The mutual fund dealers Association of Canada’s investor-protection fund, the MFDA Investor Protection Corp., is approaching its initial target of $30 million in assets, and plans are already underway to continue its growth despite MFDA members’ concerns over its fees.

“I don’t think anyone realistically expected that the initial target was going to be the end of it,” says Joni Alexander, president of the IPC. “We are essentially an insurer, and we are insuring a body of assets that is valued somewhere north of $300 billion. So, if you look at a number of scenarios in which member firms might go bankrupt and client assets might be lost, it doesn’t take much before you can model wiping out a $30-million fund.”

Insolvencies in the Canadian marketplace are unusual but not unheard of. Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. were both investment disasters that left investors with empty pockets.

In the Norshield case, 1,900 investors lost $159 million when it was placed in receivership in 2005.

The collapse of hedge fund company Portus involved 26,000 investors, mostly Canadians, with more $800 million lost initially.

Over the past year, the MFDA has seen two insolvencies of member firms: Farm Mutual Financial Services Inc. and ASL Direct Inc., both based in Ontario.

In the case of Farm Mutual, client accounts were transferred to another dealer and no claims to the IPC have been reported.

With ASL Direct, the receiver paid out what it could to clients, but there remained a small shortfall in the amount of cash they were owed and the IPC had to pay out $63,300 in claims — its first payout since its inception in 2005.

“Every incremental year is a major proportion of our life to date, and we learn more every year about how these things work,” says Alexander. “Certainly, in the past year and a half, when we’ve had a couple of bankruptcies, we have learned a lot from the experience and we try to bring all of that to the evaluation process.”

The IPC fund was created to provide coverage to MFDA members’ clients for losses incurred in their accounts in case the member dealer becomes bankrupt. The coverage includes compensation of up to $1 million per client account — including cash, securities and segregated funds — which has to be held in nominee name, meaning the assets have to be held by the member dealer and not in a client-name account.

Prior to the MFDA’s March 4 annual general meeting, the IPC presented its proposal to continue the growth of the fund to the MFDA board; the MFDA is in the process of forming a committee that will be soliciting member input. Although the IPC fund was not on the agenda for the meeting, members voiced their concerns about whether or not fees would be continuing once the target of $30 million was met. Additionally, MFDA members had a lot to say about the IPC fund and its fee structure in Investment Executive’s Regulators’ Report Card.

“IPC fees that are collected by the MFDA on behalf of the IPC are far too high,” says a dealer in Ontario.

Adds another dealer in Ontario: “One objection I have is the fees charged toward investor protection, especially when it doesn’t even relate to our firm’s assets. It’s an ongoing sore spot for us.”

(For more on the Regulators’ Report Card, see page 25.)

The IPC fund’s balance stood at $22.9 million as of June 30, 2009; it is expected to hit its $30-million target within the next year.

MFDA members are assessed annually for IPC fees and are invoiced on a quarterly basis. The assessments are calculated after a dealer reports its assets under administration to the MFDA. The IPC then looks at each individual dealer’s AUA and calculates the proportion of AUA in relation to that of the entire membership. That amount is then multiplied by the IPC fund’s annual goal, which has been approximately $5 million since inception.

But regardless of the straightforward calculation, fees are fees in the member’s eyes — and they question their validity. Many members are concerned the IPC fund covers only assets that are under nominee name, as many dealer firms have a higher percentage of client name accounts on their books.