MUTUAL FUND DEALERS ASSOCIATION OF CANADA (THE "MFDA")

Updated on: APRIL 26, 2001

Questions:

1. What is the MFDA?
2. Has the MFDA been recognized in Ontario as a self-regulatory organization for mutual fund dealers?
3. Now that the MFDA has been recognized, do registrants still have to comply with the Commission's requirements as well as the MFDA's Rules, By-law and procedures?
4. Where is the legislative requirement for mutual fund dealers to become members of the MFDA?
5. What is the effect of Rule 31-506?
6. Is Rule 31-506 in force?
7. When Rule 31-506 comes into force, will mutual fund dealers still be required to register with the Commission?
8. Will the Commission register new mutual fund dealers before July 2, 2002?
9. How does a mutual fun dealer apply to the MFDA for membership?
10. Does Rule 31-506 set a deadline that is 75 days from the date that the MFDA was recognized?
11. What is the deadline for an existing mutual fund dealer to apply for membership in the MFDA?
12. Does a person or company who applies to the Commission for registration as a mutual fund dealer before Rule 31-506 is in force (but is not yet registered as a mutual fund dealer when Rule 31-506 comes into force) need to apply for membership in the MFDA?
13. Will a person or company who applies to the Commission for registration as a mutual fund dealer once Rule 31-506 is in force need to apply for membership in the MFDA?
14. Does a person or company who applies to the Commission for registration as a mutual fund dealer once Rule 31-506 is in force but before the end of 30 days after the effective date, need to apply for membership in the MFDA?
15. What deadlines will apply to registrants already registered with the Commission in another category who apply to amend their registration to become mutual fund dealers (as my be the case, for example, as a result of Rule 31-507 SRO Membership - Securities Dealers and Brokers)?
16. What if a mutual fund dealer (or person or company applying to be a mutual fund dealer) does not meet the relevant deadline to file an application (as well as required fees) with the MFDA?
17. Are all mutual fund dealers required to become members of the MFDA?
18. Does a mutual fund dealer who only sells pooled funds need to join the MFDA?
19. How soon can registrants registered as mutual fund dealers apply for an exemption to Rule 31-506 or registration requirements?
20. Once a mutual fund dealer applies to the MFDA, how soon can they expect to become members?
21. Rule 31-506 requires all mutual fund dealers to be members of the MFDA from and after July 2, 2002. Can the Commission process an application for registration as a mutual fund dealer where the applicant has applied for membership in the MFDA but has not yet received it as of July 2, 2002?
22. If the MFDA rejects an application for membership, how will that affect the applicant's registration with the Commission?
23. Will new mutual fund dealers still be required to contribute to the Ontario Contingency Trust Fund?
24. Will the Commission still conduct compliance reviews of mutual fund dealers once they become members of the MFDA?
25. Will mutual fund dealers be required to file financial reports with both the Commission and the MFDA?
26. Can a salesperson continue to be an independant contractor?
27. Can a salesperson "bulk transfer" client accounts from one dealer to another?
28. Is a dealer required to supervise a salesperson's non-securities related business that is conducted through the salesperson's personal corporation?
29. Does a mutual fund dealer have to register trade or style names that it uses to conduct securities related business with the Ministry of Consumer and Commercial Relations ("MCCR")?
30. Where can registrants and potential registrants get more information?

Answers

1. What is the MFDA?

The MFDA is a self-regulatory organization for mutual fund dealers. Members of the MFDA will be mutual fund dealers operating in the jurisdictions which have recognized the MFDA and may include dealers from across Canada.⁽¹⁾ Once fully operational, the MFDA will be responsible for regulating all mutual fund dealers and their sales of mutual funds. The Commission will continue to directly regulate mutual fund managers, portfolio advisers and mutual funds. For more information on the MFDA, see the MFDA's website at: www.mfda.ca.

(1). Quebec has its own government developed regime of regulating mutual fund dealers, insurance agents and financial planning through the new Bureau des services financiers ("BSF").

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2. Has the MFDA been recognized in Ontario as a self-regulatory organization for mutual fund dealers?

Yes. After extensive consultation with industry and the public, the MFDA was recognized in Ontario, subject to certain conditions, by the Commission on February 6, 2001. The order recognizing the MFDA (the "Recognition Order") (as well as other material relating to the recognition of the MFDA) were published in the OSC Bulletin at (2001) 24 OSCB (Supp) and on the Commission website at http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/Mfda.pdf.

