The British Columbia Securities Commission has ruled that the Mutual Fund Dealers Association of Canada did not conduct a proper proxy solicitation prior to a special meeting of its members in October 2009 and by-law changes passed during that meeting must be set aside.

The commission published its decision on Tuesday.

The case has its history in the MFDA’s annual meeting in late 2008. At that meeting, the self-regulatory organization sought to make changes to its governance rules, which would have allowed two public directors to extend their terms on the SRO’s board.

When those changes weren’t approved, the MFDA decided to allow two directors whose terms had expired to stay on the board while it worked on further governance reforms. Then, in October 2009, the MFDA called a special meeting to consider proposed governance by-law changes. Ahead of that meeting, the regulator solicited proxies from members to vote in favour of the proposed changes.

The outcome of that second meeting was challenged by Partners in Planning Financial Services Ltd., which sought a hearing by the BCSC. The application for a hearing was later withdrawn, but the BCSC decided to go ahead with a hearing anyway.

The BCSC has now ruled that the decision to leave the directors whose terms had expired in place was acceptable, but that the proxy process for the special meeting was not.

“We find that the MFDA board’s decision to conduct the proxy solicitation process as it did for the October 2009 special meeting would have led an objective observer to question the integrity and credibility of the MFDA in managing that process,” the BCSC said in its decision.

The BCSC stresses that its decision only concerns the MFDA’s internal governance, not its overall integrity or credibility as an SRO. In fact, it says that the MFDA has been built into “an effective and credible regulator”.

Nevertheless, the commission has found that the MFDA’s proxy process was inherently flawed, and it ruled that the by-law changes passed using that process must be set aside. The BCSC found that the proxy process didn’t simply seek to maximize participation at the special meeting, but that it sought to ensure the proposed by-law changes were approved.

“Apart from whether pressuring members was the intent, it would have been obvious to an objective observer that the process was fraught with the risk of members’ feeling pressure to vote, and to do so in favour of the amendments,” the decision said.

The proxy solicitation strategy was led by the MFDA’s board, and the BCSC says the board’s basic failing was in not considering the difference between a corporation soliciting proxies from its shareholders and a regulator soliciting them from members that it also oversees.

“Clearly, the relationship between the MFDA and its members is not the same as the relationship between a corporation and its shareholders,” the BCSC said, explaining that dealers could feel pressure to vote in favour of management-sponsored resolutions when proxies are being solicited by their regulator.

In addition to concluding that the proxy process used before the 2009 meeting was flawed, the BCSC also says that the regulator’s proposed new proxy process doesn’t resolve all of its concerns either. As a result, the BCSC directs the MFDA to revise the process further, including the requirement to use an independent proxy solicitation firm to administer the process, and to ensure that proxy votes remain confidential, and proxies aren’t solicited directly by the regulator.

As well, the BCSC says the MFDA must not adopt the by-law changes approved at the disputed meeting until they are passed in accordance with the BCSC’s directions.

In response to the decision, the MFDA said, “We are in the process of reviewing the BCSC decision with counsel and have no further comment at this time.”

IE