Annual Report Raising the standard of regulation in Canada

Transcription

1 Mutual Fund Dealers Association of Canada Association canadienne des courtiers de fonds mutuels Annual Report Raising the standard of regulation in Canada 2010

2 Table of Contents Joint Message from the Chair and President MFDA Membership Information Corporate Governance Regional Councils and Hearing Panels MFDA Regulatory Operations Compliance Enforcement Policy Membership Services Management Discussion and Analysis Management s Responsibility for Financial Reporting Financial Statements

3 Joint Message from the Chair and President The MFDA Board of Directors experienced significant change in fiscal , with the introduction of six new Public Directors and one new Industry Director between November 2009 and March The new Directors bring a variety and wealth of experience to the Board. The new Board and senior staff recognize the contributions of Directors who stepped down last year and we thank George Aguiar, Martin Friedland, William Grace, Helen Meyer, Janet Pau and Robert Wright for their dedication and leadership. Their contributions are reflected in the Canadian Securities Administrators Oversight Review Report of the MFDA, released in July 2010, which concludes that the MFDA s Compliance and Policy Departments continue to guide its maturing membership towards a culture of compliance and notes that Generally, the MFDA s processes are efficient, effective, consistent, and fair; and it has adequate staffing, resources and training processes to perform its regulatory functions effectively and efficiently. While the report s overall findings are positive and tell us that we are doing many things right, we know that there is room for improvement and we will continue to strive for the highest standards and best practices at every level of the organization. As President and CEO, I welcome Rod McLeod as a new Public Director and Chair of the Board. His legal and regulatory experience, both as a regulator and, laterally, as a lawyer in private practice representing private sector business organizations impacted by regulators, will be very helpful. Together, we both welcome the other new Board members: Sonny Goldstein, Sandy Grant, Lea Hansen, Dawn Russell, Doug Thomson and Janet Woodruff. The MFDA is committed to on-going dialogue with its stakeholders and will continue to meet with regulators, Members, investor representatives and industry associations on a regular basis. Experience tells us that obtaining real-time information about industry practices, concerns and problems facing Members and investors is crucial to the MFDA s ability to meet its regulatory goals. We conclude by thanking the MFDA s management and staff. Their skill, integrity and dedication ensure that the MFDA continues to raise the standard of regulation in Canada for the protection of investors through commitment to collaboration, staff excellence and regulatory best practices. Rod M. McLeod, Q.C. Chair, MFDA Board of Directors Larry M. Waite President & Chief Executive Officer Mutual fund dealers association of canada 1

4 MFDA Membership Information The MFDA is Canada s national self-regulatory organization responsible for regulating the activities and operations of 139 mutual fund dealer firms ( Members ) and their approximately 73,000 salesperson ( Approved Persons ). These Members accounted for approximately $271 Billion of the approximately $592 Billion of client assets under administration in the Canadian mutual fund industry as at June 30, There are four principal categories of MFDA Membership. Level 1 Member - an introducing dealer that is not a Level 2, 3 or 4 Member. Level 2 Member - a dealer that does not hold client cash, securities or other property (i.e. the Member does not operate a trust account and conducts business in client name only). Level 3 Member - a dealer that does not hold client securities or other property except client cash in a trust account. Level 4 Member - includes all other Members (including a Member that acts as a carrying dealer). The MFDA presently operates in Québec pursuant to a Cooperative Agreement with the Autorité des marchés financiers and the Chambre de la sécurité financière. Accordingly, the information set out in the tables below does not reflect Member activities based in the province of Québec. Number of MFDA Members by Category Level (as at June 30) Level 1 Nil Nil Nil Nil Nil Level Level Level Mutual fund dealers association of canada

5 MFDA Membership Profile (as at June 30) Number of Members Number of Approved Persons 69,691 71,086 73,455 74,768 73,291 Assets Under Administration of all Members $ 276 B $ 310 B $ 304 B $ 252 B $ 271 B Total Industry Assets Under Administration $ 589 B $ 707 B $ 700 B $ 547 B $ 592 B Location of Member Head Offices (as at June 30) Ontario British Columbia Québec Alberta Manitoba Saskatchewan Nova Scotia New Brunswick Total Member Assets Under Administration per Head Office (as at June 30) Ontario $ B $ B $ B $ B $ B Manitoba 46.7 B 55.7 B 52.4 B 45.7 B 48.9 B British Columbia 13.5 B 16.4 B 16.5 B 13.6 B 14.8 B Québec* 6.4 B 7.8 B 7.2 B 9.9 B 10.5 B Saskatchewan 4.4 B 5.0 B 4.6 B 3.4 B 3.5 B Alberta 3.1 B 3.9 B 3.8 B 3.1 B 2.5 B New Brunswick 0.5 B 0.6 B 0.5 B 0.4 B 0.2 B Nova Scotia 0.2 B 0.2 B 0.2 B 0.1 B 0.1 B Total (rounded) $ 276 B $ 310 B $ 304 B $ 252 B $ 271 B * The figures reflect assets outside the province of Québec for dealers with a Head Office in Québec. Mutual fund dealers association of canada 3

6 Number of Members by Assets Under Administration $100 Million and Under $101 Million to $500 Million $501 Million to $1 Billion Over $1 Billion Total Number of Members by Firm Size Approved Persons or Fewer to 100 Approved Persons to 500 Approved Persons to 1,000 Approved Persons Over 1,000 Approved Persons Total Staff of the MFDA s Toronto Office. 4 Mutual fund dealers association of canada

7 MFDA Vision Raising the standard of regulation in Canada for the protection of investors through commitment to collaboration, staff excellence and regulatory best practices.