The recognition of the MFDA means that the Commission is satisfied that the recognition of the MFDA as a self-regulatory organization on the terms and conditions of the Recognition Order is in the public interest. The Recognition Order is not the document that requires registrants registered with the Commission to become members of the MFDA. This is done by way of a Rule.

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3. Now that the MFDA has been recognized, do registrants still have to comply with the Commission's requirements as well as the MFDA's Rules, By-law and procedures?

Yes. Registrants must comply with all requirements under securities laws unless specifically exempted. Staff will review provisions of the Securities Act and the Regulation under the Securities Act to ensure appropriate harmonization between the requirements of the Commission and the requirements of the MFDA.

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4. Where is the legislative requirement for mutual fund dealers to become members of the MFDA?

Rule 31-506 SRO Membership - Mutual Fund Dealers ("Rule 31-506") will require all mutual fund dealers to apply to and become members of the MFDA. The Commission made Rule 31-506 on February 6, 2001. Rule 31-506 and the related Notice (as well as other material relating to the recognition of the MFDA) were published in the OSC Bulletin at (2001) 24 OSCB (Supp) and on the Commission website at http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/Mfda.pdf.

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5. What is the effect of Rule 31-506?

In a nutshell, Rule 31-506 requires mutual fund dealers to take two actions:

Apply for membership to the MFDA within 30 days of Rule 31-506 coming into force; and

Become a member of the MFDA by July 2, 2002

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6. Is Rule 31-506 in force?

The Minister of Finance approved Rule 31-506 on April 6, 2001 Rule 31-506 will come in force on April 23, 2001.

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7. When Rule 31-506 comes into force, will mutual fund dealers still be required to register with the Commission?

Commission registration requirements have not changed. The Commission has not delegated registration functions to the MFDA. A person or company wishing to become a mutual fund dealer is still required to register with the Commission but will be subject to the additional requirement of application to the MFDA and membership in the MFDA no later than July 2, 2002.

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8. Will the commission register new mutual fund dealers before July 2, 2002?

Yes, the Commission will continue to process registration applications. A person or company applying to the Commission as a mutual fund dealer must meet al Commission registration requirements and file an application for membership (as well as required fees) with the MFDA within the prescribed times.

9. How does a mutual fund dealer apply to the MFDA for membership?

Each mutual fund dealer must submit an application package in the form prescribed by the MFDA as well as the fees prescribed by the MFDA for the application for membership.

The MFDA's completed application package is available electronically on its website at www.mfda.ca. The application fee is $1,500 for a Level 1 dealer; $3,000 for a Level 2 or 3 dealer and $5,000 for a Level 4 dealer. This amount is non-refundable and will be credited towards the annual membership fee of the MFDA.

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10. Does Rule 31-506 set a deadline that is 75 days from the date that the MFDA was recognized?

No. Actions that mutual fund dealers must take are linked to the day that Rule 31-506 comes into force - April 23, 2001. An earlier version of Rule 31-506 linked actions to be taken by mutual fund dealers to the date of recognition of the MFDA. That version of Rule 31-506 has now been replaced by the version of Rule 31-506 made by the Commission on February 6, 2001.

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11. What is the deadline for an existing mutual fund dealer to apply for membership in the MFDA?

Rule 31-506 requires existing mutual fund dealers to file an application for membership (as well as required fees) with the MFDA no later than 30 days after the date Rule 31-506 comes into force (the "effective date"). Therefore, the deadline for current mutual fund dealers to file an application (as well as required fees) by May 23, 2001.

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12. Does a person or company who applies to the Commission for registration as a mutual fund dealer before Rule 31-506 is in force (but is not yet registered as a mutual fund dealer when Rule 31-506 comes into force) need to apply for membership in the MFDA?

Yes, a new applicant for registration as a mutual fund dealer must also file an application for membership (as well as required fees) with the MFDA no later than 30 days after the effective date. (See Rule 31-506, section 3.2) - i.e. no later than May 23, 2001.

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13. Will a person or company who applies to the Commission for registration as a mutual fund dealer once Rule 31-506 is in force need to apply for membership in the MFDA?

