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Bulletin #0675-P

For further information, please contact:

Ken Woodard
Director, Communications & Membership Services
Policy
For Distribution to Relevant Parties within your Firm

2015 Year in Review and 2016 Initiatives

This document summarizes significant MFDA regulatory activities and initiatives undertaken in 2015 and some key initiatives for 2016. Readers can access further information located on the MFDA website by clicking on the links that appear throughout the document.

KEY INITIATIVES

Member and Industry Events

In 2015, Member Education staff presented at over 45 events to provide education and guidance on a number of key regulatory topics including identifying and addressing senior investor issues, role of the branch manager, effective Branch Review Programs and policies and procedures to approve and monitor outside business activities. Members have shown increased interest in having MFDA staff directly communicate with their supervisory staff and salesforce. We expect to continue participating in these types of events in 2016.

Seniors Summit

The MFDA held its second “Seniors Summit” on October 29, 2015. The Summit featured leading experts from various fields of expertise who discussed relevant issues and actionable advice and best practices for servicing senior clients. Topics included:

  • Detailed demographic research pertaining to the investment industry
  • Medico-legal issues when servicing senior clients
  • Advising in Retirement – Draw-down and de-accumulation strategies
  • Compliance Best Practices regarding seniors’ issues
  • Viewpoints from the U.S. – Experiences and Best Practices from Regulatory and Industry Participants

Attendees at the Seniors Summit included compliance and supervisory staff from Members, staff from the Canadian Securities Administrators (“CSA”), Members, staff from industry associations, and representatives from the investor advocacy community.

A webcast of the Summit can be found on the MFDA website at MFDA Webcasts. The MFDA will continue with initiatives focused on senior investors in 2016.

CRM 2 Guidance

The Client Relationship Model Phase 2 (“CRM 2”) will result in significant changes to client reporting beginning in 2016. To assist in identifying and addressing implementation issues, the MFDA has issued guidance in the form of “Frequently Asked Questions” and Implementation Guidance. The MFDA intends on updating these documents as issues arise in the future.

Continuing Education

In 2015, the MFDA issued a discussion document designed to solicit feedback on the MFDA implementing a continuing education (“CE”) requirement for Approved Persons. The MFDA received 21 comments all supporting a CE requirement but with different views on what the requirement would look like. The MFDA intends on considering the comments received and developing Rule proposals in 2016 for further public consultation.

ETF Proficiency

The MFDA issued a discussion document regarding an appropriate proficiency standard that should apply to Approved Persons who want to trade in exchange-traded funds. The MFDA intends on considering the comments received and developing Rule proposals in 2016 for further public consultation.

Financial Planning

The MFDA is currently considering Rule proposals that would prohibit Approved Persons from using the title “Financial Planner” unless they have appropriate proficiency. As a first step in the Rule development process, MFDA staff has developed a Consultation Paper respecting standards for use of the title “Financial Planner” to solicit feedback from stakeholders on the MFDA’s proposal. The MFDA received 29 comments on the proposal and a summary of comments can be found in Policy Bulletin #0673-P. MFDA staff is also participating in consultations with the Expert Panel created by the Ontario Ministry of Finance to review the regulation of financial advisors and financial planners and will consider the output of the Ontario Ministry of Finance consultations in the development of future MFDA policy initiatives.

MFDA Consultations with other Regulators/Government Agencies

In 2015, MFDA participated in consultations with the Ontario Ministry of Finance with respect to its reviews of: the regulation of financial planners and financial advice (as noted above) and; the review of the mandates of the Financial Services Commission of Ontario, the Financial Services Tribunal and the Deposit Insurance Council of Ontario. MFDA staff met with the Expert Panels tasked with these reviews and also made written submissions. In addition, MFDA staff also participated in consultations with respect to the Cooperative Capital Markets Regulatory System by submitting comment letters on the draft Provincial/Territorial Capital Markets Act.

Client Research Project

In order to better understand the segment of the Canadian marketplace that is served by MFDA Members the MFDA intends on engaging in a client research project in 2016. This research will focus on the geographic, demographic and wealth footprint of the MFDA Member client base.