8 Corporate Governance This section contains information about the composition of the MFDA Board of Directors, terms of office, compensation and the composition of each Committee, as well as information regarding Directors attendance at Board and Committee meetings. Further biographical information on the current Directors can be found at Board of Directors Below is the composition of the Board of Directors as at July 1, Public Directors Roderick M. McLeod, Q.C. (Chair) Lawyer, Part-time Counsel Miller Thomson LLP (Markham, Ontario) Joined Board: March 2010 Term expires: AGM 2012 Sandy (D.W.) Grant, CA Corporate Director (Orillia, Ontario) Joined Board: March 2010 Term expires: AGM 2011 Lea B. Hansen, CFA Corporate Director (Toronto, Ontario) Joined Board: January 2010 Term expires: AGM 2012 Dawn A. Russell, Q.C. Associate Professor Schulich School of Law Dalhousie University (Halifax, Nova Scotia) Joined Board: November 2009 Term expires: AGM 2012 Doug Thomson, FCA Corporate Director (Edmonton, Alberta) Joined Board: January 2010 Term expires: AGM 2011 Janet P. Woodruff, CA Vice-President & Special Advisor BC Hydro (Vancouver, British Columbia) Joined Board: January 2010 Term expires: AGM Mutual fund dealers association of canada

9 Left to Right: Bob Sellars, Ed Legzdins, Larry Waite, Peter Glaab, Sandy Grant, Steve Geist, Rod McLeod, Janet Woodruff, Kevin Regan, Doug Thomson, Dawn Russell, Sonny Goldstein, Lea Hansen Industry Directors Ed Legzdins, CA (Vice-Chair) Senior Vice-President, Retail Investments & Managing Director, International BMO Financial Group (Toronto, Ontario) Joined Board: December 2005 Term expires: AGM 2011 Stephen Geist, CA, CFP President CIBC Asset Management Inc./CIBC Securities Inc. (Toronto, Ontario) Joined Board: December 2008 Term expires: AGM 2010 Peter W. Glaab, CMA Senior Vice-President CI Investments Inc. (Toronto, Ontario) Joined Board: December 2004 Term expires: AGM 2010 Sonny Goldstein, CFP President Goldstein Financial Investments Inc. (Toronto, Ontario) Joined Board: March 2010 Term expires: AGM 2010 Kevin E. Regan, CA, CFP President & Chairman of the Board Investors Group Financial Services Inc. (Winnipeg, Manitoba) Joined Board: December 2005 Term expires: AGM 2011 Robert M. Sellars, CA, CFA Executive Vice-President & Chief Financial Officer Dundee Private Investors Inc. (Toronto, Ontario) Joined Board: December 2006 Term expires: AGM 2010 Mutual fund dealers association of canada 7

10 Board Committees The MFDA Board has four standing committees Audit & Finance, Executive, Governance and Regulatory Issues. The President and CEO of the MFDA is an ex officio member of all four committees. The composition and mandate of each Committee is outlined below. Audit & Finance Committee The Audit & Finance Committee oversees internal and external audits of the MFDA and advises the Board on financial issues including the Management Discussion and Analysis and the financial statements. The Committee oversees MFDA risk management internal control functions and reviews the MFDA budget. The Committee must be chaired by a Public Director. Committee Members Doug Thomson (Chair) Peter Glaab Sandy Grant Public Director Industry Director Public Director The Audit & Finance Committee met four times during fiscal 2009/2010. Executive Committee The Executive Committee meets, when required, to review any matter that the Chair or the President and CEO does not consider to be within the mandate of any other Committee and to carry out such other functions as are assigned or delegated to it by the Board. The Committee is currently chaired by an Industry Director. Committee Members Ed Legzdins (Chair) Industry Director Rod McLeod Public Director Robert Sellars Industry Director Janet Woodruff Public Director The Executive Committee met once during fiscal 2009/ Mutual fund dealers association of canada

11 Governance Committee The Governance Committee s responsibilities include the coordination and oversight of the Director nomination process, recommendations for Committee membership and Board self-assessments. The Committee must be chaired by a Public Director. Committee Members Rod McLeod (Chair) Ed Legzdins Dawn Russell Robert Sellars Public Director Industry Director Public Director Industry Director The Governance Committee met 14 times during fiscal 2009/2010. Regulatory Issues Committee The Regulatory Issues Committee s responsibilities include the review of proposed Policy, Rule or By-law amendments to be presented to the Board and review of applications from Members for exemptive relief from MFDA regulatory requirements. The Committee must be chaired by a Public Director. Committee Members Dawn Russell (Chair) Stephen Geist Sonny Goldstein Lea Hansen Kevin Regan Robert Sellars Public Director Industry Director Industry Director Public Director Industry Director Industry Director The Regulatory Issues Committee met four times during fiscal 2009/2010. Ad Hoc Committees In March 2010, the Board established the IPC Issues Committee to consider a number of proposals made by the MFDA Investor Protection Corporation ( IPC ), including (a) increasing the target size of the IPC fund from $30 million to $50 million over five years; (b) aligning the asset base on which IPC assessments are calculated with assets currently covered by the fund; and (c) aligning the risk of Member insolvency with assessments. In June 2010, the IPC Issues Committee made a number of recommendations (see Bulletin #0437-M) on which Members were invited to comment by September 1, The Committee held an information session for Members on July 15, 2010 and met with members of the Investment Funds Institute of Canada and the Federation of Mutual Fund Dealers on July 28, The Committee s final recommendations are subject to Board approval. Mutual fund dealers association of canada 9

12 Amendments to MFDA By-law No. 1 A Special Meeting of Members was held on October 2, 2009 at which Members approved the amendments to MFDA By-law No. 1 set out in By-law No. 15 by the requisite two-thirds of votes cast at the meeting. Following the meeting, a Member filed a Notice of Request for Review of Decision with the British Columbia Securities Commission ( BCSC ) concerning the amendments. In January 2010, the BCSC advised the MFDA that the Canadian Securities Administrators ( CSA ) approval of By-law No. 15 could not be expected until at least the completion of the proceedings noted above and so the MFDA held its Annual General Meeting of Members in March 2010 under the existing version of By-law No. 1. In April 2010, the MFDA and the Member that initiated the BCSC proceeding made a joint application to the BCSC Hearing Panel to discontinue the proceeding. However, in June 2010 the Hearing Panel rejected the parties application and determined that it was in the public interest to hold a hearing. At the time of printing this Annual Report, the proceeding was still underway. Director Compensation As part of its mandate, the Governance Committee reviewed the MFDA s Director Compensation Policy to ensure that it is adequate and in line with similar organizations. Public Director remuneration remains unchanged from Each Public Director on the MFDA Board receives an annual retainer of $15,000. The Committee Chair retainer for all committees, with the exception of the Audit & Finance Committee, is $2,500 per annum. The Audit & Finance Committee Chair retainer is $4,000 per annum. Public Directors receive a meeting attendance fee of up to $1,500 per Board or Committee meeting. Out-of-town Public Directors who attend Board or Committee meetings in person receive an additional $1,000 supplementary fee. In circumstances where a Public Director serves as the Chair of the Board, the Board of Directors has the discretion to set the amount of the Chair retainer, which is reviewed annually during the tenure of the individual. The annual retainer for the Chair of the Board is $50,000 compared to $70,000 in Industry Directors are not compensated for their participation on the MFDA Board, however, all Directors are reimbursed for related travel and out-of-pocket expenses. Board Orientation New Directors participated in a comprehensive orientation session following their appointment to the MFDA Board. The orientation provided an overview of the MFDA s regulatory mandate, its operations, financial affairs, legal framework and governance practices. The session also provided new Board members with an opportunity to meet senior management and be briefed on their specific roles within the Corporation. 10 Mutual fund dealers association of canada

