper and craft an industry response.

IFIC says firms weren’t given enough time to think through all the implications of the issue, and craft a reply. “It appears that both the short comment period and the fast-approaching roundtable discussions that have been scheduled for industry stakeholder consultations in Toronto (Aug. 16) are being driven by the need to accommodate the Dec. 31 deadline that the OSC has contemplated for the potential winding up of joint service and omnibus account arrangements,” IFIC says. “Given the short comment period, we are concerned that the OSC may have already made a determination with respect to the winding up of joint service and omnibus account arrangements and is engaging in its process of industry comment and consultation as a formality.”

IFIC urges the OSC to engage “in a meaningful process of consultation” by providing dealers with more time to consider the issues raised in the OSC’s paper.

One of the biggest questions the OSC poses is whether a restricted dealer registration category is still necessary in the current business environment “where clients want to have one consolidated account and be serviced by one sales representative.”

IFIC argues that fund dealers are still necessary. It says that if there is widespread abuse in the dealer system, which hasn’t been demonstrated, this should be dealt with through enforcement. Either way, fund dealers are performing a useful service it argues.

“In our view, the restricted dealer category continues to serve an important need by providing investors with cost-effective access to diversified mutual fund products,” it says. “Full service brokers have no economic incentive, to provide affordable investment alternatives to this particular market segment. Accordingly, elimination of the mutual fund dealer registration category would effectively disenfranchise small net worth investors.”

That said, it doesn’t accept the OSC’s characterization of these business arrangements either. IFIC says that an MFDA survey shows that only 16 MFDA firms have either omnibus account arrangements (13 firms) or joint service arrangements (three firms) in place.

In response to the OSC’s concerns about these arrangements, IFIC says it would support the extension of requirements that would allow for Canadian Investor Protection Fund coverage of non-mutual fund securities in certain circumstances (in which assets are held by an IDA member firm in an omnibus account in the name of a mutual fund dealer). It also suggests exploring the possibility of allowing introducing/carrying dealer arrangements between MFDA and IDA dealers or requiring dealers involved in joint service arrangements to have formal written agreements that clearly establish the authority and itemize the specific responsibilities of each dealer.