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THE SECURITIES ACT |
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Order No. 7021 |
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Section 31.1 |
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October 22, 2014 |
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA
WHEREAS:
(A) The Manitoba Securities Commission (the “Commission”) issued an order on May 31, 2007 (the “Original Order), recognizing the Mutual Fund Dealers Association of Canada (the “MFDA”) as a self-regulatory organization pursuant to subsection 31.1(1) of The Securities Act (the “Act”).
(B) Section 14 of Schedule A to the Original Order suspended MFDA Rule 2.4.1 (“Rule 2.4.1”) until December 31, 2008. Rule 2.4.1 required a mutual fund dealer to pay any remuneration for business conducted by a salesperson on its behalf directly to and in the name of the salesperson.
(C) The Commission issued an Order (the “Exemption Order”) dated October 5, 2007 pursuant to section 20.1 of the Act providing a registration exemption for a Salespersons’ Corporation solely in connection with receiving commissions and fees from a dealer, subject to certain terms and conditions.
(D) The Commission issued an Order (the “Variation Order”) dated September 12, 2008, varying the Original Order pursuant to subsection 31.5(3) by amending section 14 of Schedule A to extend the suspension of Rule 2.4.1 in Manitoba until such time as a decision or legislative amendments were made with respect to the payment of commissions to non-registered entities.
(E) The Commission issued an Order dated November 28, 2008 amending and restating the MFDA’s recognition as a self regulatory organization deleting the definition of “Public Director” from Schedule A of the Order.
(F) The Commission approved amendments to Rule 2.4.1 on March 23, 2010 which included provisions to address the terms and conditions in the Exemption Order and the Variation Order.
(G) The MFDA is recognized by the British Columbia Securities Commission, the Alberta Securities Commission, the Financial and Consumer Affairs Authority of Saskatchewan, the Ontario Securities Commission, the Nova Scotia Securities Commission, the Financial and Consumer Services Commission of New Brunswick, and the Government of Prince Edward Island Superintendent of Securities (together with the Commission, the “Recognizing Regulators”) as a self-regulatory organization.
(H) The Recognizing Regulators entered into a Memorandum of Understanding regarding oversight of the MFDA effective October 2, 2013, including the Joint Rule Review Protocol (the “JRRP”) established for review and approval of, or non-objection to, rule changes.
(I) The Commission is of the opinion that it would not be prejudicial to the public interest to amend Schedule A of the MFDA Recognition Order to:
1. remove section 14 - Suspension of MFDA Rule 2.4.1;
2. replace references to an investor protection plan (IPP) with the MFDA Investor Protection Corporation (IPC);
3. replace the rule review steps described in section 11 with a statement requiring the MFDA to comply with the JRRP.
IT IS ORDERED:
1. THAT, the Commission amends and restates the MFDA’s recognition as a self-regulatory organization so that the recognition pursuant to subsection 31.1(1) of the Securities Act continues, subject to the terms and conditions attached as Schedule A to this Order.
2. THAT, the Variation Order be and is hereby revoked.
3. THAT, this order comes into effect on November 6, 2014.
BY ORDER OF THE COMMISSION
___”Chris Besko”_____
Acting Director
SCHEDULE A
TERMS AND CONDITIONS OF
RECOGNITION OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA
AS A SELF-REGULATORY ORGANIZATION FOR MUTUAL FUND DEALERS
1. DEFINITIONS
For the purposes of this Schedule:
"Approved Person" has the same meaning as that under the MFDA rules, as amended by the MFDA and approved by the Commission from time to time;
"member" means a member of the MFDA;
“MFDA IPC” means MFDA Investor Protection Corporation;
"rules" means the by-laws, rules, regulations, policies, forms, and other similar instruments of the MFDA; and
"securities legislation" has the same meaning as that defined in National Instrument 14-101.
2. STATUS
The MFDA is and shall remain a not-for-profit corporation.
