The Mutual Fund Dealers Association of Canada (MFDA) recently published its 2018 Annual Enforcement Report (the Report), highlighting key enforcement activities and developments over the past year.
The MFDA commenced 136 enforcement proceedings in 2018 by Notice of Hearing or Notice of Settlement Hearing, a record number for the self-regulatory organization (SRO). The SRO attributes the record number, in part, to enhanced detection and reporting by its mutual fund dealer members (the Members). The Report highlighted the following trends:
Primary sources of cases to be assessed. Roughly 65% of the cases opened in 2018 stemmed from the MFDA’s Member Event Tracking System, through which Members can file event reports. The only other significant source of complaints (28%) was the general public. There were 50% less case openings prompted by event reports from the MFDA Compliance Department between 2017 and 2018 (from 16 to 8). Conversely, there was a marked uptick in complaints brought by the Canadian Securities Administrators and other regulators compared to last year (from 1 to 11).
Primary allegations. The top five alleged violations of MFDA Rules, By-Laws, or Policies in 2018 were the following: (1) pre-signed forms; (2) unauthorized commissions and fees; (3) unsuitable investments; (4) breaches of the MFDA Rule 2.1.1(b) business standards; and (5) unauthorized or discretionary trading without client approval. Compared to last year’s figures, allegations related to unauthorized commissions and fees more than doubled. Allegations tied to the falsification of documents/misrepresentations and outside activities decreased by more than 50%.
Hearing types and penalties. Of the 132 hearings concluded by the Enforcement Department in 2018, almost 75% were settlement hearings (as opposed to contested or uncontested hearings). 41 hearings resulted in suspensions, 19 in permanent prohibitions, and 5 in educational course requirements. Further, the MFDA Hearing Panels imposed over $6M in fines, down from $8.5M in 2017 and $21.1M in 2016.
Expanded evidentiary powers. In 2018, the MFDA was granted enhanced evidence gathering powers in three unidentified provinces which provide the SRO with the ability to compel evidence and cooperation from non-registrants.
New sanction guidelines. November 2018 also saw the introduction of the new MFDA Sanction Guidelines, which replaced the MFDA Penalty Guidelines that had been in place for over a decade. The Sanction Guidelines, in part, provide a framework for disciplinary actions, settlement negotiations, and determining appropriate sanctions.
Supervisory obligations. In 2018, 11 proceedings were concluded against Members and supervisors for failing to properly carry out a reasonable supervisory investigation. Members must track and monitor information that they receive, both internally and externally, pertaining to potential breaches of Member requirements and to take reasonable supervisory action in response to such reports.
Looking forward, the MFDA has explicitly cited sales incentive practices as a key enforcement area that it will continue to investigate in 2019. The MFDA is targeting any sales incentive practices that: (i) may impact product sales to clients; (ii) could engender conflicts of interest; and (iii) do not comply with National Instrument 81-105, Mutual Funds Sales Practices.
The author would like to thank Sarah Pennington, Articling Student, for her contribution to this article.