Oversight Review Report of
the Mutual Fund Dealers Association of Canada
Issued: September 15, 2017
I. Introduction
The Mutual Fund Dealers Association of Canada (the MFDA) is the national self-regulatory organization (SRO) that oversees mutual fund dealers in Canada. The MFDA’s head office is in Toronto and regional offices are in Calgary and Vancouver.
The MFDA is recognized as an SRO by the Alberta Securities Commission (ASC), the British Columbia Securities Commission (BCSC), the Financial and Consumer Affairs Authority of Saskatchewan (FCAA), the Financial and Consumer Services Commission of New Brunswick, the Manitoba Securities Commission (MSC), the Nova Scotia Securities Commission (NSSC), the Ontario Securities Commission (OSC), and the Prince Edward Island Office of the Superintendent of Securities, collectively, the Recognizing Regulators.
The MFDA is not recognized as an SRO in Québec. The MFDA cooperates with the Autorité des marchés financiers in regulating MFDA member firms with operations and activities in Québec.
Staff of the ASC, BCSC, FCAA, MSC, NSSC and OSC (Staff) conducted the review jointly.
This report details the objectives, methodology, frame of reference, report format, scope, overall assessment, and findings of the review for the period from August 1, 2015 to January 31, 2017 (the review period).
1. Objective
The objective of the oversight review was to evaluate whether selected regulatory processes were effective, efficient, and applied consistently and fairly, and whether the MFDA complied with the terms and conditions (T&Cs) of the Recognizing Regulators’ recognition orders.
2. Methodology
The Recognizing Regulators used a risk-based methodology to determine the scope of the review. On an annual basis, the Recognizing Regulators:
• assess the inherent risks of each functional area or key process based on:
o reviews of MFDA documentation, including management self-assessments and risk assessments
o information received from the MFDA in the ordinary course of oversight activities, including filings and discussions with MFDA staff
o extent and prioritization of findings from the last oversight review
o impact of significant events in or changes to markets and participants to a particular area
• evaluate known controls for each functional area
• consider relevant situational / external factors and the impact of enterprise wide risks on the MFDA as a whole or on multiple departments
• assign an initial overall risk score for each area
• discuss with the MFDA the effectiveness of other controls and processes that may be in place in specific functional areas
• assign an adjusted overall risk score for each area
• use the adjusted risk scores to determine the scope of the review
3. Frame of reference
Staff last performed an oversight review of the MFDA in late fall of 2015[1]. Following that review, Staff issued and published a report on November 18, 2016 (the 2015 oversight review report), which noted a number of regulatory related findings, particularly in enforcement with two high priority findings and financial compliance with one high priority finding. The 2015 oversight review report included the MFDA’s commitments and timelines to resolve the findings, which Staff reviewed and accepted.
As part of the risk assessment process, Staff followed up on the MFDA’s progress in resolving the 2015 oversight review report findings. Staff also considered the following challenges faced by the MFDA, and the implications for the relevant functional areas and processes included in the review:
• Stakeholder expectations: As an SRO, the MFDA must fulfill its regulatory mandate to enhance investor protection and strengthen public confidence in the mutual fund industry. In achieving this objective, the MFDA must manage limited resources committed to regulating and enforcing existing standards of conduct on its members and approved persons, while meeting the needs and expectations of the investing public and broader financial community.
• Changing regulations: Changes in the investment industry also require the MFDA to focus resources on policy initiatives to interpret changes in securities regulation, and implement changes to internal processes and systems necessary to keep pace with the evolving regulatory environment.
4. Report format
In keeping with a risk-based approach, this report focuses on functional areas or key processes with findings that require corrective action. While the MFDA is required to respond to all findings, some findings do not concern every MFDA office. In those cases, the MFDA must correct deficiencies as necessary to ensure consistency in all MFDA offices.
5. Scope
Through the risk assessment process, including consideration of the status of the resolution of findings from the last oversight review and the challenging issues that may affect the MFDA, Staff identified specific processes and activities[2] within the following above average risk areas for review[3]:
Above average
- Enforcement
- Financial compliance
- Policy
Also through the risk assessment process, Staff determined that the following moderate and low risk areas would not be in this review[4]:
Moderate
- Sales compliance
- Membership services
- Financial operations
- Risk management
- Information technology
Low
- Corporate governance
6. Priority of findings
Staff prioritized findings based on the following criteria:
High |
Staff raise an issue that, if unresolved, will result in the MFDA not meeting its mandate, or one or more of the terms and conditions of its recognition orders, or the applicable regulatory requirements. The MFDA must immediately put in place an action plan (with any supporting documentation) and timelines for addressing the finding that are acceptable to Staff. If necessary, compensating controls should be implemented before the finding is resolved. The MFDA must report regularly to Staff on its progress. |
Medium |
Staff raise an issue that, if unresolved, has the potential to result in an inconsistency with the MFDA’s mandate, or with one or more of the terms and conditions of its recognition orders, or with applicable regulatory requirements. The MFDA must put in place an action plan (with any supporting documentation) and timelines for addressing the finding that are acceptable to Staff. If necessary, compensating controls should be implemented before the finding is resolved. The MFDA must report regularly to Staff on its progress. |
Low |
Staff identify an issue requiring improvement in the MFDA’s processes or controls and are raising the issue for resolution by the MFDA’s management.
