The Ontario Securities Commission laid out its concerns Friday with jury-rigged solutions that fund dealers have devised with investment dealers to offer a full slate of securities in one consolidated account. In doing so, the paper raises the question of whether fund dealers should exist at all.

In a discussion paper, the OSC divides these structures into two categories: joint-service arrangements, and omnibus accounts for fund dealers at investment dealers. Earlier today, the IDA and MFDA ordered their members to stop taking new clients into these arrangements, and to cease devising new arrangements immediately.

The paper is being put out to give the industry a chance to help solve the OSC’s regulatory concerns. If this effort fails, it warns that these existing arrangements will have to be unwound.

Regarding the omnibus accounts, the OSC is worried that clients’ securities held in an omnibus account at an investment dealer are not covered by any investor protection fund. It also says that fund dealers may be acting beyond the scope of their registration and that they may be acting in furtherance of a securities trade.

As for the joint-service arrangements, it is worried that the division of responsibility to the client for advice and trade suitability is unclear as is the responsibility for supervising the mutual fund rep and any other personnel dealing with the client. As well, there are potential gaps in liability to the client, the client may be misled to believe that their mutual fund salesperson is proficient to deal in other types of securities and the mutual fund dealer salesperson is acting on behalf of both the mutual fund dealer and the investment dealer.

In the paper, the OSC says that it recognizes that these arrangements may have developed from the industry’s need to meet the demands of their clients. “However, these arrangements are not in compliance with current regulatory requirements and raise the concerns identified above,” it says. “As a result, the OSC is soliciting input from the industry on these issues in order to identify possible solutions that will address the investor protection concerns, while allowing the industry to meet clients’ demands.”

To that end, it proposes the possibility of a fund dealer/investment dealer introducer/carrier model. The IDA and the MFDA contemplate a model where the mutual fund portion of a client portfolio will be serviced by the MFDA introducer, and the non-mutual fund portion of the client portfolio will be serviced by the IDA carrier. The MFDA and the IDA have indicated that they will assemble a working group to consider such a structure.

However, the OSC warns that this solution may not address all of its concerns. It questions whether fund dealers have outlived their usefulness. “Does a restricted dealer registration category continue to be appropriate in the current business environment where clients want to have one consolidated account and be serviced by one sales representative?” the paper asks.