3. CORPORATE GOVERNANCE
(A) The MFDA’s arrangements with respect to the appointment, removal from office and functions of the persons ultimately responsible for making or enforcing the rules of the MFDA, being the Board of Directors (the "Board"), shall secure a proper balance between the interests of the different members of the MFDA in order to ensure diversity of representation on the Board. In recognition that the protection of the public interest is a primary goal of the MFDA, a reasonable number and proportion of directors on the Board and on the committees of the Board shall be and remain during their term of office Public Directors as defined in By-law No. 1 of the MFDA.
(B) The MFDA’s governance structure shall provide for:
(i) at least 50% of its directors, other than its President and Chief Executive Officer, shall be Public Directors;
(ii) the President and Chief Executive Officer of the MFDA is deemed to be neither a Public Director nor a non-Public Director;
(iii) appropriate representation of Public Directors on committees and bodies of the Board, in particular:
(a) at least 50% of directors on the governance committee of the Board shall be Public Directors,
(b) a majority of directors on the audit committee of the Board shall be Public Directors,
(c) at least 50% of directors on the executive committee of the Board, if any, shall be Public Directors,
(d) meetings of the Board shall have a quorum requirement of a reasonable number and proportion of Public Directors and non-Public Directors, with at least two Public Directors, and
(e) meetings of any committee or body of the Board shall have a quorum requirement of a reasonable number and proportion of Public Directors and non-Public Directors, provided that if the committee or body has Public Directors then the quorum must require at least one Public Director be present;
(iv) the remaining number of directors serving on the Board and on the above referred to committees and bodies of the Board, shall consist of directors representing the different members of the MFDA to ensure diversity of representation on the Board in accordance with paragraph (A);
(v) appropriate qualification, remuneration, and conflict of interest provisions and provisions with respect to the limitation of liability of and indemnification protection for directors, officers and employees of the MFDA; and
(vi) a chief executive officer and other officers, all of whom, except for the chair of the Board, are independent of any member.
4. FEES
(A) Any and all fees imposed by the MFDA on its members shall be equitably allocated and bear a reasonable relation to the costs of regulating members, carrying out the MFDA’s objects and protecting the public interest. Fees shall not have the effect of creating unreasonable barriers to membership and shall be designed to ensure that the MFDA has sufficient revenues to discharge its responsibilities.
(B) The MFDA’s process for setting fees shall be fair, transparent, and appropriate.
5. COMPENSATION OR CONTINGENCY TRUST FUNDS
The MFDA shall co-operate with the MFDA IPC and any compensation funds or contingency trust funds that are from time to time considered under securities legislation to be compensation funds or contingency trust funds for mutual fund dealers. The MFDA shall ensure that its rules give it the power to assess members, and require members to pay such assessments, on account of assessments or levies made by or in respect of the MFDA IPC.
6. MEMBERSHIP REQUIREMENTS
(A) The MFDA's rules shall permit all properly registered mutual fund dealers who satisfy the membership criteria to become members thereof and shall provide for the non-transferability of membership.
(B) Without limiting the generality of the foregoing, the MFDA’s rules shall provide for:
(i) reasonable financial and operational requirements, including minimum capital and capital adequacy, debt subordination, bonding, insurance, record-keeping, new account, knowledge of clients, suitability of trades, supervisory practices, segregation, protection of clients' funds and securities, operation of accounts, risk management, internal control and compliance (including a written compliance program), client statement, settlement, order taking, order processing, account inquiries, confirmation and back office requirements;
(ii) reasonable proficiency requirements (including training, education and experience) with respect to Approved Persons of members;
(iii) consideration of disciplinary history, including breaches of applicable securities legislation, the rules of other self-regulatory organizations or MFDA rules, prior involvement in criminal, relevant quasi-criminal, administrative or insolvency proceedings or civil proceedings involving business conduct or alleging fraudulent conduct or deceit, and prior business and other conduct generally, of applicants for membership and any partners, directors and officers, in order that membership may, where appropriate, be refused where any of the foregoing have previously engaged in improper conduct, and shall be refused where the past conduct of any of the foregoing affords reasonable grounds for belief that the applicant's business would not be conducted with integrity;
(iv) reasonable consideration of relationships with other members and other business activities to ensure the appropriateness thereof; and
(v) consideration of the ownership of applicants for membership under the criteria established in paragraph 6(E).