13 Code of Conduct In 2009, the MFDA formalized a Code of Conduct for Directors as a practical guide for Board members. The Code includes provisions designed to minimize the possibility of bias and conflicts of interest which may arise from the use of information obtained during the course of Directors duties. Board and Committee Meeting Attendance A total of 38 meetings were held during the fiscal year ended June 30, 2010, including 13 Board meetings, one Special Meeting of Members and one Annual General Meeting of Members. Below is a breakdown of attendance. Director Board of Directors Audit & Finance Executive Governance Regulatory Issues George Aguiar (departed March 4/10) 8 of 9 n/a 1 of 1 9 of 10 2 of 3 Martin Friedland (departed March 4/10) 9 of 9 n/a n/a 10 of 10 n/a Stephen Geist 9 of 13 n/a n/a n/a 3 of 4 Peter Glaab 11 of 13 4 of 4 n/a n/a n/a Sonny Goldstein (joined March 4/10) 4 of 4 n/a n/a n/a 1 of 1 William Grace (departed Dec. 21/09) 5 of 6 2 of 2 1 of 1 n/a 2 of 2 Sandy Grant (joined March 4/10) 4 of 4 1 of 1 n/a n/a n/a Lea Hansen (joined Jan.12/10) 6 of 6 n/a n/a n/a 2 of 2 Ed Legzdins 10 of 13 n/a 1 of 1 13 of 14 n/a Rod McLeod (appointed March 4/10) 3 of 3 n/a n/a 4 of 4 n/a Helen Meyer (departed Dec. 22/09) 6 of 6 n/a n/a n/a 2 of 2 Janet Pau (departed Dec. 21/09) 5 of 6 2 of 2 n/a n/a n/a Kevin Regan 11 of 13 n/a n/a n/a 3 of 4 Dawn Russell (joined Nov. 4/09) 7 of 8 n/a n/a 4 of 4 2 of 2 Robert Sellars 13 of 13 n/a n/a 4 of 4 4 of 4 Doug Thomson (joined Jan.12/10) 6 of 6 2 of 2 n/a n/a n/a Larry Waite 13 of 13 4 of 4 1 of 1 14 of 14 4 of 4 Janet Woodruff (joined Jan.12/10) 6 of 6 1 of 1 n/a n/a n/a Robert Wright (departed Feb. 1/10) 8 of 8 n/a 1 of 1 9 of 9 n/a Mutual fund dealers association of canada 11

14 Regional Councils and Hearing Panels The MFDA has four Regional Councils corresponding to the following geographic Regions: Atlantic Region: Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador Central Region: Ontario and Québec Pacific Region: Prairie Region: British Columbia and Yukon Territory Alberta, Saskatchewan, Manitoba, Northwest Territories and Nunavut The principal activity of the Regional Councils is the conduct of hearings by threeperson Hearing Panels created from among members of each Regional Council. The membership of each Regional Council includes elected industry representatives, (partners, officers, directors, employees or agents of Members resident in the Region), appointed public representatives and appointed industry representatives. The primary role of representatives is to serve on MFDA disciplinary Hearing Panels, each of which is chaired by a public representative who is generally a retired judge but may also be a lawyer with extensive litigation and administrative law experience. The two-year terms of office of elected industry representatives on the Regional Councils expired in June 2010 and the MFDA conducted a formal nomination and election process to re-constitute the Councils in Spring The Board of Directors approved the new Chairs and Vice-Chairs of the Regional Councils at its June 2010 meeting. Further details regarding the composition of the Regional Councils are outlined on the MFDA website. Newly elected industry representatives are provided with a day-long orientation program prior to serving on a Hearing Panel. The program is presented by an external expert in administrative law and tribunal conduct and is focused on educating potential panelists on how to conduct disciplinary proceedings as well as providing background on the MFDA s legal framework, compliance and enforcement functions. 12 Mutual fund dealers association of canada

15 MFDA Regulatory Operations MFDA regulatory operations are organized among the following Departments: Compliance, Enforcement, Policy and Membership Services. COMPLIANCE The Compliance Department is responsible for monitoring Members adherence to MFDA requirements and is comprised of two groups: Sales Compliance and Financial Compliance. The Compliance Department is also responsible for reviewing and approving Member resignation and reorganization requests, reviewing new membership applications and assisting in policy and enforcement initiatives as required. Sales Compliance Third Compliance Examination Cycle MFDA Members are subject to a compliance examination within a three-year cycle. The MFDA s third cycle of compliance examinations commenced in January 2009 and staff performed 60 head office examinations and 156 branch examinations through to June 30, All Reports issued to date have been issued within the established benchmarks. The following is a breakdown of compliance examinations by province as at June 30, Head Office Branch Total Ontario British Columbia Alberta Nova Scotia Manitoba New Brunswick Saskatchewan Québec 5-5 Newfoundland and Labrador Prince Edward Island Total Mutual fund dealers association of canada 13

