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New fund watchdog forming as need for oversight grows


Canada's new watchdog group -- charged with overseeing the firms that distribute mutual funds -- could not have been formed at a better time.

This was the view espoused by many panelists at the 12th annual Investment Funds Institute (IFIC) conference. They cited surging asset growth in the Canadian mutual fund industry and increasing acceptance by consumers of these investment vehicles as factors making the time ripe for new oversight. But there are still many details to be resolved concerning the new Mutual Fund Dealers Association (MFDA), IFIC delegates learned.

"For the first time in history, Canadians have as much invested in funds as in deposits and GICs [guaranteed investment certificates]," said Joe Oliver, president and chief executive officer of both the Investment Dealers Association of Canada (IDA) and the MFDA. Add to this market volatility and the fact that there are over 60,000 registrants licensed to sell mutual funds and you have conditions that raise questions about the adequacy of investor protections, Oliver said. Distributors are neither governed by standard regulations nor directly supervised by regulators, he noted.

The new self-regulatory organization is the result of a process initiated by a declaration by the provincial regulator, the Ontario Securities Commission in January 1997. Acknowledging that it had little power to directly monitor the practices of mutual-fund sellers, the OSC said that all mutual-fund registrants should become members of an SRO. The idea of an SRO was supported by the private sector, and the Canadian Securities Administrators was a major player in its development, Oliver said.

Larry Waite, the association's chief operating officer and first employee, described the formation of the new SRO as a significant historical event. He pointed out that the Toronto Stock Exchange and the IDA, which were previously the last SROs to be formed in the investment industry, are more than 80 years old. Waite, who was once director of enforcement with the OSC, described the goals of the new organization as investor protection.

The new regulator held its first board meeting on May 22 and was officially launched with Waite at its head on Oct. 1. In updating its status, Waite outlined the organization's structure, which has evolved from months of negotiation among the various fund distributors. Governed jointly by the IDA and IFIC and managed by the IDA, the MFDA board is made up of 21 directors. Seven are nominated by the IDA; seven are nominated by IFIC, representing primarily the interests of mutual fund dealers; and seven are public directors.

In addition, five regulatory committees have been established to develop policy in separate areas of the industry. These fields are: distribution structures; sales compliance and practices; proficiency and continuing education; capital and contingency; and books, records and administration.

The organization's goal is to be a national regulator for the industry, according to Waite. "There's a high likelihood that all provinces, with the exception of Quebec, will be included," he said. (Quebec is currently drafting legislation that will create a separate financial services branch that will govern the distribution of mutual funds as well as of other investment products in that province.)

Some significant issues surrounding the role and jurisdiction of the MFDA remain unresolved. The nature of the new regulator will in part be determined by industry participants themselves, attendees were told. "We must be present and involved as this organization develops. If we don't participate and give our input, someone else will," warned MFDA chairman Jacques Daoust in a speech to IFIC member delegates.

The IFIC is the only mutual fund industry organization in the world to have both managers and distributors on its board, said Tom Hockin, chairman of the IFIC. This dual membership explains, in part, the complexity of creating the MFDA and defining its operational role.

Crossovers among players in Canada's investment industry compound the problem of who is regulated by the new entity. For instance, among the unresolved issues is whether bank branches, where bank representatives sell mutual funds along with other investment products, will be obliged to join the SRO when bank-owned brokerage subsidiaries may already hold membership in another self-regulating industry group.

The regulatory committees are scheduled to submit recommendations to the board by January 1999, and rules are expected to be in place by early that year. The MFDA also expects regulators to recognize it as an SRO by 1999. At that time, firms that are just entering the industry will be obliged to join the MFDA. Pre-existing firms will be expected to join by 2000, as their registrations come up for renewal, according to Waite.

It also remains to be determined how dues will be set for the various members of the MFDA. Waite said that details of a tiered system of membership were still to be worked out. In addition, panelists agreed that how to ccordinate with Quebec's new financial services board -- which is expected to be operating within the next 18 months - will have to be addressed. "The next year promises to be a hectic one for compliance," said John Mountain, IFIC's vice president of regulation.