MFDA sees highest number of proceedings commenced in 2018

In its newly released 2018 Annual Enforcement report, the Mutual Fund Dealers Association of Canada (MFDA) highlighted its enforcement activities to combat breaches including unsuitable investment recommendations, signature falsification, and unauthorized outside business activities.

Among the highlights of the report was an increase in the number of proceedings commenced. From 111 in 2016, the MFDA said it increased to 121 in 2017 and reached a record high of 136 last year.

“Part of this increase is due to the supervisory efforts of Members which have resulted in enhanced detection and reporting of MFDA rule breaches,” said President and CEO Mark Gordon. “This clearly demonstrates both the MFDA’s and its Members’ commitment to investor protection, as well as the benefits of a regulatory approach that focuses on Member education and collaboration.”

The report noted that the increase in hearings came primarily due to a rise in MFDA members’ detection and reporting of signature-related cases. A breakdown of primary allegations made in cases opened showed that largest case count consistently went to those involving pre-signed forms from 2016 to 2018.

Over that time, the number of allegations involving that type of misconduct decreased: from 104 in 2016, it fell to 90 in 2017 and 71 the year after. The report also showed significant declines in the number of active signature falsification (from 26 to 13) and suitability-leveraging allegations (from 27 to 10) over the three-year period. The MFDA expects that the 2018 decrease in signature-related allegations “will be reflected in a decrease in the number of proceedings in the future.”

The report also showed that between 2017 and 2018, there was a sizeable increase in the number of cases closed (from 438 to 535) as well as the number of cautionary letters issued (from 73 to 114). “Cautionary letters are issued when the violation is minor or less serious in nature and one that the MFDA would not generally escalate to a formal disciplinary hearing,” the report said. “While Cautionary Letters are disciplinary in nature, they are often issued for educational purposes.”

According to Gordon, the MFDA placed an emphasis on prosecuting cases involving both unsuitable concentration of assets and issues regarding KYC uniformity across an advisor’s client base, which “represent significant breakdowns in the proper application of the suitability standard.” Other key areas of enforcement activity were:

• Sales incentives practices that may impact the sale of products to clients, potentially give rise to conflicts of interest, and may not comply with requirements set out in NI 81-105;
• Emphasizing that members are responsible for conducting a “reasonable supervisory investigation” (RSI), with supervisory personnel to monitor information that they receive regarding potential breaches that raise risks to their clients or other investors; and
• Member cases in 2018 that involve failures to conduct branch reviews, which resulted in a lack or absence of supervision of branch activities.

Focusing on sanctions issued, the MFDA said that its concluded hearings resulted in 19 permanent prohibitions and 41 suspensions against approved persons. It also meted out a total of around $6 million in finds and $592,000 in costs against erring members and approved persons.

“The MFDA remains committed to working with our Members to find ways to further the protection of vulnerable Canadian investors such as seniors, persons with diminished capacity and individuals who are subject to undue influence,” Gordon said. “In 2019 the MFDA will be hosting its third Seniors Summit to further provide Members with practical guidance related to best protecting the interests of these vulnerable clients.”

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