16 Referrals to the Enforcement Department Compliance made a total of 23 referrals to the Enforcement Department as at June 30, 2010 originating from information received in the third cycle of compliance examinations. Financial Compliance Level 4 Member Examinations During calendar 2009, the Financial Compliance group satisfied its benchmark to perform an annual on-site financial examination of all 37 active Level 4 Members. Furthermore, all examination reports were issued within the established benchmarks. Of the 37 examinations conducted during the period, 24 were in Ontario, 6 in Québec 3 in British Columbia and 2 each in Alberta and Manitoba. As at June 30, 2010, sixth-round financial compliance examinations were being performed for Level 4 dealers. A total of 24 sixth-round examinations had commenced, of which eight reports had been issued as of June 30, Financial Compliance Desk Reviews The Financial Compliance group is responsible for reviewing the monthly financial reports of all Members within 5 business days of the filing due date and the annual audited financial reports within 3 months of the report date. During calendar 2009, approximately 1,700 unaudited monthly and 140 audited annual financial reports were reviewed by Financial Compliance staff within the established benchmarks. In a number of instances, capital and/or reporting issues were identified through this review process and Financial Compliance staff took steps to communicate with Member staff on a timely basis so that corrective action could be taken. Financial Compliance referred six matters to the Enforcement Department for the 12 months ended June 30, 2010, primarily relating to breaches of early warning requirements and failure to notify the MFDA immediately of capital deficiencies. Key Compliance Initiatives Additional Member Guidance on Key Compliance Issues In addition to the MFDA s ongoing efforts to provide further guidance to Members through its examinations process, Member Regulation Forums and industry and dealer conferences, during calendar 2009 MFDA Compliance staff undertook various specific initiatives to provide more guidance to Members on key compliance issues. 14 Mutual fund dealers association of canada

17 In particular, Compliance staff issued Bulletin #0355-C Common Sales Compliance Deficiencies and Appropriate Corrective Action, which provides both general guidance on how to address compliance deficiencies and develop an appropriate action plan and specific guidance on how to address several of the most common compliance deficiencies. Compliance staff also commenced work on several written guides on specific compliance topics to be made available on the MFDA s public website and Members-only web site. The first such guide issued in 2009 was the Policies and Procedures Manual Reference Guide, which provides Members with a consolidated reference document that details all of the necessary written Member policies and procedures annotated to the applicable Rules, Policies and Notices. In addition, Compliance staff worked extensively on developing additional guidance and tools for Members on the topics of leverage supervision and suitability one of the largest areas of focus in the third cycle of examinations. While MR-0069 Suitability Guidelines provided significantly more guidance to Members and industry participants on leverage supervision and suitability than had ever been provided previously in the Canadian securities industry, compliance examination findings through 2009 indicated that further guidance was still required. In response, Compliance staff created a Leverage Supervision Guide and several supervisory tools including a Leverage Review Worksheet and an Approved Person Leverage Analysis template to assist Members in meeting their supervision and suitability obligations. The guide and associated supervisory tools were issued in early Member and Auditor Education MFDA Financial Compliance staff has been performing, on an annual basis, on-site examinations of Level 4 dealers financial operations for over five years. Members have demonstrated an improvement in their understanding of the financial requirements during this time. However, staff has identified a number of areas where Members have incurred capital deficiencies as a result of not understanding or not fully complying with the financial requirements. To address this weakness, the MFDA issued Bulletin #0427-C in early 2010 highlighting these significant deficiencies with the expectation that Members will review the issues against their current practices and rectify them if applicable. In addition to on-site examinations of Member operations, MFDA staff has been reviewing the auditor working papers prepared in support of the auditors work relating to their annual audit engagement of Members. Under MFDA Rules, auditors are required to perform their audit of the Form 1 in accordance with Canadian auditing standards and also perform specific audit procedures outlined in MFDA Rules. As a result of reviewing auditor working papers, it was determined that not all auditors have been incorporating Mutual fund dealers association of canada 15

18 the specified MFDA audit requirements into their engagements. Consequently, the MFDA issued Bulletin #0428-C in early 2010 highlighting these deficiencies in the auditor year-end engagements of MFDA Members with the expectation that auditors will review the issues identified and modify their engagements to incorporate MFDA-specific requirements. Looking Forward International Financial Reporting Standards In addition to amending Form 1, MFDA staff is also planning to develop an internal training plan to ensure that all applicable staff is familiar with the new International Financial Reporting Standards ( IFRS ) and, more specifically, proficient with the requirements under the revised Form 1. Educational sessions for Member staff regarding the changes to Form 1 are planned for the second half of Electronic Filing System The MFDA is in the process of developing a new electronic financial filing application that will replace the existing system upon Members transitioning to the IFRS Form 1 basis of reporting. Staff of the MFDA s Calgary Office. 16 Mutual fund dealers association of canada

19 Enforcement The Enforcement Department is responsible for addressing non-compliance with regulatory requirements by Members and Approved Persons. The Department is comprised of four groups: Case Assessment, Investigations, Litigation and Policy Annual Trends The number of complaints and other intake matters received by Case Assessment in 2009 increased by 35% from The increase was attributable to the period between January to June In the latter part of 2009, the intake numbers decreased to the same monthly levels as early 2008, and they have continued to remain at those lower levels in Staff believes that the temporary increase in intake numbers relates to the significant decline in the markets during that period. Enforcement Priorities The Enforcement Department reviews supervision by the Member and its supervisory personnel in all cases it opens. This is an important part of our enforcement and compliance strategy that focuses on addressing Members efforts in proactively avoiding non-compliant situations by implementing effective supervisory regimes. The Enforcement Department also reviews the Member s complaint handling in all cases involving a client complaint. Although the MFDA, as a regulator, does not provide compensation, it robustly enforces the Member s obligation to respond to complaints in a fair and timely manner. The following case types will continue to be a priority for the Enforcement Department, given the high level of potential client harm: Suitability of investment and leveraging recommendations; Member supervision, including Approved Person compliance with Member supervisory requirements; Complaint handling; Securities and other business outside the Member; and Abusive sales practices, including theft, fraud, personal financial dealings, misrepresentations and unauthorized and discretionary trading. Mutual fund dealers association of canada 17