IIROC Paper

In November 2015, the Investment Industry Regulatory Organization of Canada (“IIROC”) issued a paper setting out a proposal that would include the elimination of the 270 day proficiency upgrade requirement for mutual fund advisors who migrate to the IIROC platform. The issue of the elimination of the 270 day proficiency upgrade requirement was also the subject of an earlier exemptive relief order granted by IIROC which resulted in an extensive consultation with MFDA and IIROC Members in 2014. Feedback from MFDA Members received through the consultation indicated that the potential elimination of the 270 day proficiency upgrade requirement would impact clients, the mutual fund distribution channel, individual dealers, mutual fund representatives, the investing public and the securities regulatory structure in Canada. Following the 2014 consultation on this issue, IIROC revoked the exemptive relief order in March 2015.

The IIROC paper raises many of the same broader regulatory and economic, policy and public interest concerns and considerations identified by Members in the 2014 consultation. A summary of Member comments can be found at Proposed MFDA Regulation & Consultations.

SALES COMPLIANCE

DSC Sweep

In 2015, the MFDA conducted a targeted examination sweep of Member deferred sales charge trading activity. The purpose of the sweep was to specifically focus on the suitability of sales charges.

MFDA staff reviewed trading activity from a sample of Members who trade in deferred sales charge and/or low load sales charge funds (collectively referred to as “DSC”). Members chosen for the sweep were then asked to submit transaction data for a 12-month period. MFDA staff then selected a sample of DSC purchase and redemption transactions from each Member for further detailed review. In addition to reviewing selected DSC trades, the MFDA reviewed Member trade supervision practices, supervisory inquiry processes, time horizon categories and disclosure practices. The results of the DSC Sweep are outlined in the 2015 DSC Sweep Report: Supervision, Suitability and Disclosure of Funds with Redemption Charges.

As suitability continues to be an area of focus for the MFDA, particularly as it relates to senior investors, we will continue to review these issues in future compliance examinations.

Intermediary Arrangements

MFDA surveyed its Members requesting Members to identify client assets held by intermediaries on behalf of clients not reflected as business of the Member. Throughout 2015, the MFDA has followed up with its Members to ensure action was taken to address exceptions and Members had appropriate reconciliation practices in place. The MFDA intends on issuing a policy document regarding Member use of intermediaries with a view to clarifying and harmonizing regulatory requirements applicable in these cases.

Focused Review of Member Policies and Procedures

The MFDA performed a review of all Member policies and practices regarding updating KYC information, concentration limits for certain exempt securities and sector funds, pre-trade disclosure practices and use of titles targeting senior investors. The results of the review and additional recommendations and guidance will be published early in 2016.

New Examination Cycle and Enhancements to the MFDA Risk Model

Routine sales compliance examinations are performed on a 2-year or 4-year cycle and on January 1, 2016 we commenced a new 2 and 4-year examination cycle. Whether a Member is designated in the 2-year or 4-year cycle is determined based on an assessment of risk factors in the MFDA Risk Model. With the start of the new examination cycles, certain changes were made to the examination program and MFDA Risk Model to address new risks and requirements such as the new client reporting requirements under CRM 2. In addition, specific criteria have been added to the MFDA Risk Model to consider a Member’s responsiveness to examination findings. Accordingly, Members should be cognizant of the fact that in addition to inherent risks and the risks identified in specific examination findings, a Member’s responsiveness to those findings will be a factor in the risk assessment and cycle determination going forward starting in 2016.

Suitability

Suitability remains the primary area of focus in our regulatory activities and, particularly, our compliance examinations. We continuously look for ways to improve the efficiency and effectiveness of our suitability testing. With that in mind, we will be requesting certain additional information in our examination documents request list for examinations starting after January 1, 2016. Specifically, we will be requesting that the trade blotters Members are asked to submit at the start of an examination include client KYC information to allow us to more effectively focus our testing on those transactions that pose a higher risk of being unsuitable.

Electronic Communications

Many Members are increasingly dealing with clients through electronic means in an effort to reduce costs, streamline processes and improve the overall client experience. These electronic processes include not only electronic delivery of account statements and other disclosures but also initiatives such as electronic client on-boarding. We are generally supportive of such initiatives and will look to work with Members to help establish procedures and controls that meet regulatory requirements and protect the security and confidentiality of client information.

Review of Sales Incentives and Conflicts of Interest

In 2016, the MFDA, in conjunction with other securities regulators, intends on performing a review of sales incentives that may impact the sale of products to clients and situations which could potentially give rise to a conflict of interest.