(C) The MFDA shall require members to confirm to the MFDA that persons that it wishes to sponsor, employ or associate with as Approved Persons comply with applicable securities legislation and are properly registered.
(D) The MFDA rules shall require a member to give prior notice to the MFDA before any person or company acquires a material registered or beneficial interest in securities or indebtedness of or any other ownership interest in the member, directly or indirectly, or becomes a transferee of any such interests, or before the member engages in any business combination, merger, amalgamation, redemption or repurchase of securities, dissolution or acquisition of assets. In each case there may be appropriate exceptions in the case of publicly traded securities, de minimis transactions that do not involve changes in de facto or legal control or the acquisitions of material interests or assets, and non-participating indebtedness.
(E) The MFDA rules shall require approval by the MFDA in respect of all persons or companies proposing to acquire an ownership interest in a member in the circumstances outlined in paragraph 6(D) and, except as provided in paragraph 6(F), for approval of all persons or companies that satisfy criteria providing for:
(i) consideration of disciplinary history, including breaches of applicable securities legislation, the rules of other self-regulatory organizations or MFDA rules, involvement in criminal, relevant quasi-criminal, administrative or insolvency proceedings or civil proceedings involving business conduct or alleging fraudulent conduct or deceit, and prior business and other conduct generally; and
(ii) reasonable consideration of relationships with other members and involvement in other business activities to ensure the appropriateness thereof.
(F) The MFDA rules shall give the MFDA the right to refuse approval of all persons or companies that are proposing to acquire an ownership interest in a member in the circumstances outlined in paragraph 6(D) who do not agree to:
(i) submit to the jurisdiction of the MFDA and comply with its rules;
(ii) notify the MFDA of any changes in his, her or its relationship with the member or of any involvement in criminal, relevant quasi-criminal, administrative or insolvency proceedings or in civil proceedings involving business conduct or alleging fraudulent conduct or deceit;
(iii) accept service by mail in addition to any other permitted methods of service;
(iv) authorize the MFDA to co-operate with other regulatory and self-regulatory organizations, including sharing information with these organizations; and
(v) provide the MFDA with such information as it may from time to time request and full access to and copies of any records.
(G) The MFDA shall notify the Commission forthwith of members whose rights and privileges will be suspended or terminated or whose membership will be terminated, and in each case the MFDA shall identify the member, the reasons for the proposed suspension or termination and provide a description of the steps being taken to ensure that the member’s clients are being dealt with appropriately.
7. COMPLIANCE BY MEMBERS WITH MFDA RULES
(A) The MFDA shall enforce, as a matter of contract between itself and its members, compliance by its members and their Approved Persons with the rules of the MFDA and the MFDA shall cooperate with the Commission in ensuring compliance with applicable securities legislation relating to the operations, standards of practice and business conduct of members and Approved Persons, without prejudice to any action that may be taken by the Commission under securities legislation.
(B) The MFDA shall conduct periodic reviews of its members and the members’ Approved Persons to ensure compliance by its members and the members’ Approved Persons with the rules of the MFDA and shall conduct such reviews at a frequency requested by the Commission or its staff. The MFDA shall provide notice to staff of the Commission of any material violations of securities legislation of which it becomes aware in the ordinary course operation of its business. The MFDA shall also cooperate with the Commission in the conduct of reviews of its members and the members’ Approved Persons as requested by the Commission or its staff, to ensure compliance by its members and their Approved Persons with applicable securities legislation.
(C) The MFDA shall promptly report to the Commission when:
(i) any member has failed to file on a timely basis any required financial, operational or other report;
(ii) early warning thresholds established by the MFDA that would reasonably be expected to raise concerns about a member’s liquidity, risk-adjusted capital or profitability have been triggered by any member; and
(iii) any condition exists with respect to a member which, in the opinion of the MFDA, could give rise to payments being made out of the MFDA IPC, including any condition which, alone or together with other conditions, could, if appropriate corrective action is not taken, reasonably be expected to:
(a) inhibit the member from promptly completing securities transactions, promptly segregating clients’ securities as required or promptly discharging its responsibilities to clients, other members or creditors,
(b) result in material financial loss, or
(c) result in material misstatement of the member’s financial statements.