20 Disciplinary Action Staff commenced 26 disciplinary cases during the past fiscal year, a decrease of 5 cases from the previous fiscal year. This was because several earlier cases had been adjourned pending the results of a court decision involving an Investment Industry Regulatory Organization of Canada ( IIROC ) matter that related to the jurisdiction of a Self-Regulatory Organization ( SRO ) to proceed against former Approved Persons. The court case was decided in favour of the SROs in the Fall of 2009 and much of staff s work during the fiscal year involved bringing the adjourned cases back on track for a hearing. In addition, staff identified 276 cases involving violations of a minor nature that did not warrant formal disciplinary proceedings. Of the 276 minor violation cases, 106 were closed by Warning Letter, 169 by Cautionary Letter and one was closed with an Agreement and Undertaking. Looking Forward Enforcement s main priority will continue to be the suitability of investment and leveraging recommendations regarding mutual funds, exempt securities and any other product sold by Members. Enforcement generally identifies suitability cases as ones involving Approved Persons who make specific investment or leveraging recommendations, as well as cases involving a failure to develop, implement and maintain supervisory procedures by Members and supervisors. Members have a supervisory duty to set clear procedures that meet regulatory requirements, and to actively supervise investment and leveraging recommendations made to clients by their Approved Persons. The majority of the supervision cases to date have been against Members and have come from referrals from MFDA Sales Compliance. There have also been some cases against individual Approved Persons regarding suitability, primarily with regard to exempt products. In the coming year, a number of current files are likely to result in additional proceedings against Members regarding supervision, and there is the potential for proceedings against individual Approved Persons for unsuitable investment and leveraging recommendations regarding mutual funds. 18 Mutual fund dealers association of canada

21 Policy The principal role of the Policy Department is to monitor the effectiveness of MFDA By-laws, Rules and Policies; recommend changes, where appropriate; draft new or amended By-laws, Rules and Policies; and draft Notices and Bulletins for Members to assist them with the interpretation and application of MFDA requirements. In addition, the department provides consulting, legal, research and drafting support to the other departments of the MFDA. Consultations with Industry In the Fall of 2009 and Spring of 2010, MFDA staff held eight Member Regulation Forum meetings in Vancouver, Calgary, Winnipeg, Toronto and Montreal. MFDA staff updated Members on various policy initiatives, including proposed Rule and Policy amendments, guidance on how to address compliance deficiencies and recent enforcement cases. By-law Amendments MFDA By-law No. 1 Section 35 (No Actions Against the Corporation) On February 19, 2010, the Recognizing Regulators approved proposed amendments to section 35 of MFDA By-law No. 1 regarding the MFDA Investor Protection Corporation ( IPC ). The proposed amendments are intended to: (i) ensure that IPC and its directors, officers and personnel are adequately protected in the discharge of their investor protection mandate from legal actions by Members, Approved Persons or other persons under the jurisdiction of the MFDA; and (ii) provide for, within the MFDA By-laws, the terms of the relationship between the MFDA and IPC and existing MFDA and Member obligations to the IPC. The proposed amendments will be brought forward for Member approval at the December 2010 Annual General and Special Meeting of Members ( 2010 AGM ). Rule Amendments MFDA Rules 2.2 (Client Accounts), 2.8 (Client Communications) and 5.3 (Client Reporting) and Policy No. 2 Minimum Standards for Account Supervision On June 29, 2010, the Recognizing Regulators approved proposed amendments to Rules 2.2, 2.8, 5.3 and Policy No. 2, which were drafted to address the issues of clarity of the Member/client relationship and performance reporting under the Client Relationship Model ( CRM ) project, as well as various other regulatory issues identified by MFDA Compliance and Enforcement staff. The MFDA CRM proposals will be brought forward for Member approval at the 2010 AGM. Mutual fund dealers association of canada 19

22 Consequential Amendments Resulting from National Instrument Registration Requirements and Exemptions Consequential amendments to MFDA Rules resulting from National Instrument ( NI ) were published for a 90-day comment period which expired on March 23, The proposed amendments include changes to Rule 1.2 (Individual Qualifications), Rule (Referral Arrangements), Rule 2.5 (Minimum Standards of Supervision), Rule 5.3 (Client Reporting) and Rule 5.6 (Record Retention). On June 25, 2010, the CSA published proposed amendments to NI for a 90-day public comment period, which include revisions to requirements with respect to account statements and referral arrangements. As a result, the consequential amendments to Rules 5.3 and have been put on hold until the revisions to the requirements under NI are finalized. The other consequential amendments to MFDA Rules were approved by the Recognizing Regulators in October MFDA Rule (Payment of Commission to Non-registered Entities) Amendments to Rule codify existing practice with respect to the payment of commissions to unregistered corporations and are intended to allow Members and their Approved Persons an appropriate degree of flexibility in how they structure their business affairs, provided that certain conditions are satisfied. The revised Rule came into effect on March 29, 2010 and is subject to ratification by Members at the 2010 AGM. Proposed New MFDA Rule (Transaction Fees or Charges) and Proposed Amendments to MFDA Rule 5.1 (Requirement for Records) Proposed new Rule and proposed amendments to Rule 5.1 were published for a 90-day public comment period which expired on September 23, Proposed new Rule will require that, prior to the acceptance of an order, the Member inform the client of any sales charge, service charge or any other fees or charges to be deducted in respect of the transaction so that the client is able to make an informed decision with respect to the order. Conforming changes are also proposed to Rule 5.1(b) by adding a new subsection (iv), which will require Members to maintain records evidencing that the client was informed of all fees and charges in accordance with Rule Mutual fund dealers association of canada

23 Proposed Amendments to MFDA Rule (Capital Minimum Requirements) Proposed amendments to Rule 3.1.1, which prescribes the minimum capital to be maintained by Level 1, 2, 3 and 4 Members, are intended to harmonize MFDA minimum capital requirements for Members that are licensed in multiple registration categories with the minimum capital requirements under NI The proposed amendments were published for comment on August 13, Proposed Amendments to MFDA Rule (Segregation of Client Property Cash) Rule requires Members to hold client cash in trust and segregate client cash for investment in mutual funds separately from client cash for other investments and prohibits Members from earning interest on client funds held in trust. The requirements in Rule respecting commingling and the allocation and payment of interest on client cash held in trust are based on the provisions of Part 11 (Commingling of Cash) of National Instrument Mutual Funds ( NI ). Proposed amendments to Rule and NI were concurrently published for a 90-day public comment period which expired on September 24, The proposed amendments to Rule are intended to remove commingling and related restrictions from the Rule, while maintaining the requirement to keep client cash segregated from Member property. The amendments will also permit Members discretion as to whether they will pay interest on client cash held in trust, subject to conditions, including a disclosure requirement on account opening, as to whether or not such interest will be paid and, if so, at what rate. Staff of the MFDA s Vancouver Office. Mutual fund dealers association of canada 21

