Annual enforcement report highlights work on complaint handling, suitability, and protecting vulnerable investors
The Mutual Fund Dealers Association of Canada (MFDA) has published its annual enforcement report covering for 2020, which highlighted the regulator’s continued efforts to combat misconduct by approved persons and members amid the pandemic.
“Despite COVID-19 and the transition to predominantly working from home, Enforcement continued to perform its core functions,” the MFDA said in its report. “Case Assessment continued to accept, review and respond to complaints and inquiries from the public. Investigations and Litigation remained fully operational and conducted interviews and hearings remotely.”
Across the proceedings it concluded in 2020, the MFDA handed down 16 permanent prohibitions and 24 suspensions, compared to 2019 when it issued 22 lifetime prohibitions and 56 suspensions. The amount of fines also decreased drastically, with $3,350,602 in fines ordered in 2020 compared to $9,298,603 in 2019.
“A lower quantum of fines was imposed in 2020 because fewer cases were completed in this year, which in turn is due to a decrease in the number of signature and forms cases,” the report said. “It is also attributable to fewer serious Approved Person misconduct cases.”
Among its key enforcement activities, the MFDA highlighted instances in recent years when it found approved persons documenting high risk tolerance, a long time horizon, or aggressive investment objectives among a disproportionately large number of clients. In many cases, that uniformity of KYC information leads to a significant number of recommendations for clients to put a substantial portion of their portfolio in exempt products or mutual funds that are concentrated in precious metals and other specific economic sectors.
The self-regulatory organization also identified client complaints as an area of continuing focus. Where it believes a member may have failed to promptly and fairly respond to a client complaint, MFDA enforcement staff often engage in dialogue with the member’s compliance staff regarding the issues and how the member addresses them.
The report cited one case wherein a member admitted that it failed to fairly handle 13 client complaints pertaining to a leveraged investment strategy the clients had implemented in their accounts, causing investment losses. In its handling of the complaints, the report said, the firm failed to issue timely substantive responses; failed to investigate and assess complaints thoroughly and objectively; and issued inadequate and unfair substantive responses.
Subsequently, the firm paid $89,000 for a consultant to help resolve its complaint-handling shortfalls, and paid nearly $250,000 in compensation to complainants who incurred losses from the strategy.
The MFDA also underscored its ongoing efforts to protect seniors and vulnerable persons. It cited continuing observations of unsuitable advice given to such clients, approved persons borrowing money and never paying it back, and clients bestowing executor powers to approved persons.
“In 2020, 30% of commenced proceedings involved seniors or vulnerable persons (other than signature falsification cases that do not involve a client complaint or harm to a client),” the report said.
Among other efforts to protect seniors and vulnerable clients, the MFDA said it’s actively engaged with the Canadian Securities Administrators to develop a flexible and responsive regulatory approach for issues of financial exploitation and diminished mental capacity among seniors and vulnerable clients.
