What started as an internal governance dispute involving some members of the Mutual Fund Dealers Association of Canada has boiled over into a public review of its governance practices.

The B.C. Securities Commission will conduct a review of recent bylaw changes by the MFDA, which some disgruntled MFDA members say would leave smaller dealers underrepresented on the regulator’s board of directors. These members contend that a vote held at a special meeting on Oct. 2 to approve the amendments was improperly conducted; they are also unhappy with the process for electing the MFDA’s board.

One result of this dispute — in addition to the uncertainty it creates in the industry — is that the MFDA has postponed its annual general meeting, originally scheduled for Dec. 3, to a later date.

Among those MFDA members who are concerned that the proposed method of electing members to the MFDA board of directors is flawed and would result in inadequate representation of small and medium-sized firms are Ken Parker, vice president of compliance and finance with Calgary-based Portfolio Strategies Corp., and Merlin Chouinard, president and chief compliance officer with Saskatoon-based Sentinel Financial Management Corp.

Says Chouinard: “I think something very powerful has come out of [the controversial Oct. 2 meeting], in that the members have finally reached the point of no return in their own capacity to function under this present regulatory regime. We are finally banding together to fight back.”

In a written submission to the BCSC one week after the MFDA bylaw changes were approved by members at the Oct. 2 special meeting, Regina-based Partners in Planning Financial Services Ltd. asked the BCSC to withhold its approval of the changes and for a review of the MFDA’s decision to amend the bylaw. The MFDA’s bylaws are subject to approval by provincial securities commissions, and the BCSC acts as the principal regulator, working with other Canadian Securities Administrators jurisdictions, to approve MFDA bylaws.

In the BCSC’s written decision granting the review, that regulator says the application raises sufficient concerns for the public interest to justify a hearing: “The system of securities regulation we have in Canada depends on the roles played by regulatory organizations like the MFDA. It is essential that those organizations operate, and are seen to operate, in a manner that leaves no room to question the integrity of their governance, procedures and practices. It is equally essential that any allegations that could raise those questions be dealt with thoroughly and openly.”

The BCSC is working with the parties on procedures to prepare for the hearing and will publish the hearing dates on its website. The MFDA says it is co-operating fully with the BCSC, with respect to the application filed by PIP, and will not comment further on the application because it is currently before the BCSC for review.

PIP, Portfolio Strategies and other MFDA members have several areas of concern with respect to MFDA governance.

> The Board. They allege that the MFDA board of directors has been unlawfully constituted since December 2008, when members at its AGM were asked to vote on a proposal that included — among other things — lengthening the term limits of directors.

This proposal was voted down by members, partly because some felt longer terms would result in existing directors holding on to their seats for a longer time, thus stifling the entrance of newcomers, particularly those from small firms. As a result two directors were ineligible to be re-elected for the 2009 mandate. However, the two directors have remained on the board.

Aside from the term-limit issue, some members are not happy with the manner in which board members are appointed. Currently, the board is made up of 13 directors — six public directors, six industry directors and the MFDA president and CEO. Five of the six industry directors must be officers or directors of an MFDA member. Prospective directors are nominated by MFDA members, and a final selection of a slate of candidates is made by the governance committee. MFDA members then vote on the entire slate. This process, some members say, does not result in appropriate representation of smaller companies. They would like to see board positions allotted specifically for small and medium-sized dealers.

“There was no disclosure of who else had been nominated or even how many others had been nominated,” says Parker. “In effect, the governance committee, rather than the members, determine who will be on the board. And there is no accountability built into the process.”

@page_break@> The Task Force. The MFDA struck a task force several months after the 2008 AGM to try to address the problems. At the controversial Oct. 2 meeting, MFDA members voted to approve the task force’s recommendations.

Among other things, the task force proposed adopting a new nomination process for directors that it said would ensure smaller firms have a bigger say in electing directors. In addition, the task force suggested increasing the board’s size to 15 directors from 13 and creating four two-year terms for all directors. This last recommendation would increase the maximum term for directors to eight years from six.

The task force and its proposals have come under fire for two main reasons. The first is that some members were concerned that one of the so-called “ineligible” directors sat on the task force. “Although the conflict of interest [was] obvious,” Bill Doherty, PIP’s CEO, wrote in his statement to the MFDA, “the task force shrugged it off as an inherent conflict that most directors would, now or in the future, face.”

The second reason is that some MFDA members are unhappy with the recommendation to expand the board, and with the notion of extending the term limits of directors. “They are just throwing a dog a bone,” says Chouinard. “Instead of making two of the 13 representatives come from small dealers, they just added two more directors — and that doesn’t do a damn thing for representation.”

> The Proxy Vote. Some of the disgruntled MFDA members say the MFDA improperly pressured members into providing proxies in favour of the bylaw amendments at the Oct. 2 meeting. The amendments to the bylaw in question were passed by a vote of 86 to 29; 57 votes were made by way of proxy. “Without these proxies,” says Parker, “the proposed changes would have been defeated.”

The MFDA did not comment on whether proxy solicitation was used for the Oct. 2 meeting, but did say that its bylaws do provide for members to use proxies for voting at members’ meetings; and that MFDA staff make proxies available to members to allow them to exercise their voting rights in this regard.

However, Andrew Mayhew, president of Cambridge, Ont.-based Family Investment Plan-ning Inc. , is one member who received a call from the MFDA regarding proxy voting prior to the Oct. 2 meeting. He addressed this issue at that meeting, telling the board that he felt it was inappropriate and intimidating to receive such a call: “They were asking if I would be attending the meeting and, if not, would I provide them with my proxy. After I told them I was attending, they went on to ask how I was voting.” IE