Yes, a new applicant for registration as a mutual fund dealer after the effective date must file an application for membership (as well as required fees) with the MFDA on the same date as it files its application for registration with the Commission. (See Rule 31-506, section 3.3)

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14. Does a person or company who applies to the Commission for registration as a mutual fund dealer once Rule 31-506 is in force but before the end of 30 days after the effective date, need to apply for membership in the MFDA?

Yes, a new applicant for registration as a mutual fund dealer after the effective date but before the end of 30 days after the effective date, must file an application (as well as required fees) with the MFDA no later than 30 days after the effective date of Rule 31-506. (See Rule 31-506, subsection 3.3(2) - i.e. no later than May 23, 2001.)

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15. What deadlines will apply to registrants already registered with the Commission in another category who apply to amend their registration to become mutual fund dealers (as may be the case, for example, as a result of Rule 31-507 SRO Membership - Securities Dealers and Brokers)?

A person or company applying for an amendment to registration category will be subject to the same deadlines as a new applicant for registration for filing an application for membership (as well as required fees) with the MFDA and for becoming a member of the MFDA.

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16. What if a mutual fund dealer (or person or company applying to be a mutual fund dealer) does not meet the relevant deadline to file an application (as well as required fees) with the MFDA?

If a mutual fund dealer (or person or company applying to be a mutual fund dealer) does not meet the relevant deadline to file an application (as well as required fees) with the MFDA, it is in violation of securities laws.

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17. Are all mutual fund dealers required to become members of the MFDA?

Yes, all mutual fund dealers must apply to and become members of the MFDA.

However, Rule 31-506 provides that the Director may grant exemptions. In certain cases, staff may recommend that mutual fund managers who are registered as mutual fund dealers for limited reasons and investment counsel/portfolio managers who are registered as mutual fund dealers for limited reasons be exempted from Rule 31-506 or from registration requirements. Registrants who do not believe that it is appropriate for them to become members of the MFDA, can apply for an exemption from Rule 31-506 or from registration requirements. This issue is discussed at greater length in a letter sent to the Investment Funds Institute of Canada and the Investment Counsel Association of Canada on December 6, 2000 and published in the OSC Bulletin of December 22, 2000 at (2000) 23 OSCB 8467. Each application will be evaluated on a case-by-case basis.

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18. Does a mutual fund dealer who only sells pooled funds need to join the MFDA?

All registrants who are registered as mutual fund dealers are required to become members of the MFDA. Registrants who do not believe that it is appropriate for them to become members of the MFDA can apply for an exemption from Rule 31-506 or from registration requirements. As noted above, this issue is discussed at greater length in a letter sent to the Investment Funds Institute of Canada and the Investment Counsel Association of Canada on December 6, 2000 and published in the OSC Bulletin of December 22, 2000 at (2000) 23 OSCB 8467.

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19. How soon can registrants registered as mutual fund dealers apply for an exemption to Rule 31-506 or registration requirements?

The Commission is currently accepting applications for exemption from Rule 31-506 or from registration requirements.

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20. Once a mutual fund dealer applies to the MFDA, how soon can they expect to become members?

The approval process for members in the first months of the MFDA's operation will take place gradually. However, it is expected that the MFDA will accept its first member by the fall of 2001 and will have completed its membership review and have accepted all qualified members by July 2, 2002.

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21. Rule 31-506 requires all mutual fund dealers to be members of the MFDA from and after July 2, 2002. Can the Commission process an application for registration as a mutual fund dealer where the applicant has applied for membership in the MFDA but has not yet received it as of July 2, 2002?

Pursuant to Rule 31-506, all mutual fund dealers must be members of the MFDA from and after July 2, 2002. As a result, no registration as a mutual fund dealer, including renewals of registration, will be granted by the Commission after that date to persons or companies who are not members of the MFDA. A procedure to coordinate registration with MFDA membership will be implemented.

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22. If the MFDA rejects an application for membership, how will that affect the applicant's registration with the Commission?

A mutual fund dealer who is not a member of the MFDA from and after July 2, 2002 will be (unless exempted from Rule 31-506) in breach of securities laws. It may be inappropriate for a mutual fund dealer who is unqualified to be a member of the MFDA to continue to act as a mutual fund dealer and as a result, a mutual fund dealer in this situation may have its registration revoked. As noted above, no registration as a mutual fund dealer, including renewals of registration, will be granted by the Commission after July 2, 2002 to persons or companies who are not members of the MFDA.

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23. Will new mutual fund dealers still be required to contribute to the Ontario Contingency Trust Fund?

