The Ontario Securities Commission has decided that mutual fund dealers must unwind two types of business arrangements due to investor protection concerns.

In June, the OSC published a notice alerting the industry to its concerns about omnibus account arrangements and joint-service arrangements. The commission received 20 comment letters on the issue and conducted other consultations. “Based on the comments received and discussions with the industry, we have noted that a number of mutual fund dealers have chosen not to enter into omnibus account arrangements and joint service arrangements and are able to continue to service their clients using other business arrangements,” it says in a new notice.

“For example, referral arrangements and the trust company/financial intermediary model can be utilized to address client needs without dealers being offside current regulatory requirements,” the notice says.

“The other proposed solutions cannot be implemented immediately and do not address all the investor protection concerns, e.g. pressure to act beyond the scope of registration, client confusion, unclear supervisory responsibilities and liability, and lack of protection fund coverage. In addition, only a limited number of mutual fund dealers utilize omnibus account and joint service arrangements.”

As a result, the OSC says it has directed the Mutual Fund Dealers Association and the Investment Dealers Association of Canada to enforce current regulatory requirements, “Mutual fund dealers and investment dealers must unwind existing omnibus account arrangements and joint service arrangements. Mutual fund dealers should not trade in, provide advice on or act in furtherance of trades in Prohibited Securities. Dealers should notify their clients of changes to the omnibus account and joint service arrangements, impact to their clients, and options available to minimize or eliminate any potential adverse consequences to their clients.”

However, the commission is not planning to force firms to unwind the arrangements by the end of the year, as it originally contemplated. Instead, “In order to allow dealers time to implement these changes and to ensure that client interests are placed first, a transition period expiring October 31, 2005 will be provided.” And, the OSC says it has also directed the MFDA and the IDA to monitor the progress of their members in unwinding these arrangements.

Other possible solutions proposed, and supported by many industry participants, were to allow mutual fund dealer and investment dealer introducing/carrying arrangements. “However, this arrangement cannot be implemented until the MFDA becomes a sponsoring self-regulatory organization of the Canadian Investor Protection Fund, which will not be in the foreseeable future. Therefore, this is not a viable solution at this time,” the notice states.

The MFDA and IDA also suggested back office servicing arrangements, which will allow mutual fund dealers to outsource their back office functions to affiliated investment dealers. “The OSC understands that this solution only resolves the systems issues relating to joint service arrangements, and will only be available to affiliated dealers,” it says.

Another alternative suggested during the consultation is to allow full-service investment dealers to hire restricted sales representatives. “The OSC notes that this alternative might necessitate changes to existing registration provisions and will consider this as part of the Registration Project,” it says.