CSA sets out amendments to MFDA proposals

The amendments were proposed by the Ontario Securities Commission in response to comments that rules relating to distribution structures would negatively affect the businesses of many mutual fund salespeople, particularly those who are dually licensed. The CSA has agreed to support the proposed amendments on the basis that they will address many of these concerns without compromising investor protection, says CSA chairman, Doug Hyndman.

The CSA has agreed to allow salespersons to direct their dealers to pay a portion of their earned commissions directly to their unregistered personal corporations, provided that:

> the portion of the commissions paid directly to a salesperson’s corporation must be related to the provision by the corporation to the dealer of services for which registration is not required;
> the services provided and the resulting remuneration must be reflected in an agreement between the dealer and the salesperson’s corporation;
> all remaining remuneration, including all remuneration resulting from activities for which registration is required, must be paid directly by the dealers to the salespersons.
> no more than 25% of the total commissions earned by a salesperson may be paid to the salesperson’s corporation.

In order to accommodate salespersons who wish to become dealers in the early stage of the MFDA, the CSA will allow a transition period of two years, during which a salesperson may obtain negative affirmation of clients’ consent to transfer, provided that the salesperson applies to become registered as a dealer; and the new account at the receiving dealer is a client name account.

“The draft MFDA Rules would allow salespersons to continue to conduct financial planning activities through a business outside of the dealer, provided that the business is regulated by any governmental authority or statutory agency other than a securities commission. This differs from the position taken in the CSA Distribution Structures Position Paper, which states that financial planning activities must be conducted through and supervised by the mutual fund dealers.”

@page_break@The CSA agrees to support the MFDA position that salespersons can record income derived from their financial planning activities through businesses that are otherwise regulated; however, any part of financial planning that could be considered advice relating to trading in securities or acts in furtherance of a trade must be supervised by their dealers. “This will require amendments to be made to the draft MFDA Rules to ensure that the dealers are notified of and approve the financial planning activities of their salespersons and the dealers have access to the complete financial plans prepared by their salespersons that have resulted in advice or trades in securities.”

The CSA has agreed to amendments that will permit salespersons to continue to own the trade names under which they conduct their mutual fund businesses provided that:

> the dealer consents to the use of the trade names by the salespersons;
> the securities regulators and the MFDA are notified in writing of all trade names that are used by the dealer and its salespersons in conducting the dealer’s business;
> the trade names are always used in conjunction with the full legal name of the dealer;
> the full legal name of the dealer is given at least equal prominence as the trade name; and
> the trade names should not be used to deceive or mislead clients.

The CSA will “not object to a reduction in the minimum capital for level 2 dealers from $75,000 to $50,000 and for level 3 dealers from $125,000 to $75,000, based on the proposed restricted activities of these dealers.” In light of the more stringent capital requirements, the CSA also accepts the MFDA’s proposal to provide all dealers with a transition period for them to accumulate the minimum capital levels, as published with the draft MFDA Rules. “The transition period for level 1 dealers is one year after the MFDA is recognized, and the transition period for dealers of other levels is three years after the MFDA is recognized.”

“The CSA will not object to the lowering of minimum insurance requirements for level 1 introducers and levels 2 and 3 dealers, provided the minimum levels will be at or above the current statutory requirements,” says Hyndman.