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7. Summary of findings and assessment
The MFDA made significant progress in completing the action plans for the findings cited in the 2015 oversight review report as detailed in the Fieldwork & findings section.
In this review, Staff identified one medium priority finding in the Financial Compliance Department and one low priority finding in the Enforcement Department. There were no findings in the Policy Department. Staff expect the MFDA to resolve the findings, and Staff will monitor and follow up on the MFDA’s progress in taking specific and timely corrective action on the findings.
Other than the findings noted, Staff did not identify concerns with the MFDA meeting the relevant terms and conditions of the Recognizing Regulators’ recognition orders. Staff make no comments on the MFDA operations or activities that are outside the scope of the review.
II. Fieldwork & findings
A. Enforcement
B. Financial compliance
T&C #7 of the recognition orders require the MFDA to conduct periodic examinations of MFDA members and Approved Persons to ensure they comply with MFDA rules. The Financial Compliance Department is responsible for ensuring that members comply with prudential requirements.
Financial compliance staff are responsible for:
The 2015 oversight review identified:
Following the risk assessment, the 2017 oversight review principally focused on the MFDA’s progress in addressing the findings from the 2015 oversight review report.
In fieldwork, Staff reviewed:
Staff interviewed the Senior Vice-President, Member Regulation - Compliance, the Managing Director, Financial Compliance, and other staff.
• formalized an annual review of the risk model in its policies and procedures
Staff expect the MFDA to review new and amended internal financial compliance processes on an ongoing and timely basis to ensure that they are operating effectively, and revise as necessary.
Staff identified one medium priority finding regarding a lack of policies and procedures for handling repeat deficiencies as noted below.
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Finding: Lack of written guidance for handling repeat deficiencies
MFDA financial compliance staff are expected to exercise judgment in determining the appropriate resolution of repeat deficiencies in MFDA financial compliance examination reports issued to members. However, there is no specific written guidance for MFDA staff to assist them in assessing the nature and significance of repeat deficiencies and in determining an appropriate timeline for resolution by the members.
In one financial compliance examination file reviewed by Staff, the financial compliance examination report noted several repeat deficiencies that had also been raised in prior examination reports. In this case, financial compliance staff accepted the member’s responses and did not require the member to provide evidence of resolution of the repeated deficiencies. In Staff’s view, written guidance, in addition to professional judgment, is necessary for the consistent classification and resolution of repeat deficiencies. In addition, guidance concerning the follow-up work required based on the significance of each finding and adequacy of the member’s response is also necessary.
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Why this is Important / Risk Implication
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A lack of specific written guidance concerning the nature, classification, significance and resolution of repeat deficiencies may result in inconsistent or inadequate outcomes, and could undermine the effectiveness of the regulatory process and increase the risk to the investing public.
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Priority |
Medium
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Requirement
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Please describe the action plan that MFDA will take to address this finding, including a timeline for resolution.
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MFDA’s Response
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We agree that providing additional written guidance, relating to the nature / significance of repeat deficiencies and the related expected timeline for resolution by the Member, could enhance consistency going forward. We will make changes to our policies and procedures to address the finding by September 30, 2017.
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Staff Comments and Follow-up |
Staff are encouraged that the MFDA will make changes to their policies and procedures to guide MFDA staff in assessing the nature and significance of repeat deficiencies and in determining an appropriate timeline for resolution by the member.
Staff expect the MFDA to: • have the new process in place by September 30, 2017 • monitor and report on the effectiveness of the enhancements by February 28, 2018
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C. Policy
T&C #10 of the recognition orders require the MFDA to establish by-laws, rules, regulations, policies, forms, and other similar instruments as are necessary or appropriate to govern and regulate all aspects of its business and affairs. The Policy Department is responsible for:
The 2015 oversight review identified:
Based on Staff’s annual risk assessment of the MFDA, Staff reviewed the MFDA’s progress in addressing findings from the 2015 oversight review.
In fieldwork, Staff reviewed:
Staff interviewed the MFDA’s General Counsel, Corporate Secretary and Vice-President, Policy, and other senior management.
Staff found that the MFDA addressed the issues raised in the 2015 oversight review. The MFDA enhanced their internal documentation procedures to provide greater clarity on the scope of authority of individuals authorized to act for the Corporation in accordance with MFDA Rules and By-law.
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Finding
There were no findings noted for the area.
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[1] The 2015 oversight review period was from July 1, 2012 to July 31, 2015.
[2] The processes and activities are described in more detail within the body of the report.
[3] No functional areas were determined to be categorized as high risk.
[4] The areas continue to be subject to oversight by the Recognizing Regulators through ongoing mandatory reporting by the MFDA as required by the recognition orders, as well as regularly scheduled and ad hoc meetings between the Recognizing Regulators and MFDA staff.