Canada’s ‘other’ national self regulatory agency is demonstrating its intention to police the mutual fund distributors it represents. On May 1, 2019, the Mutual Fund Dealers Association of Canada (MFDA), the national self-regulatory organization (SRO) for the distribution side of the Canadian mutual fund industry, released its 2018 Annual Enforcement Report (the Report). The Report, which highlights the organization's enforcement activities over the year, shows that the SRO’s enforcement activity appears to be on the rise.
MFDA President and CEO, Mark Gordon, describes the Report as highlighting a "significant increase" in enforcement activity over the past year, and the numbers that bear that out. The MFDA commenced a record-breaking 136 enforcement hearings in 2018, up from its previous high of 121 cases in 2017. In fact, 2018 marked the highest number of enforcement proceedings commenced by the MFDA in any year to date.
The Report attributes the increase in proceedings in part due to the supervisory efforts of MFDA Members, which have resulted in enhanced detection and reporting of MFDA rule breaches. The use of warning and cautionary letters is also up, perhaps signaling that (similar to IIROC) the MFDA is looking for flexible ways to deploy the enforcement options in its toolbox.
Over half of the proceedings were commenced utilizing the “bulk track” process that provides the MFDA the ability to proceed efficiently in consolidating cases with typically minor violation of MFDA requirements, and where the allegations are not disputed by the Respondent(s).
With respect to penalties, MFDA Hearing Panels imposed fines of approximately $6 million in 2018, of which approximately $3 million has been collected – i.e., almost 50%. This ratio is significant when placed against the backdrop of the MFDA Hearing Panels’ historical success rate – with the MFDA having imposed total fines of approximately $88 million since the commencement of disciplinary activity in 2004, and of that, collecting only roughly $12 million.
The Report also flags certain “new developments” that have occurred in 2018 which have impacted the enforcement landscape as it relates to the MFDA.
In particular, the MFDA expanded its evidence gathering powers in three provinces (to compel evidence and cooperation from non-registrants), was granted statutory immunity in several more provinces insulating the regulator from civil law suits relating to the exercise of its good faith and duties and powers, and released the MFDA Sanction Guidelines in November 2018 (replacing the MFDA Penalty Guidelines that had been in place since 2006) reflecting industry trends toward a more principles-based approach to sanctioning Members.
Key enforcement activity: Areas of interest
The Report highlights four areas of “key enforcement activity”, including sales incentive practices, reasonable supervisory investigation (RSI), concentration and KYC uniformity and branch reviews.
In particular, the Report notes that the MFDA expects to commence further proceedings in 2019 in respect of Member sales incentive practices, putting members on notice that failing to establish and maintain adequate systems/controls and supervision to ensure compliance with legislation relating to internal dealer sales incentives practices is firmly on their radar. Sales practices that give rise to conflicts of interest are a hot button issue for Canadian regulators, and one that we have written on in the past.
The Report also notes that RSI continues to be a focus for the MFDA. MFDA Policy No. 3 clarifies that Members are responsible for conducting an RSI, and Members should be on notice that the MFDA reviews whether an adequate RSI was completed. This applies to information received from both internal and external sources. A failure to respond appropriately and to investigate client complaints, or issues identified during a Member’s routine supervisory activity, will not be tolerated. The extent of how “reasonable” the supervisory investigation is will be laregely dependent on the severity of the allegations, and the complexity of the issues. In 2018, the MFDA proceeded against two Members for inadequate RSI’s.
For a fully copy of the detailed Report click here.