Edited by David Di Paolo
COMPLIANCE
On July 3, 2007, the Mutual Fund Dealers Association of Canada ("MFDA") approved MFDA Policy No. 6 (Information Reporting Requirements), which establishes minimum reporting requirements concerning events that Approved Persons are required to report to Members and events that Members are required to report to the MFDA pursuant to Rule 1.2.5. Events that must be reported are not limited solely to securities related business, but include all business conducted by Approved Persons and Members. However, the obligation to report an event is limited to events of which an Approved Person or Member has become aware of regardless of how they became aware of it. All requirements to report events regarding former Approved Persons are limited to events which occurred while the Approved Person was an Approved Person of the Member.
MFDA Policy No. 6 requires Members to designate a compliance officer at its head office (or another person at head office) to whom reports made by Approved Persons are to be submitted. Documentation associated with each event required to be reported under MFDA Policy No. 6 must be maintained for a minimum of 7 years from the resolution of the matter and made available to the MFDA upon request.
In addition to general reporting requirements, MFDA Policy No. 6 consists of three parts. Part A deals with Approved Person reporting requirements under MFDA Rule 1.2.5(b) and sets out the various types of events that Approved Persons are required to report to their Member within 2 days of the occurrence of the event. Such events include where the Approved Person:
- is aware of a client complaint whether in writing or otherwise, and with respect to him or herself, or any other Approved Person, involving: (i) allegations of theft, fraud, misappropriation of funds or securities forgery, money laundering, market manipulation, insider trading, misrepresentation, or unauthorized trading; or (ii) engaging in securities related business outside of the Member;
- has reason to believe that he or she has, or may have, contravened a securities law or securities regulatory requirement, or is named as a defendant or respondent in any proceeding alleging a contravention of such requirements;
- is charged with, convicted of, pleads guilty or no contest to, any criminal offence;
- is named as a defendant in a civil claim relating to the handling of client accounts or trading or advising in securities;
- is denied registration or a licence that allows them to deal with the public in any capacity by any regulatory body or has such registration or license cancelled, suspended or terminated, or made subject to terms and conditions;
- becomes bankrupt or suspends payment of debts generally, makes an arrangement with creditors or makes an assignment or is declared insolvent; and
- has garnishments outstanding against him or her.
Part B of MFDA Policy No. 6 sets out details regarding reporting of information under Rule 1.2.5(a)(i) and Rule 1.2.5(a)(ii) by Members. All reporting under Part B must be submitted through the electronic reporting system provided by the MFDA within 5 business days of the occurrence of the event. The reporting of events that must be submitted electronically by any other means is considered a failure to report the event and a failure to comply with MFDA Policy No. 6. In addition to the reporting of general events, Members are also required to update event reports and report the resolution of any event that has previously been reported.
Finally, Part C sets out reporting requirements for Members of other information, such as a change of name, contact information, Member registration or licensing, organizational structure or auditor and other business activities. All reporting under Part C must be submitted to the MFDA in writing within 5 business days of the occurrence of the event except for events such as bankruptcy and insolvency of a Member which must be reported to the MFDA immediately.
Amendments have also been made to the various reporting requirements of MFDA Policy No. 3 (Handling Client Complaints), MFDA Rule 1.2.5 (Notification of Changes in Registration Information) and MFDA Rule 1.2.6 (Notification of Termination of Approved Persons) in order to coincide with the requirements in MFDA Policy No. 6.
MFDA Policy No. 6 and the various amendments to MFDA Policy No. 3, MFDA Rule 1.2.5 and MFDA Rule 1.2.6 came into effect on July 3, 2007.
REGULATORY
Two recent decisions from the Investment Dealers Association of Canada (the "IDA") emphasize the rights of respondents who are the subjects of IDA investigations.
On July 5, 2007, in Re Vitug, a hearing panel of the Ontario District Council dismissed charges against a respondent for failing to respond truthfully or completely to questions posed during two interviews conducted by Staff of the IDA ("Staff"). The hearing panel found that the respondent was not given adequate notice of the issues on which he was to be questioned, as required by the IDA By-laws. Significantly, it was revealed under cross-examination that Staff had made a conscious decision not to provide the respondent with all of the topics on which he would be questioned because it believed that such information would prejudice its ongoing investigations. The hearing panel disagreed and noted that while Staff was required to balance the need for providing notice to the respondent with its duty to protect the integrity of its investigations, it was required to provide "the minimum information which is necessary to enable the member to understand in what respect its cooperation with the investigation is required." In the case before it, the hearing panel observed that the responses underpinning the charges against the respondent were in respect of the very topics that Staff had failed to provide notice of. It further held that to avail itself of the investigative opportunities provided to it under its By-laws, the IDA must follow its own procedures, including the duty to advise in writing the matters under investigation. As Staff failed to do so in this case, the charges against the respondent were dismissed.
In a July 23, 2007 decision in Re Credifinance Securities Limited, an appeal panel of the Ontario District Council overturned the decision of a hearing panel which had found Credifinance guilty of failing to provide information and documents as required by the IDA under By-law 19.5. The IDA’s case against Credifinance was that it had exhibited a "course of conduct" of failing to provide information and documents requested by Staff on a timely basis. The hearing panel had found that in respect of two particular requests, Credifinance had failed to provide information and documents requested: the first, in relation to the timely answering of undertakings given during interviews of Credifinance employees by the IDA, the second in relation to the failure of Credifinance to respond to a request for documents until well after the deadline imposed by the IDA.
The appeal panel granted Credifinance’s request to have transcripts of IDA interviews with its employees entered as fresh evidence at the appeal. The transcripts had been unavailable to Credifinance at the original hearing. They revealed that Staff and counsel for Credifinance had agreed, during the interviews, that Credifinance would not begin the process of answering undertakings given until Staff provided it with a written list of the information required pursuant to the undertakings given. This contradicted the finding of the hearing panel, which had found Credifinance guilty on the basis that it should have begun answering undertakings immediately after the interviews and should not have waiting for Staff to send a written request. As such, the appeal panel found that Credifinance was not guilty of failing to provide the information and documents requested in that instance. As such, there was only one remaining incident in respect of which the hearing panel had found that Credifinance was guilty of the charge against it. Because Staff of the IDA had emphasized that its charge was in relation to "the cumulative nature of the conduct" of Credifinance, rather than in respect of isolated incidents, the appeal panel dismissed the charges. It found that there was only one incident in which Credifinance had failed to provide the information and documentation requested of it, and as such Staff of the IDA had not proved their case.
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