24 Form Amendments Proposed Amendments to MFDA Form 1 Financial Questionnaire and Report Proposed amendments to MFDA Form 1 were published for comment on August 13, The proposed amendments are intended to align MFDA financial reporting requirements with IFRS. Policy Amendments MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline Amendments to Policy No. 3 were developed to address procedural issues identified by clients who have filed complaints against Members and their Approved Persons and provide further guidance with respect to the fair and prompt handling of complaints by Members and supervisory investigations to be conducted by Members following the receipt of a complaint. The amendments to Policy No. 3 became effective on February 1, MFDA Policy No. 6 Information Reporting Requirements Consequential amendments to section 14 (Changes in Organizational Structure) of Policy No. 6 have been proposed to conform to NI and NI Registration Information by including references to the Ultimate Designated Person and Chief Compliance Officer in the reporting requirements under this section. The proposed amendments to Policy No. 6 were approved by the Recognizing Regulators in October Member Regulation Notices Leverage Risk Disclosure MR#0074 (Issue Date: May 19, 2010) This Notice replaces Member Regulation Notice MR-0006 Borrowing Money to Buy Securities (Leveraging), issued on March 16, The Notice attaches revised leverage risk disclosure documents to be provided to clients and provides guidance with respect to leverage risk disclosure requirements. 22 Mutual fund dealers association of canada

25 Complaint Handling MFDA Policy No. 3 MR#0073 (Issue date: April 6, 2010) This Notice was issued to provide summary information and guidance on Parts I and II of revised Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline. The Notice also reminds MFDA Members that they are required to implement policies and procedures for handling client complaints that address the minimum complaint handling requirements set out in MFDA Policy No. 3 and attaches the revised Client Complaint Information Form that must be provided to new clients and to clients who submit a written complaint to the Member. Looking Forward National Instrument Registration Requirements and Exemptions In 2009 and 2010, MFDA staff continued to participate on CSA Registrant Regulation Committees with CSA and IIROC staff to consider amendments to NI , which came into force on September 28, The MFDA has proposed consequential Rule amendments to ensure consistency with requirements under NI MFDA staff will also be reviewing and revising Member Regulation Notices affected by these amendments. Powers of Attorney and Similar Authorizations MFDA staff is currently drafting a Member Regulation Notice that is intended to clarify the obligations of Members and Approved Persons with respect to powers of attorney and similar authorizations such as executorships and trusteeships. The Notice will update and replace Member Regulation Notice MR#0031 Powers of Attorney Rule Exception for Family Members of Approved Persons, issued on October 29, 2004, and provide clarification with respect to the requirements of the Rule. Approved Person Transfers MFDA staff is preparing a Member Regulation Notice intended to identify concerns with respect to some of the account transfer practices that MFDA staff has observed and to remind Members and Approved Persons of applicable regulatory requirements. Staff of the MFDA s Toronto Office. Mutual fund dealers association of canada 23

26 Amendments to Rule 2.2 (Client Accounts) and Policy No. 2 Minimum Standards for Account Supervision MFDA staff is currently drafting amendments to Rule 2.2 and Policy No. 2 to clarify that the obligation for Members and Approved Persons to ensure that each order accepted or recommendation made for any account of a client is suitable includes recommendations to borrow to invest ( leverage ). Amendments to Policy No. 2 will also clarify that the suitability of leverage must be assessed having regard to the client s investment knowledge, risk tolerance, age, time horizon, income and net worth and set out minimum criteria that would require further supervisory review and investigation. Membership Services The Communications and Membership Services group is active in maintaining Member files and responding to inquiries from Members, the public and the media. It is also responsible for maintaining and updating the MFDA website and facilitating Member events. During the period July 1, 2009 to June 30, 2010, the Department responded to approximately 900 inquiries by telephone and . The majority of inquiries come from MFDA Members and Approved Persons respecting such topics as registration of Approved Persons, the Electronic Filing System and questions about the latest Notices and Bulletins. Staff of the MFDA s Toronto Office. 24 Mutual fund dealers association of canada

27 Management Discussion and Analysis The financial statements present the financial results of the MFDA for the fiscal year ended June 30, 2010 with 2009 comparatives and accompanying notes. Revenues For FY 2010, the MFDA had revenues from operations of $25,366,717 (compared to $25,807,652 for FY 2009). The principal source of revenue for the MFDA is Membership fees, which are assessed against Members and are calculated to provide sufficient funding to meet the MFDA s yearly budgeted expenses. Membership fees are calculated based upon a formula that takes into account the amount of assets under administration ( AUA ) that each Member has under its control. Each year, on or before April 15 th, MFDA Members are required to report their AUA figures as at March 31 st. AUA figures represent AUA from operations in all provinces other than Québec and specifically exclude cash, GIC s, limited partnerships, and segregated funds. A Member s reported AUA at March 31 st for the current year is then added to the previous year s reported AUA and an average of the two years is calculated for billing purposes. The MFDA uses a five-tiered AUA rate schedule as the basis for its billing. Members are billed a set fee amount per million dollars of AUA based upon this schedule with the fee rates set to provide sufficient funding for the next fiscal year. The MFDA fee payable by a Member is calculated by matching its average AUA figure to this tiered fee schedule. For some Members, a minimum fee applies. Each Member s fees for the year are divided into four installments payable on a quarterly basis. Membership fees for FY 2010 amounted to $24,724,881. Other sources of revenue for the MFDA include the following: Hearing cost recoveries of $438,511 are costs related to hearings held by the MFDA. In December 2008 the MFDA Board of Directors approved the recovery of these costs through the use of fine monies collected in the MFDA s Discretionary Fund. Investment income of $37,749 is derived from the investment of MFDA operating cash balances in the CIBC Imperial Money Market Pooled Fund and Canadian federal treasury bills. Investment returns for FY 2010 were negatively impacted by the low short-term interest rate environment experienced throughout the year. Enforcement recoveries of $100,476 are costs awarded by the MFDA Regional Council Hearing Panels at the conclusion of MFDA disciplinary hearings or settlements and which have been collected by the MFDA. Mutual fund dealers association of canada 25