Review of Auditor Working Papers

The MFDA completed a review of all Member auditor working papers. In 2016, the MFDA intends on issuing a summary of common deficiencies identified by MFDA staff. Further in 2016, we will be implementing a new risk-based approach to reviewing auditor working papers.

ENFORCEMENT

Disciplinary Proceedings

The MFDA commenced 69 disciplinary proceedings in 2015, which is the highest number of cases commenced annually by the MFDA. The MFDA concluded 65 disciplinary proceedings during the year.

Signature Falsification

Thirty-eight of the 69 disciplinary proceedings commenced in 2015 involved signature falsification. The MFDA also issued a bulletin in 2015 to remind Approved Persons that the falsification of client signatures is not permissible under MFDA Rules, whether or not there is intent to harm clients or such harm results. The Bulletin also advised that the MFDA has recently been and will continue seeking increased penalties in upcoming cases involving signature falsification. A webcast was also conducted for Approved Persons and Members supporting the topics in the Bulletin. The MFDA will be enhancing its guidance to Members on this issue in 2016. These activities reflect that signature falsification is a concern for all Canadian securities regulators.

Bulk Track Processes

The MFDA increased the effectiveness of its bulk track processes, which provide for the efficient resolution of routine cases. Enhancements included the implementation of duty panel processes under which multiple hearings are conducted before a single Hearing Panel on one day.

Member Complaint Handling

The MFDA created a specialized unit within the Case Assessment group to deal with client complaint handling activity by Members. In addition, the MFDA completed its first discipline hearing against a Member regarding client complaint handling obligations.

Additional information regarding Enforcement activities will be provided in the 2015 MFDA Annual Enforcement report.

POLICY

Outside Activity

The MFDA proposed amendments in 2015 to MFDA Rule 1.2 to clarify the application and scope of existing obligations under MFDA Rules in respect of outside activities. The amendments were approved by Members at the 2015 Annual General and Special Meeting of Members in December and are currently awaiting approval by the Recognizing Regulators. In conjunction with the proposed amendments to Rule 1.2, MFDA staff also made revisions to MFDA Staff Notice MSN-0040 Outside Activity. In 2016, MFDA staff will be developing additional guidance for Members to consider when approving outside activities and supervising to detect undisclosed outside activity.

Powers of Attorney and Similar Authorizations

In 2016, MFDA staff will be considering amendments to Rule 2.3.1 with respect to Powers of Attorney and similar authorizations. The proposed amendments will include clarification that the prohibition on accepting or acting as a Power of Attorney for a client or having a similar authorization includes situations where an Approved Person acts as an executor or trustee for a client.

Charges and Compensation Report

On December 18, 2015, the MFDA issued a discussion document requesting input into possibly expanding the Charges and Compensation Report to include other costs incurred by clients including fund management expenses and operating costs. The MFDA will consider the submissions in determining whether to proceed with additional Rule amendments.

INVESTOR EDUCATION INITIATIVES

Benefits of Working with an MFDA Member Brochure

In 2015, the MFDA issued a brochure entitled, “The Benefits of Working with an MFDA Member” for Members to provide to clients. The purpose of the brochure is to promote client awareness of the regulatory oversight exercised by the MFDA in respect of MFDA Members and their Approved Persons, and the benefits of working with an MFDA Member.

CRM 2

In 2016, MFDA staff will publish a CRM 2 guidance document for investors. The guidance document will inform investors about the changes they will see under CRM 2 and explain key concepts relating to the compensation and performance reporting that investors will receive.

Point of Sale 3/Fund Facts

Under Point of Sale 3, the timing of the delivery of the Fund Facts will change from delivery within two days of buying a mutual fund, to delivery prior to the dealer accepting instructions to purchase a mutual fund. In 2016, MFDA staff will publish a brochure that explains this change and the Fund Facts document to investors. The brochure will be made available for Members and Approved Persons to provide to clients.

Selecting an Advisor

In 2016, MFDA staff will develop plain language communications to educate investors on the advisory process, including steps investors can take when selecting an advisor.

MFDA Website Redesign

In 2016, the MFDA will be launching a redesigned website which will improve ease of use for both MFDA Members and the public, and will include features for increased accessibility for seniors.

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Members are encouraged to contact Ken Woodard, Director of Membership Services at 416-943-4602 should they have any questions or wish to discuss any of the topics set out in this Bulletin.

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