BULLETIN #0511 – P
General Counsel & Vice-President, Policy
December 13, 2011
Phone: (416) 943-5838
For Distribution to Relevant Parties within your Firm
Summary of Comments – Consultation Paper on the Use of Third
Party Back-Office Service Providers
On June 30, 2011, MFDA staff issued Bulletin #0484-P Consultation Paper on the Use of Third
Party Back–Office Service Providers to solicit feedback from Members, third party back-office
service providers, and other industry stakeholders to identify regulatory concerns with the use of
third party back-office service providers and solutions to address these concerns to improve
overall compliance within the membership. The paper was prompted by Member requests for
assistance from MFDA staff in addressing issues that arise in dealings with third party back-
office service providers.
The deadline for comments was September 30, 2011. The MFDA received 14 submissions in
response to its request for comments.
The paper outlined three potential solutions to address the concerns identified:
A rule amendment that would require Members to only use third party back-office
service providers that are approved by the MFDA;
The development of a list of third party back-office service providers whose systems
have been reviewed and approved as compliant with MFDA requirements. Members
would not be required to exclusively use the back-office service providers identified on
the list; and
Maintaining the current approach. Currently, where deficiencies in a system are
identified, MFDA staff provides notification to the service provider and all Members
using the system outlining how the system does not meet MFDA requirements.
The majority of commenters were of the opinion that the MFDA should maintain its current
approach with respect to third party back-office service providers. The commenters noted that
this approach provides Members with the flexibility to determine what solutions are best for their
MFDA Approach Going Forward: Status Quo
In light of the comments, MFDA staff will be maintaining its current approach of monitoring
issues related to the use of third party back-office service providers and addressing them directly
as they arise with the service providers and affected Members.
Attached, as Schedule “A” to this bulletin, is a summary of key comments received.
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MFDA Bulletin #0484-P Consultation Paper on the Use of Third
Party Back-Office Service Providers
Summary of Comments
Support for Status Quo Approach
The majority of commenters were of the opinion that the MFDA should maintain its
current approach with respect to third party back-office service providers. These
commenters noted that this approach provides Members with the flexibility to determine
what solutions are best for their specific activities.
Two commenters also expressed the view that the MFDA has already provided sufficient
guidance with respect to service providers by issuing Member Regulation Notice MR-
0044 Member Obligations Regarding Service Providers and Member Regulation Notice
MR-0061 Member Obligations Regarding Outsourcing.
Issues Related to Formal Approval of Providers and Development of
an Approved List of Providers
Commenters were generally opposed to the MFDA formally approving service providers
or developing an approved list of providers and cited the following reasons for their
Several commenters expressed the view that MFDA Members should have the freedom
to choose how to best meet their obligations and service provider regulation would
restrict a Member’s autonomy and flexibility in deciding how to conduct their business.
Scope of MFDA Mandate
Several commenters expressed the view that it is unclear whether the MFDA has
jurisdiction under its existing Recognition Orders to implement a process for reviewing
service providers. These commenters were of the opinion that issues relating to service
providers are beyond the MFDA’s mandate to oversee Member compliance and
regulatory matters and would effectively allow the MFDA to enter into the realm of its
Members’ business decision-making processes. These commenters indicated that
compliance with regulatory requirements and due diligence of service providers are the
responsibility of MFDA Members.
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Effect on Competition
Numerous commenters expressed concern that an approval process would stifle
competition and create barriers to entry, as regulation would favor existing firms since
new firms would have to face an additional cost and delay prior to entering the market.
Numerous commenters expressed the view that regulation would increase costs for all
Members, since service providers would pass on the added costs incurred to become
approved. Several commenters also expressed the view that the software review process
would require resources and expertise that the MFDA does not currently have and,
therefore, could increase MFDA fees as well.
Several commenters indicated that smaller dealer Members should be able to continue to
use less expensive back-office solutions that are appropriate for the scale of their
operations, and should not be required to adopt an elaborate and costly automated system
designed for larger dealers.
Customized Software and Hybrid Issues
Numerous commenters indicated that many dealers do not use a single standard form of
back-office software, but may instead create hybrid systems that combine customized and
proprietary applications. As a result, these commenters indicated that approving the
service provider and its base module would not be effective.
Numerous commenters expressed the view that approving third party back-office service
providers and monitoring them on an ongoing basis would require expertise and
resources on the part of MFDA staff, which it may or may not have, and which may
divert attention from other areas for which it is responsible.
Numerous commenters indicated that all third party and proprietary systems should have
the same standards if service provider regulation is implemented.
Several commenters questioned whether or not the MFDA would incur liability in the
event that a system that was previously approved proves to be non-compliant with
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