28 Administration recoveries of $60,000 are costs recovered from the MFDA IPC for administrative services provided by MFDA staff. Late filing fees of $5,100 are fees levied against Members that have missed information filing deadlines. Expenses Given the adverse economic environment facing MFDA Members for FY 2010, the MFDA implemented a cost cutting strategy when it formulated its budget for the 2010 fiscal year. Primary among the cost cutting initiatives was a suspension of salary merit increases for all staff, a reduction in Board member and Senior Executive remuneration, restrictions on travel and training expenditures, and deferral of various technology related projects. As a result of this cost cutting strategy, operating expenses for the MFDA declined nearly $1 million or 3.6% year over year ($26,316,528 for FY 2010 compared to $27,312,601 for FY 2009). Operating costs would have been substantially lower had it not been for the MFDA having to defend itself before a BCSC hearing panel for which significant legal costs were incurred. This hearing was the result of a complaint filed by a Member with respect to the MFDA s governance processes. Although the matter remains outstanding, it is in the process of being resolved and going forward, substantially less legal expense is anticipated to be incurred. Legal costs related to the BCSC hearing were approximately $679,000 to the end of June Staff related expenses remain the largest expense for the MFDA, representing 73% of total expenses. The MFDA experienced a year over year decrease in salaries and benefits expense for FY 2010 of $1,134,771 or 5.6%. This decrease arose mainly from the suspension of salary merit increases for all staff that was effective throughout fiscal 2010 coupled with lower post-retirement benefits costs. The MFDA also experienced modest staff turnover resulting in some vacant positions throughout the year which also lowered salary expense. The MFDA completed fiscal 2010 with 162 employees which was six positions short of the budgeted staff count of 168 positions. For fiscal 2011, the budgeted staff count will be increased by two positions to 170 employees. Overhead expenses such as rent and utilities, general office expenses, insurance, telecom, bank charges, computer software and maintenance expenses collectively saw a 1.6% year over year reduction from fiscal year Cost cutting measures and the deferral of some IT related initiatives contributed to the savings. Restrictions placed upon travel and training throughout the year achieved an 18.7% year over year decrease in these two expense categories. Hearing panel costs increased again year over year for FY However, these costs are recovered through the use of fine monies accumulated in the MFDA s Discretionary Fund. As a result, Hearing Panel costs have no impact on the MFDA s revenues over expenses position. 26 Mutual fund dealers association of canada

29 Deficiency of Revenue over Expenses The MFDA ended FY 2010 with a deficiency of revenues over expenses of $949,811 (compared to a deficiency of $1,504,949 for FY 2009). The MFDA budgeted a deficit of $1,317,741 for FY The combination of higher than anticipated revenues and lower than expected employee related expenses constituted the bulk of the variance. The deficit for FY 2010 would have been reduced further were it not for the MFDA incurring $679,000 in legal fees pertaining to the BCSC hearing matter. MFDA Discretionary Fund This Fund is an internally restricted fund established by the MFDA Board of Directors to receive monies from the collection of enforcement fines and the surrender of profits imposed by order of an MFDA hearing panel. For FY 2010 the fund received fines of $370,500 (compared to $477,500 for FY 2009) and investment revenue of $5,303 (compared to $19,197 for FY 2009). The Discretionary Fund ended the year with a balance of $909,085 at June 30, 2010 (compared to $972,093 at June 30, 2009). MFDA Investor Protection Corporation The MFDA bills and collects assessments by the MFDA IPC. These amounts flow through the Statements of financial position as an asset to reflect the assessment to be received from Members. An offsetting liability to the MFDA IPC accounts for future remittances due from the MFDA. For the period from July 1, 2009 to June 30, 2009 the MFDA billed $5,030,220 to its Members on behalf of the MFDA IPC. $58,109 relating to IPC assessments remained due to the IPC as of June 30, Outlook for Fiscal 2011 Expenses for FY 2011 are projected to be $29.0 million with several factors accounting for the year over year increase. The budget for FY 2010 was formulated subsequent to the market collapse that created significant challenges for our Members. In recognition of these challenges and in order to mitigate a fee increase for FY 2010, the MFDA implemented significant budget cuts, as previously mentioned. These cuts however, could not practically be maintained going forward without jeopardizing the investment that the MFDA has made in its staff or impairing the organization s ability to effectively deliver upon its regulatory mandate. Consequently, in order to mitigate the risk of significant employee turnover and to ensure that staff members remain adequately trained to fulfill our regulatory mandate, the MFDA will see increases in employee related expenses and training costs for FY Fortunately, Member AUA has recovered to support a return to a normalized budget. Mutual fund dealers association of canada 27