For the time being, persons or companies applying to the Commission for registration as mutual fund dealers are required to contribute to the Ontario Contingency Trust Fund, as required under section 110 of the Regulation under the Securities Act. The Commission has been advised that the Mutual Fund Dealers Investor Protection Plan (the "MFIPP") will ask the Commission to consider the MFIPP to be a compensation fund for members of the MFDA. The Commission intends to publish for comment the MFIPP's application, once received, and will consider it once it has reviewed any comments received. Should the MFIPP (or another plan) be authorized by the Commission as a compensation plan for members of the MFDA, continued participation in the Ontario Contingency Trust Fund will be required at least until the new compensation plan commences its coverage.

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24. Will the Commission still conduct compliance reviews of mutual fund dealers once they become members of the MFDA?

The MFDA will assume primary responsibility in conducting compliance reviews on its members to ensure they are complying with the MFDA by-law and rules, and will cooperate with the Commission in ensuring compliance with applicable Ontario securities laws relating to the operations, standards of practice and business conduct of members and their approved persons. Commission staff may conduct compliance reviews of mutual fund dealers on a periodic basis as part of its oversight of the MFDA's regulatory functions.

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25. Will mutual fund dealers be required to file financial reports with both the Commission and the MFDA?

Yes, mutual fund dealers are required to file certain financial reports with the Commission under securities laws. Staff will review provisions of the Securities Act and the Regulation under the Securities Act to harmonize the requirements of the Commission and the requirements of the MFDA and to eliminate any duplication in financial reporting requirements. It is the intent to delegate the responsibility of monitoring financial reporting to the MFDA in the future.

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26. Can a salesperson continue to be an independent contractor?

According to MFDA Rule 1, the relationship between a dealer and its salesperson (referred to as an Approved Person under the MFDA Rule) can only be that of an employer and employee, or a principal and agent. A salesperson, who would like to maintain his/her independence and would like to carry on an independent relationship with a dealer through his/her personal corporation, may register his/her corporation with the Commission as a mutual fund dealer and apply for membership with the MFDA.

Salespersons can continue to have personal corporations. The Commission has approved the MFDA's three-year rule transition to allow salespersons registered in Ontario to direct their dealer to pay commissions they earned to their personal corporations. Salespersons, however, cannot conduct securities related business through their personal corporations unless these corporations are also registered with the Commission as a mutual fund dealer and apply for membership with the MFDA. Salespersons who are also registered outside of Ontario should consult with securities legislation of the jurisdiction in which they are registered.

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27. Can a salesperson "bulk transfer" client accounts from one dealer to another?

"Bulk transfers" are transfers of client accounts from one dealer to another without the prior written authorization of the clients. MFDA Rule 2.12 requires a mutual fund dealer to obtain clients' written authorization to transfer their accounts. The MFDA, however, has provided a two-year transition period for compliance with the Rule for salespersons to bulk transfer their clients' accounts to a mutual fund dealership that they have established. The Rule requires, however, that clients are informed of the transfer in advance and are provided with a request for negative confirmation of the transfer, that the accounts are in client name, and that the delivering mutual fund dealer has agreed to such transfer. A request for negative confirmation informs clients that if they do not wish to have their accounts transferred they must contact the salespersons or the mutual fund dealer to confirm their disagreement.

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28. Is a dealer required to supervise a salesperson's non-securities related business that is conducted through the salesperson's personal corporation?

No. However, MFDA Rule 1.2.1(d) requires a dealer to have knowledge of and approve of its salesperson's non-securities related business, to have procedures to address potential conflicts of interest that may arise from this business, and to provide disclosure to clients that the non-securities related business is not the business and responsibility of the dealer.

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29. Does a mutual fund dealer have to register trade or style names that it uses to conduct securities related business with the Ministry of Consumer and Commercial Relations ("MCCR")?

Yes. A mutual fund dealer must register with MCCR any trade or style names that it uses to conduct business. In addition, MFDA Rule 1.1.7 and 1.1.6(ix) establish rules for the use of trade names by its Members and Approved Persons.

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30. Where can registrants and potential registrants get more information?

Registrants and potential registrants can consult the MFDA's website at www.mfda.ca or the OSC website. The Commission published a supplement to the OSC Bulletin relating to the MFDA on February 16, 2001 at (2001) 24 OSCB (Supp) (and available on the Commission website at http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/Mfda.pdf).