The MFDA shall, in each case, identify the member, describe the circumstances that gave rise to the reportable event and describe the MFDA’s proposed response to ensure the identified circumstances are resolved.
(D) The MFDA shall promptly report to the Commission actual or apparent misconduct by members and their Approved Persons and others where investors, creditors, members, the MFDA IPC or the MFDA may reasonably be expected to suffer serious damage as a consequence thereof, including where the solvency of a member is at risk, fraud is present or there exist serious deficiencies in supervision or internal controls or non-compliance with MFDA rules or securities legislation. The MFDA shall, in each case, identify the member, the Approved Persons, or others, and the misconduct or deficiency as well as the MFDA’s proposed response to ensure that the identified problem is resolved.
(E) The MFDA shall advise the Commission promptly following the taking of any action by it with respect to any member in financial difficulty.
(F) The MFDA shall promptly advise the MFDA IPC of any actual or apparent material breach of the rules thereof of which the MFDA becomes aware.
8. DISCIPLINE OF MEMBERS AND APPROVED PERSONS
(A) The MFDA shall, as a matter of contract, have the right to and shall appropriately discipline its members and their Approved Persons for violations of the rules of the MFDA and shall cooperate with the Commission in the enforcement of applicable securities legislation relating to the operations, standards of practice and business conduct of the members and Approved Persons, without prejudice to any action that may be taken by the Commission under securities legislation.
(B) The MFDA rules shall enable it to prevent the resignation of a member from the MFDA if the MFDA considers that any matter affecting the member or any registered or beneficial holder of a direct or indirect ownership interest in securities, indebtedness or other interests in the member, or in a person or company associated or affiliated with the member or affecting the member’s Approved Persons or any of them, should be investigated or that the member or any such person, company or Approved Person should be disciplined.
(C) The MFDA shall require its members and their Approved Persons to be subject to the MFDA’s review, enforcement and disciplinary procedures.
(D) The MFDA shall notify
(i) the Commission in writing, and
(ii) the public and the media
(a) of any disciplinary or settlement hearing, as soon as practicable and in any event not less than 14 days prior to the date of the hearing, and
(b) of the disposition of any disciplinary action or settlement, including any discipline imposed, and shall promptly make available any written decision and reasons.
(E) Any notification required under paragraph 8 (D) shall include, in addition to any other information specified in paragraph 8 (D), the names of the member and the relevant Approved Persons together with a summary of circumstances that gave rise to the proceedings.
(F) The MFDA shall maintain a register to be made available to the public, summarizing the information which is required to be disclosed to the Commission under paragraphs 8 (D) and (E).
(G) The information given to the Commission under paragraphs 8 (D) and (E) will be published by the Commission unless the Commission determines otherwise.
(H) The MFDA shall at least annually review all material settlements involving its members or their Approved Persons and their clients with a view to determining whether any action is warranted, and the MFDA shall prohibit members and their Approved Persons from imposing confidentiality restrictions on clients vis-à-vis the MFDA or the Commission, whether as part of a resolution of a dispute or otherwise.
(I) Disciplinary and settlement hearings shall be open to the public and media except where confidentiality is required for the protection of confidential matters. The criteria and any changes thereto for determining these exceptions shall be specified and submitted to the Commission for approval.
