Proposals from the Mutual Fund Dealers Association of Canada to beef up its compliance provisions involving disciplinary hearings and reporting on the activities of advisors has raised the ire of the Independent Financial Brokers of Canada.

The proposed new powers would enable the MFDA to respond in an appropriate and timely fashion to protect the public, says Shaun Devlin, vice president of enforcement for the MFDA: “It will bring us in line with other securities regulators.”

But the requested powers “far exceed any reasonable, demonstrable need,” counters IFB executive director John Whaley in a recent letter to the MFDA and Canadian Securities Administrators.

The MFDA is seeking approval from the CSA to increase the powers of MFDA hearing panels to hold hearings — with or without notice — that could result in interim or permanent penalties, such as suspension from conducting securities-related business, against approved person-advisors and mem-ber firms. The new powers are proposed under amended section 24.3 of the MFDA’s By-law No. 1, entitled “Applications in exceptional circumstances.”

The comment period concluded at the end of November. The MFDA expects to provide its response to comments by the end of January.

“The danger with the proposals is that the desire for administrative efficiency will drive the hearings such that procedural justice will be sacrificed and approved persons will suffer the unfortunate consequences,” Whaley writes..

Some of the proposed rule’s triggers for making applications for hearings against approved persons include:

> a securities commission, self-regulatory organization, securities regulatory authority, financial services regulator or professional licensing or registration body in any jurisdiction inside or outside Canada cancels, suspends or terminates the person;

> the person has been charged with a criminal or regulatory offence relating to theft, fraud, misappropriation of funds or securities, forgery, money laundering, market manipulation, insider trading, misrepresentation or unauthorized trading and such charges that bring the capital markets into disrepute.

These circumstances are too broad, says the IFB.

Many IFB members are dually licensed to sell mutual funds and insurance, says Susan Allemang, the IFB’s director of regulatory affairs. They are also general insurance agents, mortgage brokers and financial planners. The MFDA proposals get into other lines of business dealt with by other SROs and regulators — including those outside the country, she notes.

Devlin counters that an advisor’s standard of conduct and suitability is not limited to regulatory mandate or geography. For example, he says, if an advisor steals money from insurance clients and is penalized by his provincial insurance regulator, it speaks to his overall fitness in the financial services industry and how he deals with the public.

He refers to the MFDA’s current rule 1.2.1 (d), which deals with advisors who have dual occupations. Under the heading “conduct unbecoming,” an approved person must not bring the MFDA, its members or the mutual fund industry “into disrepute.”

However, he notes, an independent MFDA panel would make an ultimate determination of the impact of a penalty imposed by a body other than the MFDA.

CHARGED VS CONVICTED

The IFB also objects to the reference to approved persons who are “charged” with regulatory as well as criminal offences. The section should apply only to people convicted of criminal or regulatory offences — not those who are simply charged, says Allemang.

Section 24.3.1 states that these applications can be brought before a panel “with or without notice.” The conditions for triggering an “ex parte” — without notice — hearing should be clearly defined, she adds: “What constitutes crossing the line? There must be some sort of context for it, such as imminent harm to the consumer.”

Devlin points out that under s. 24.3.4, a hearing panel can require that notice be given to a member firm or advisor “on such terms and conditions as it considers appropriate.”

A review of any decision made by a panel under exceptional circumstances can be requested by giving notice within 30 days of the imposition of a penalty, he adds. The review — conducted by a different hearing panel— must be convened within 21 days of the request.

The IFB considers the 21-day limit too long. It suggests that the MFDA follow a rule similar to one set out in s. 127 of the Ontario Securities Act that mandates a review be held within 15 days of the imposition of a penalty. That would lessen “the period of uncertainty” and “potential harm” to the advisor’s business, says the IFB.

@page_break@Devlin says these powers will be used fairly and only when circumstances require it. “We don’t anticipate a lot of interim procedures to handle exceptional circumstances,” he says.

The MFDA is also beefing up its information reporting requirements; advisors will be required to submit various reports that member firms will have to vet.

Noteably, this change involves the MFDA moving from a paper-based reporting system of enforcement and compliance information to electronic reporting — similar to the Web-based financial reporting that members already undertake.

Under current MFDA rules, members are required to report complaints, terminations and legal proceedings involving advisors. The MFDA says it needs to increase the scope of its reporting to enhance its ability to assess member risk and identify possible cases worthy of investigation.

Under the proposed policy, events that are to be reported by approved-person advisors to member firms include not only all securities related and member business, but also “all business conducted by the approved person.”

The IFB says this requirement is too broad and invasive, extending into business areas that do not fall under the mandate of the MFDA, its members or even provincial securities commissions.

Approved persons will be required within two business days to report the following to their sponsoring MFDA member firm:

> any written complaint;

> any written or verbal complaint involving theft, fraud, misappropriation, forgery, money laundering, market manipulation, insider trading, engaging in off-book securities-related business or unauthorized trading involving the advisor or another advisor;

> allegations of breaches of securities law or regulatory requirements;

> charges, convictions or guilty pleas to criminal offence;

> being named as a defendant in a civil claim;

> denial or withdrawal of licence registration;

> bankruptcies and garnishments.

For more details see www.mfda.ca/regulation/propamend.html. IE