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Fund Distributors Face Tougher Oversight

Toronto - Distributors of mutual funds face more scrutiny, higher costs and stricter rules as a result of recent moves by Canadian regulators to increase consumer protection and standardize the rules governing the firms and individuals who sell these products.

Speaking at the Investment Funds Institute's annual conference in Toronto last month, Larry Waite, chief operating officer of the Mutual Fund Dealers Association, told industry delegates that all mutual fund dealers are expected to be members of a self-regulatory organization by the spring of 2000.

"We believe that investors should have the same degree of protection regardless of where they buy their mutual funds," said Waite.

The Mutual Fund Dealers Association was formed in June, 1998 and hopes to receive self-regulatory status in the provinces of British Columbia, Alberta and Ontario by November 1999. With this status, the association would have the authority to enforce compliance with standardized sales practices among its members.

The association would also have an enormous job ahead of it, since many mutual fund salespeople currently fall through the regulatory cracks. According to the Canadian Securities Administrators, the umbrella organization that encompasses all provincial securities commissions, there are approximately 60,000 salespersons in 300 dealer firms selling mutual funds in Canada. All of them fall outside the jurisdiction of the Investment Dealers Association of Canada, which regulates brokers.

The association's task would be further complicated by the fact that it would have no jurisdiction in Quebec, which has developed its own regulator. The province has an estimated 30,000 financial-services professionals, many of whose businesses include selling mutual funds.

With the Quebec government's enactment of Bill 188 on Oct. 1, oversight of distributors of financial products and services - including mutual funds - in the province is now the responsibility of the newly created "Bureau des services financiers."

While the new government entity in Quebec is entirely separate, its powers and goals parallel those that the association is expected to have in the rest of Canada. The inception of the bureau will harmonize the "mixed system of supervision" that previously existed in Quebec's financial services sector, said Louise Champoux-Paille, BSF president. Champoux-Paille spoke just two days before the new legislation came into force.

This consolidation of regulatory powers - in the bureau in Quebec and in the association elsewhere in Canada - means increased accountability on the part of fund distributors and their representatives. The new regulators have responsibility for monitoring and, in the case of misconduct, sanctioning the individuals and firms who sell mutual funds.

In Quebec, where the bureau serves to receive complaints against distributors, firms may be inspected and brought before a committee hearing. If a firm is found not to be in compliance with industry rules, the bureau can take disciplinary action such as revoking registrations, levying fines and suspending licenses, said Champoux-Paille.

Maintaining public confidence in the fund industry comes with a cost to participants. For membership in the association - which is mandatory for all fund distributors outside Quebec - proposed fees are based on the dealer's average assets under administration. Fees will range from an average of $5,304 in the lowest category to an average of $863,916 in the highest category, according to information currently being distributed by the association.

In Quebec, new rules now segment dealers according to their activities and dealers pay registration fees that vary according to the segment into which they fall. Representatives pay annual licensing fees ranging from $31 to $68 (All amounts are in Canadian dollars). There is also a registration fee of $63 for every type of service registrants provide.