(J) The MFDA will conduct disciplinary hearings in the MFDA Region:
(i) in which the member has its principal office;
(ii) in which a member has a branch office;
(iii) in which the respondent, if an Approved Person in a disciplinary action pursuant to MFDA By-law No. 1, was approved at the time the activities which are the subject of the disciplinary action primarily occurred, provided that,
(a) if the Approved Person was approved in more than one Region at the relevant time, and the matter which is the subject of the disciplinary action involves a client in a Region where the respondent was approved other than that in which the respondent resides, then in which such client resided at the time such activities occurred; or
(b) if the applicable Regional Council cannot otherwise be determined, then in which the respondent resided at the relevant time; or
(iv) in which the activities which are the subject of a disciplinary action against a respondent member pursuant to MFDA By-law No. 1 primarily occurred, or, if such activities are not referable to any specific Region, in which the principal office of the respondent member is located, provided that, if a disciplinary action involves both an Approved Person and a member, the Regional Council having jurisdiction pursuant to clause (3) herein.
(K) The MFDA will in accordance with the requirements under paragraph 8(J) conduct hearings in its Prairie Region where hearings involve a Manitoba member, Approved Person or client. Where such hearings are conducted in the Prairie Region, the hearings will be conducted in Manitoba, unless the balance of convenience of the parties and clients involved favours a hearing in another province in the Prairie Region.
(L) The MFDA by-laws will provide that a member, Approved Person, or other person in Manitoba directly affected by an MFDA hearing decision may appeal the decision to the Commission. The MFDA agrees to cooperate fully with the Commission to facilitate the conduct of an appeal of an MFDA decision made to the Commission.
9. DUE PROCESS
The MFDA shall ensure that the requirements of the MFDA relating to admission to membership, the imposition of limitations or conditions on membership, denial of membership and termination of membership are fair and reasonable, including in respect of notice, an opportunity to be heard or make representations, the keeping of a record, the giving of reasons and provision for appeals.
10. PURPOSE OF RULES
(A) The MFDA shall, subject to the terms and conditions of its recognition and the jurisdiction and oversight of the Commission in accordance with securities legislation, establish such rules as are necessary or appropriate to govern and regulate all aspects of its business and affairs and shall in so doing:
(i) seek to ensure compliance by members and their Approved Persons with applicable securities legislation relating to the operations, standards of practice and business conduct of the members;
(ii) seek to prevent fraudulent and manipulative acts and practices and to promote the protection of investors, just and equitable principles of trade and high standards of operations, business conduct and ethics;
(iii) seek to promote public confidence in and public understanding of the goals and activities of the MFDA and to improve the competence of members and their Approved Persons;
(iv) seek to standardize industry practices where appropriate for investor protection;
(v) seek to provide for appropriate discipline;
and shall not:
(vi) permit unfair discrimination among investors, mutual funds, members or others; or
(vii) impose any barrier to competition that is not appropriate.
(B) Unless otherwise approved by the Commission, the rules of the MFDA governing the conduct of member business regulated by the MFDA shall afford investors protection at least equivalent to that afforded by securities legislation, provided that higher standards in the public interest shall be permitted and are encouraged.
11. RULES AND RULE-MAKING
The MFDA will comply with the process for filing and obtaining Commission approval for by-laws, Rules and any amendments to by-laws or Rules as outlined in the JRRP, as amended from time to time.
12. OPERATIONAL ARRANGEMENTS AND RESOURCES
(A) The MFDA shall have adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules. With the consent of the Commission, the arrangements for monitoring and enforcement may make provision for the following:
(i) one or more parts of those functions to be performed (and without affecting its responsibility) by another body or person that is able and willing to perform it; and
(ii) its members and their Approved Persons to be deemed to be in compliance with its rules by complying with the substantially similar rules of such other body or person.
The Commission’s consent may be varied or revoked from time to time and may be subject to terms and conditions.
(B) The MFDA shall respond promptly and effectively to public inquiries and generally shall have effective arrangements for the investigation of complaints (including anonymous complaints) against its members or their Approved Persons. With the consent of the Commission, such arrangements may make provision for one or more parts of that function to be performed on behalf of the MFDA (and without affecting its responsibility) by another body or person that is able and willing to perform it. The Commission’s consent may be varied or revoked from time to time and may be subject to terms and conditions. The MFDA and any other body or person performing such function on behalf of the MFDA shall not refrain from investigating complaints due to the anonymity of the complainant where the complaint is otherwise worthy of investigation and sufficiently detailed to permit investigation.
