Let’s make a deal[er] – 2016 a record year for MFDA enforcement activity

Topics:

Jun 15, 2017

In a May 26, 2017 press release, the Mutual Fund Dealers Association of Canada (“MFDA”) announced its 2016 Annual Enforcement Report, reporting that it brought a record 111 proceedings last year – the highest number of proceedings commenced in any year to date.

The MFDA’s role in regulating dealers and advisors

The MFDA is the national self-regulatory organization (“SRO”) for mutual fund dealers in Canada, with a mandate to enhance investor protection and strengthen public confidence in the country’s mutual fund industry. The MFDA regulates the operations, standards for practice, and business conduct of its members and their representatives (i.e. dealers and advisors), and its regulatory activities focus exclusively on the retail distribution of mutual funds.

The MFDA is formally recognized as an SRO by provincial securities commissions in eight provinces, and has a pending application for recognition before the Newfoundland and Labrador regulator. In Quebec, where the MFDA is not a formally recognized SRO, it has a cooperative agreement in place with the province’s regulator (the Autorité des marchés financiers) and actively participates in the regulation of the province’s mutual fund dealers.

MFDA announces record year of enforcement activity

MFDA enforcement activities focus on combatting unsuitable investment recommendations, falsification, unauthorized outside business activities, supervision and complaint handling deficiencies, and other securities regulatory breaches.

The MFDA reported that, in 2016, it:

  • commenced 111 proceedings against both dealers and advisors – the SRO’s highest annual number to date;
  • concluded 85 hearings, resulting in: fines of $21.1 million and almost $500,000 in costs against both dealers and advisors; and 22 permanent prohibitions and 26 suspensions against advisors; and
  • issued 120 warning letters and 86 cautionary letters.

These figures compare favourably to 2015, when the SRO commenced 69 proceedings and imposed only $5.4 million in fines.

Aside from the increase in cases, the MFDA report highlights its efforts to address signature falsification and its continued focus on complaint handling. Part of the increase in enforcement activity in 2016 is attributable to the surge in cases involving signature falsification allegations, with 60 of the 111 cases commenced involving such allegations. However, the report notes that:

“Most cases of signature falsification investigated by the MFDA do not involve client complaints, an intent on the part of the Approved Person to harm the client or resulting financial harm to the client. In many of the cases, the activity is done for purposes of client or advisor convenience.”

In addition, the SRO continued its focus on dealer supervision and complaint handling, with 11 proceedings commenced against dealers for such violations.

Ontario looks to give increased power to SROs

In the future, the MFDA may also see its fine collection rates rise if Ontario enacts proposed legislation giving SROs the right to enforce disciplinary actions and collect fines through courts.

While the MFDA has the power to collect fines from respondents who remain within the industry (i.e. current advisors), it does not have the power to collect fines from former advisors in provinces aside from Alberta and Prince Edward Island. Since the beginning of MFDA enforcement activity in 2004, its hearing panels have imposed almost $73.6 million in fines, of which approximately 10 percent has been collected; this compares to a collection rate of only 3 percent of imposed fines for 2016.