Responses to MFDA consultation call for regulatory coordination, clarity on paperless transactions, and more efficient processes
Two major groups representing Canada’s investment industry have submitted their responses to a consultation by the Mutual Fund Dealers Association of Canada (MFDA) on the question of account transfers, which was one of the priority areas it had laid out for 2020.
In its response last week to the consultation paper, the Investment Industry Association of Canada (IIAC) said its members’ general experience with account transfers from MFDA firms has “not always been positive.” The root cause, it said, has been overreliance on manual processes at MFDA firms or mutual-fund companies.
“[IIAC] members have noted that the existing manual procedures and the amount of physical paper such as Letters of Direction (“LODs”), Powers of Attorney (“POAs”), and cheques, that are still exchanged to complete some transfers leads to significant delays and operational inefficiencies,” the response said.
Aside from a negative and inconsistent client experience, IIAC said that the dependence on paper-based processes at MFDA firms has created added costs for its members, who have had to deploy additional resource to process transfer requests as well as any follow-ups. The entire process can become onerous in situations where the account concerned holds many security positions at various fund companies.
“Our Members’ attitudes have been influenced by the vastly different experience in processing transfers involving IIROC dealers,” the letter said, highlighting aspects such as automation through the Account Transfer Online Notification (ATON) service of the Canadian Depository for
Securities (CDS), as well as prescriptive response times for IIROC members to adhere to when processing transfers.
While IIAC acknowledged that “client-name” positions used in the MFDA environment lend themselves to complexities not found in the “nominee-name” surroundings at IIROC dealers, it said MFDA firms may still explore other avenues of electronic processing of account transfers, such as moving from cheque-based to electronic movement of cash.
“A small number of MFDA dealers are currently already ATON Limited Participants,” IIAC said. “The MFDA may want to engage these firms in discussion to hear their views on the benefits of ATON to MFDA dealers.”
Meanwhile, in its own submission, the Investment Funds Institute of Canada (IFIC) emphasized the need to resolve the issue of account transfers with coordinated regulation.
“Account transfers often involve a variety of industry participants that may or may not be subject to rules or guidance issued by the MFDA,” the group said. “As such, any regulatory response should be coordinated across regulatory bodies and look to align with existing transfer rules, where reasonable and appropriate.”
While it said changes to MFDA rules should not be delayed, IFIC suggested that the MFDA work with the Joint Forum of Financial Market Regulators and the Financial Consumer Agency of Canada to set up a transfer framework that would apply across industry participants.
IFIC also acknowledged the need to continue looking for opportunities to better serve investors through electronic solutions. However, it maintained that the decision to adopt a technology solution for transfers, as well as the selection and implementation schedule for such a solution, should be left up to dealers.
“Requiring a specific technology solution or timeline to adopt an automated transfer processing service may be unduly burdensome for some dealers and may negatively impact their continued operation due to financial or operational constraints,” IFIC said.
Instead of pushing dealers toward a particular solution, IFIC suggested that the MFDA require its members to comply with transfer timeframes similar to those considered in National Instrument
81-102 Investment Funds and IIROC Dealer Member Rule 2300.
IFIC also said that some areas surrounding paperless initiatives would gain from improved regulatory clarity. One concern arises from cases where transfer instructions are routed electronically through an established platform such as Fundserv or ATON.
“Today, IIROC Dealer Member Rule 2300 allows the delivering dealer to rely upon electronic instructions received from the receiving dealer and indemnifies the delivering dealer from claims, losses, damages, liabilities or expenses suffered by them arising as a result of reliance on such communication that is unauthorized, inaccurate or incomplete,” IFIC said. “A comparable rule should be adopted by the MFDA to provide the same level of clarity and protection for mutual fund dealers.”
The fund industry group also said the Canadian Securities Administrators (CSA) should consider issuing guidance to confirm that fund managers can rely upon electronic communications they receive from dealers, including transfer instructions.
“Given the prevalence of accounts held at fund managers in client name, it is important that the MFDA and the CSA establish a coordinated regulatory response to paperless initiatives to ensure all stakeholders have regulatory clarity on what is acceptable and what is not,” IFIC said.