Small dealers remain dissatisfied

Last year, dealer firms reported major improvements in this area. But this year, ratings plunged below 2009 levels for both IIROC, plummeting to 4.5 from 5.5 last year, and the provincial regulators, which saw their collective rating drop to 4.9 from 5.9 last year.

And although the Toronto-based Mutual Fund Dealers Association of Canada didn’t see a drop in its rating for this category, it continued to score very low: 4.1 this year, up slightly from 4.0 in 2010.

Dealer firms continue to complain of outrageous fees, policies and procedures that are not applicable to their business models, and hard-of-hearing regulators.

“We feel that the MFDA, in particular, comes down tough on small firms,” says a CCO with a MFDA-licensed dealer in Ontario. “It seems as if [it is] weeding them out. Many small firms have had to shut down or merge in order to survive. It’s frustrating.”

However, Larry Waite, the MFDA’s president and CEO, says he is surprised that this continues to be a sore spot for small dealers, as 90% of the SRO’s fees are paid by the 10 largest members, which consist mainly of the banks. The majority of the small dealer firms pay a minimum annual fee of $3,000 to become members — and, he adds, the costs related to regulating these smaller dealers are much higher than that. “The MFDA’s previous boards of directors have said, ‘Why don’t you raise the minimum fee’,” he says, “and we’ve always held off.”

Nevertheless, MFDA members feel the current fees are just too burdensome, and they continue to question the validity of paying them. Says an executive with an Ontario-based mutual fund dealer: “Fees seem to be very high for a small firm. They’re a lot to us, but they’re not for the big guys.”

IIROC members also find their fees burdensome. Says a CCO with an Ontario-based investment dealer: “I feel like IIROC caters to the big bank[-owned brokerages]. Being on multiple exchanges and the numerous rules we have are a huge cost to small firms.”

Another major complaint heard from small firms concerns policies and procedures that many say are just too rigid for a small firm to support. “The [Ontario Securities Commission] is creating policies that would be difficult for small firms to put into place,” says an executive with an MFDA-licensed firm in Ontario.

Adds a CEO with an investment dealer based in the same province: “The same rules apply to a 12-person firm as to a 100-person firm. This takes a lot of time and it’s hard to follow.”@page_break@IIROC president and CEO Susan Wolburgh Jenah says she’s aware that the “one size fits all” mentality generally doesn’t apply to the SRO’s diverse membership, and she admits that many of IIROC’s rules don’t apply to firms that have a certain business model. “We’ve spent a lot of time,” she says, “in our compliance reviews, through discussions with smaller firms, to try to help them understand the rules we have and to listen to their concerns.”

Wolburgh Jenah adds that she is aware that the comment periods for new policies and regulations can be time-consuming for smaller firms to keep up with, and she encourages firms to be more informal, if necessary, when providing feedback.

Also accounting for the low ratings this year was members’ dissatisfaction with the lack of access to regulators’ meeting locations, and the costs for representatives of small firms to attend these meetings. “The concern for smaller dealers is non-existent,” says a CCO with a B.C.-based mutual fund dealer. “They ask for responses at the busiest time of year. And we can’t make it to the MFDA’s annual meetings in Toronto because it’s just too expensive to travel there.”

The concern is valid, say MFDA executives, who are considering adding a webcast to the MFDA’s annual general meeting.

IIROC, meanwhile, continues to look at ways to make itself more accessible to its members. The SRO already offers telephone and video conferencing for those that can’t attend meetings. However, IIROC executives also understand that many smaller firms cannot afford this technology.

In fact, Wolburgh Jenah says, rather than being helpful, having meetings can prove to be a burden. As a result, IIROC would like to look at making meetings more efficient, as well as continue to strengthen its advisory committees and district councils set up in each province.

Although small dealers feel disconnected from their SROs’ head offices in Toronto, those based in the West seem to be a happier bunch when it comes to their provincial regulators. The Alberta Securities Commission saw its rating in the sensitivity category rise to 6.1 from 5.2; the B.C. Securities Commission‘s rating increased to 7.0 from 6.6.

The BCSC makes sure to stay in touch with its members throughout the year. The regulator runs a quarterly compliance officer outreach session, as well as webcasts of local meetings. In addition, BCSC executives make it a point to visit firms in person.

“We are trying to make sure that the people who are leading our organization are out in the communities,” says Sandy Jakab, director of capital markets regulation with the BCSC. “We also make an effort when we go out to the smaller centres to make sure … to drop in and visit with [smaller firms], just to see how they are doing.”

Meanwhile, one of the two mutual fund dealer executives surveyed in Saskatchewan is also fond of his provincial regulator: “The MFDA is not interested in having a discussion, let alone being sensitive to a small dealer. But the Saskatchewan Financial Services Commission looks at the rules and applies them to small businesses accordingly.” IE