Fund dealers have always had a bit of a fractious relationship with their self-regulator, the Mutual Fund Dealers Association. Now, amid a wave of upheaval throughout the SRO world, one fund dealer is agitating for change from within the MFDA.

Mark Kent, president of Calgary-based Portfolio Strategies Corp. , wants to inject a little more “self” into the self-regulation provided by the MFDA. Kent says that the MFDA’s process for electing directors is flawed and, as a result, small, independent dealers or dealers from different parts of the country have not been well represented on the MFDA board.

“The public directors are a lot of lawyers and accountants that have never had exposure to the securities industry, that we can tell. And a lot of the industry directors are ivory tower executives that are far removed from the retail client,” says Kent. He also argues that the SRO’s members don’t have enough say in the rule-making process.

The MFDA’s governance model was adopted in 2003, when the fledgling regulator was required to move away from its original model, which gave equal board representation to the public and its two founding organizations, the Investment Dealers Association of Canada and the Investment Funds Institute of Canada. In 2003, it moved to a 13-member board, comprising six industry directors, six public directors and a CEO. It also adopted requirements for independence, regional representation and dealer representation for the directors.

That set-up doesn’t sit well with Kent. In a paper to the Canadian Securities Administrators, he explains his objections to the election process. Only one candidate is nominated for each board vacancy and members can’t vote against the candidate; they can only vote in favour or withhold their vote. Effectively, he says, this means the committee that makes the nominations selects the next board.

For the past few years, Kent has been raising the issue of director elections at the MFDA’s annual general meeting, but with no success. Again, at its most recent AGM on Dec. 9, Kent voiced his concerns and sought a motion asking the board to review the election process. The motion was defeated, but Kent has been invited to come up with a better way of carrying out its elections, and to bring it to the association. So, that’s just what he’s planning to do.

Kent has started preliminary work in forming a committee. He approached one of the MFDA’s public directors to see if he would sit on the committee. The director declined, but suggested the board is willing to listen to alternative governance proposals. Instead, Kent will be seeking input from dealers across the country, with the idea of reforming the process so that it results in fairer elections, and what he believes is a more representative board.

MFDA CEO Larry Waite says the association has the right governance model, “but if someone comes up with a better way, we will certainly look at it.” He notes that when the MFDA adopted its governance model in 2003, the board pledged to review it, which it did in 2004. As a result of the review, the board’s governance committee recommended keeping the current process, and improving communication with members. Waite notes that the CSA approved the model.

Nevertheless, Kent would like the CSA to take another look. In mid-November, he took his complaints to the CSA. In a paper, he says, “We are proposing that the members should be able to elect the directors through a fair, open and transparent process. This request has been made to the board of directors, who simply denied the request without substantive reasons. We are, therefore, asking the securities commissions to require the MFDA to allow members to elect the directors. We are also asking that the MFDA be required to give members the opportunity for meaningful input before adopting any rule, bylaw or policy.”

The paper proposes a few alternative election methods. “One way would be to designate board positions based on region, firm size or both, and only permit people who met the criteria to be nominated for the position. Another way would be to allow anyone to be nominated but disallow a nominee once all the vacancies into which he or she could fit had been filled, which could mean someone with fewer votes but from a different region would be elected.”

@page_break@Kent stresses that he has no interest in joining the board, a stance he’s taking so that his campaign isn’t perceived as self-serving. He says that it’s in the public interest to ensure that the MFDA’s governance model is as good as it can be, and that the industry is truly enjoying the advantages of self-regulation. If regulation is too burdensome, he warns, smaller clients will see service disappear, and dodgy dealers will give up mutual funds and start pitching segregated funds instead, for which the regulatory requirements are much less intense.

The issue comes at a particularly sensitive time for the MFDA. Less than a week after its AGM, one of its newly elected directors resigned, for fear that she didn’t adequately meet its independence requirements. Ruth Grant, chairwoman of The Sick Kids Foundation and vice chairwoman of the board of trustees at the Hospital for Sick Children in Toronto, had been elected to serve as a public director on the board for a three-year term at the most recent AGM.

However, several days later it came to light that her husband, Doug Grant, is still a director of Sceptre Investment Counsel Ltd. , a company that is an affiliate of an MFDA member. “Unfortunately, Ms. Grant thereby becomes ineligible to serve as a public director under the strict eligibility requirements of MFDA bylaws,” Waite said in a letter to members. He added that once Ruth Grant became aware of this eligibility restriction, she resigned from the board.

The MFDA is now soliciting input from its members on potential candidates for the board. Its governance committee will meet Jan. 13 to address the vacancy.

Kent says Grant’s resignation lends some credence to his claims: “Maybe that does show that the existing process isn’t so great after all.” It doesn’t change his feeling that the MFDA members should have more of a hand in nominating and electing its directors.

Apart from the flap over Grant’s election, the complaints about governance and member representation come at the time when much of the rest of the SRO world is in flux. The IDA is in the midst of splitting its regulatory and trade association functions, and its SRO side is pursuing a merger with Market Regulation Services Inc.

The MFDA has already considered and rejected the idea of a merger with the IDA at this point, which is another decision that doesn’t sit well with Kent. He says cost savings could be achieved by consolidating the SROs, but MFDA members weren’t consulted on the decision to reject a merger.

In the past, Waite has acknowledged that a merger will probably happen eventually. However, the board decided in October that it doesn’t make sense at this point, since the MFDA is still a fairly young organization that is only now coming into its own. It worries that having a merger hanging over it would hamper its ability to do its job, that it would be demoralizing to its staff and that it could hamper its ability to retain them.

An external merger might bring more upheaval than the MFDA wants right now, but it appears it will have to deal with calls for change from within. IE