(C) The MFDA shall ensure that it is accessible to the public and shall designate and make available to the public the names and telephone numbers of persons to be contacted for various purposes, including making complaints and enquiries.
(D) The arrangements and resources referred to in paragraphs (A) and (B) above shall consist at a minimum of:
(i) a sufficient complement of qualified staff, including professional and other appropriately trained staff;
(ii) an adequate supervisory structure;
(iii) adequate management information systems;
(iv) a compliance department and an enforcement department with appropriate reporting structures directly to senior management, and with written procedures wherever practicable;
(v) procedures and structures that minimize or eliminate conflicts of interest within the MFDA;
(vi) inquiry and complaint procedures and a public information facility, including with respect to the discipline history of members and their Approved Persons;
(vii) guidelines regarding appropriate disciplinary sanctions; and
(viii) the capacity and expertise to hold disciplinary hearings (including regarding proposed settlements) utilizing public representatives within the meaning of the current section 19.5 of the MFDA’s By-law No. 1 together with member representatives.
(E) The MFDA shall cooperate and assist with any reviews, scheduled or unscheduled, of its self-regulatory functions by the MFDA IPC or the Commission. In addition, in the event that the Commission is of the view that there has been a serious actual or apparent failure in the MFDA's fulfilment of its self-regulatory functions, the MFDA shall, where requested by the Commission, undergo an independent third party review on terms and by a person or persons satisfactory to or determined by the Commission, which review shall be at the expense of the MFDA.
(F) The MFDA shall cooperate and assist with any reviews, scheduled or unscheduled, of its corporate governance structure by the Commission. In addition, in the event that the Commission is of the view that there has been a serious weakness in the MFDA’s corporate governance structure, the MFDA shall upon the request of the Commission undergo an independent third party review on terms and by a person or persons satisfactory to or determined by the Commission, which review shall be at the expense of the MFDA.
(G) The MFDA shall not make material changes to its organizational structure, which would affect its self-regulatory functions, without prior approval of the Commission.
(H) The MFDA shall comply with reporting requirements set out in Appendix A, as amended from time to time by the Commission or its staff. The MFDA shall also provide the Commission with other reports, documents and information as the Commission or its staff may reasonably request.
13. INFORMATION SHARING
The MFDA shall cooperate, by sharing information and otherwise, with the MFDA IPC, the Commission and its staff, and other Canadian federal, provincial and territorial recognized self-regulatory organizations and regulatory authorities, including without limitation, those responsible for the supervision or regulation of securities firms, financial institutions, insurance matters and competition matters. The Commission and its staff shall have unrestricted access to the books and records, management, staff and systems of the MFDA.
APPENDIX A
Reporting Requirements
1. Prior Notification
1.1 The MFDA shall advise the Commission in advance of any proposed material changes or reductions in its financial review program or operational and sales compliance review programs, including as to procedures or scope, or any proposed changes in its external audit instructions and of any proposed material changes or reductions in the operation of its investigation or enforcement programs.
2. Immediate Notification
2.1 The MFDA shall give the Commission notice of new directors, officers and committee chairpersons, including a 5 year employment history and information as to the involvement in criminal, relevant quasi-criminal, administrative or insolvency proceedings and civil proceedings involving business conduct or alleging fraudulent conduct or deceit in respect of each such person.
3. Annual Reporting
The MFDA shall within 120 days of its fiscal year end file the following information and reports to the Commission:
3.1 The MFDA’s self-regulatory staff complement, by function, and of any material changes or reductions in self-regulatory staff, by function;
3.2 Copy or summary of self-assessment by management of the MFDA’s performance of its self-regulatory responsibilities and any proposed actions arising therefrom. The self-assessment shall, for each of the MFDA’s member regulatory functions, set performance measurements against which performance can be compared, and identify major successes, significant problem areas, plans to resolve these problems, recruitment and training plans, and other information as reasonably requested by the Commission or its staff; and
3.3 The MFDA’s budget and audited financial statements.