Enforcing the rules

The CSA’s report states that the review of the MFDA’s disciplinary proceedings found a few cases in which the SRO brought an enforcement action against a rep, but “it was not clear why the dealer was not also named as a respondent.”

An examination of recent enforcement statistics reveals that fund dealers are much less likely to face disciplinary action than their investment-dealer counterparts. Over each of the past three years, only 5%-6% of the cases dealt with by the MFDA during the year involved a firm, compared with statistics from the Investment Industry Regulatory Organization of Canada, in which firms generally account for more than 20% of the proceedings brought in a given year.

The structure of the investment-dealer and fund-dealer industries are fundamentally different in a number of ways, including the fact that fund dealers’ reps often operate more independently from their firms. And the MFDA’s rate of supervisory discipline also appears to be more in line with the U.S. experience – statistics from the U.S. brokerage industry’s SRO, the Financial Industry Regulatory Authority (FINRA), indicate that firms typically are sanctioned at single-digit rates, too. For example, in 2015, firms accounted for 6% of industry bans handed down by FINRA, and for 3.3% of disciplinary suspensions.

Nonetheless, the CSA is concerned about lack of dealer accountability. The CSA’s report suggests that by bringing cases against individual reps only and not against dealers (in cases that warranted taking action against the firm), regulators risk undermining the effectiveness of enforcement activity. And, the report states, this approach doesn’t “address issues of supervisory and executive responsibility” for the conduct of reps.

In response, the MFDA indicates that it sees dealer supervision as a “highly important” issue; and that the SRO has processes for ensuring that supervisory personnel, branch managers and dealers are investigated and disciplined appropriately.

“We currently are reinforcing our procedures with enforcement staff,” the MFDA stated in its response, adding that the SRO also has revised its practices, both to ensure that its reasoning is “fully documented” in cases in which no disciplinary action is taken against a firm and to improve monitoring of these outcomes.

Given these efforts, the CSA has called on the MFDA to report on the effectiveness of these processes by Jan. 31, 2017.

The other notable enforcement issue flagged in the CSA report is the prevalence of disciplinary cases that involve reps falsifying signatures. In other segments of the retail investment business, the top compliance issue typically involves suitability. Indeed, suitability issues often are cited as both the primary source of retail clients’ complaints and the most significant concern for regulators’ enforcement departments.

But that’s not the case in the mutual fund dealer world.

As the MFDA’s latest enforcement stats show, issues involving client signatures represent slightly more than 25% of the SRO’s current enforcement cases. Through the first nine months of this year, 15% of the cases the MFDA has opened feature reps using pre-signed forms, and another 11% includes some other form of signature-related shenanigans. In the fund dealer world, suitability ranks third among disciplinary issues.

The CSA report indicates that the regulator’s concern about rule violations involving client signatures stems from a case in 2014, when the MFDA issued a warning letter in a situation that involved a large number of clients rather than taking more severe enforcement action. According to the CSA report: “Failure to take appropriate enforcement action in signature falsification cases undermines the effectiveness of the enforcement of MFDA rules and understates the seriousness of the misconduct.”

However, the CSA report indicates that the MFDA since has taken action to step up enforcement of such cases – including adopting new case assessment procedures, seeking stiffer penalties for these kinds of violations and alerting dealers to the issue in an October 2015 bulletin.

That bulletin stresses that reps are not allowed to falsify client signatures – even if the motivation is innocent, such as saving clients time; whether the client complains or suffers any harm as a result doesn’t matter. Falsifying signatures simply isn’t allowed, as the practice affects the credibility of reps, destroys audit trails, misleads supervisory personnel and can harm the handling of complaints.

In the wake of these efforts to heighten industry awareness and step up discipline in these matters, the MFDA has opened more enforcement cases involving these kinds of violations. For example, the SRO brought 41 proceedings against reps involving signature falsification between 2012 and 2014; in the 12 months ending June 2016, the MFDA has brought 58 disciplinary cases against both reps and branch managers for client signature-related issues.

The MFDA also indicated in the CSA report that the SRO is seeking tougher penalties for these violations: “We have increased the penalties we seek and will be further increasing those penalties for activity that has occurred after the issuance of the bulletin.”

The MFDA response added that the SRO also will be publishing further guidance on supervising, investigating and taking internal disciplinary action for these sorts of abuses.

The CSA also stated that it expects the MFDA to continue pushing for tougher penalties in this area and to report on the outcomes of those efforts in January.

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