30 In response to the request of the CSA and based upon workload demands, the MFDA will be expanding its staff complement in the Calgary office, increasing to 14 staff members from last fiscal year s budgeted 11 positions. The additional staffing has been accommodated through inter-office transfers and the addition of only one new position for FY To accommodate the additional staff, the Calgary office will be expanded within its current location. No other office expansions are planned for FY A further net new administrative position is planned for the Enforcement group to address increased workload in the Litigation department. Over the past few years, the MFDA has subsidized Member fees through the use of its unrestricted net asset fund. The effect of these subsidies, totaling $5.45 million since 2006, was to lower Member fees and mitigate fee increases. It has been the intention of the MFDA to maintain its unrestricted net asset fund at 25% of yearly operating expenses, representing three months of operating costs. In the absence of significant year end surpluses, this fund has been depleted to approximately 11% of yearly expenses or less than 1.3 months of operating costs. Consequently, the MFDA was unable to use this fund as it has in past years to subsidize membership fees for the 2011 fiscal year. Going forward, it will be necessary to budget for the gradual replenishment of the unrestricted net asset fund in order to return it to a fiscally prudent level. A rewrite of the Electronic Filing System ( EFS ) is scheduled to take place in FY EFS was launched in October 2003 and is used by MFDA Members and Financial Compliance staff for the monthly and annual processing of the Financial Questionnaire and Report. Development of this system was deferred for the past four years as other budget considerations took priority. However, with this system having now reached its technical end-of-life and with reporting changes driven by the introduction of IFRS to take effect in 2011, a rewrite of EFS is now necessary. Similarly, further development of the Members-only section of the MFDA s website will occur throughout the 2011 fiscal year. This development is to further the goal of making it easier for Members to update their MFDA membership data, improve Member communication methods and provide Members with comparative risk information. The Strategic Plan for the MFDA calls for a strong element of industry consultation and the MFDA will continue efforts in that regard through creating enhanced awareness among our membership of policy development initiatives and the sourcing of active participation and feedback of Members in that process. The MFDA has an accrued employee benefit plan liabilities of $3,332,900. This amount is comprised of a $1,615,600 registered pension plan liability and a $1,717,300 liability with respect to the post-retirement benefits plan. The post-retirement benefits plan is an unfunded obligation. Based upon actuarial analysis, funding for the registered pension plan is planned to occur at a rate of approximately $1,300,000 annually. Finally, with respect to IFRS, as a not-for-profit organization, the MFDA is not required to adopt IFRS and so adoption would be on a voluntary basis. The MFDA has determined that the costs associated with adopting IFRS outweigh the benefits of providing IFRS compliant financial statements. Accordingly, the MFDA has elected not to adopt IFRS and will continue to follow the Section 4400 series standards in the CICA Handbook that are currently undergoing further revision by the Canadian Institute of Chartered Accountants. 28 Mutual fund dealers association of canada

31 Management s Responsibility for Financial Reporting The accompanying financial statements and all other information contained in this Annual Report are the responsibility of MFDA management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and necessarily include some amounts based on the estimates and judgments of management. In discharging its responsibilities for the integrity and reliability of the financial statements, management maintains and relies upon a system of internal controls. These internal controls are designed to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The MFDA also maintains formalized policies and procedures and an organizational structure that segregates duties. The MFDA employs standards and procedures for hiring employees who are required to abide by a business code of conduct and receive ongoing training regarding the proper execution of their duties. Mechanisms also exist that enable reporting to the Audit & Finance Committee of any perceived unethical behavior by employees. In order to provide their opinion on the MFDA s financial statements, Deloitte & Touche LLP reviews the MFDA s system of internal controls and conducts such tests and other audit procedures that they consider appropriate. The auditors also meet in-camera with the Audit & Finance Committee, without management present, to discuss the results of their work. The independence of the auditors as well as the effectiveness of their work is assessed by the Audit & Finance Committee annually. The Audit & Finance Committee reviews the effectiveness of the company s financial reporting and internal control systems, any significant financial reporting issues, the presentation and impact of significant risks, and key estimates and judgments of management that may be material for financial reporting purposes. Additionally, the Audit & Finance Committee meets periodically with MFDA management and the auditors, and reports to the Board of Directors thereon. The Audit & Finance Committee also reviews the annual financial statements and recommends them for approval by the Board of Directors. The accompanying financial statements have been audited by the auditors who are engaged by the Board of Directors on the recommendation of the Audit & Finance Committee. The appointment of the auditor is ratified at the Annual General Meeting of MFDA Members. Larry M. Waite President & Chief Executive Officer Paul Reid Director, Finance & Administration Mutual fund dealers association of canada 29

32 Financial Statements Auditors Report 31 Statements of Financial Position 32 Statements of Revenues and Expenses 33 Statements of Changes in Fund Balances 34 Statements of Cash Flows 35 Notes to the Financial Statements Mutual fund dealers association of canada

33 Auditors Report To the Members of the Mutual Fund Dealers Association of Canada We have audited the statements of financial position of the Mutual Fund Dealers Association of Canada ( MFDA ) as at June 30, 2010 and 2009 and the statements of revenues and expenses, changes in fund balances and cash flows for the years then ended. These financial statements are the responsibility of the MFDA s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the MFDA as at June 30, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Licensed Public Accountants August 20, 2010 Mutual fund dealers association of canada 31

34 Statements of Financial Position as at June $ $ ASSETS Current Cash - Operating fund (Note 3) 1,359,296 1,017,971 Cash - Discretionary fund (Note 3) 166, ,526 Investments - Operating fund (Note 3) 4,152,746 5,523,102 Investments - Discretionary fund (Note 3) 955, ,401 Membership fees billed in advance (Note 4) 7,251,145 6,222,061 MFDA Investor Protection Corporation assessments (Note 5) 58,109 15,100 Costs recoverable from MFDA Investor Protection Corporation (Note 7) 15,878 13,614 Other membership receivables 5,340 4,725 Prepaid expenses and other assets 336, ,202 14,301,694 14,232,702 Capital assets (Note 6) 1,608,767 1,900,878 Employee benefit plan asset (Note 8) 1,643,300 1,271,300 17,553,761 17,404,880 LIABILITIES AND FUND BALANCE Current Accounts payable and accrued liabilities 1,287,682 1,420,792 Unearned membership fees (Note 4) 7,254,525 6,222,811 Membership application deposits 8,000 16,000 Due to MFDA Investor Protection Corporation (Note 5) 58,109 15,100 Obligations under capital lease (Note 10) 62,474 56,938 8,670,790 7,731,641 Accrued employee benefit plans liability (Note 8) 3,332,900 3,196,200 Obligations under capital lease (Note 10) 165,374 79,523 12,169,064 11,007,364 FUND BALANCES Operating Fund Invested in capital assets 1,380,919 1,764,417 Unrestricted net assets 3,094,693 3,661,006 4,475,612 5,425,423 Discretionary Fund (Note 2) 909, ,093 5,384,697 6,397,516 17,553,761 17,404,880 The accompanying notes are an integral part of these financial statements. Approved on behalf of the Board Roderick M. McLeod, Q.C. Director Larry M. Waite Director 32 Mutual fund dealers association of canada