Regulators routinely “threaten” and “muscle” mutual fund dealers into accepting client settlements, said lawyers on a panel at the Federation of Mutual Fund Dealers annual conference. But at least one regulator said its rules have been set out for dealers and advisors to follow for the protection of investors with the goal of being fair, balanced and reasonable.
The lawyers at the panel, who often represent mutual fund dealers, said their clients are becoming frustrated that rules they are told to follow by regulators regarding client complaints may be suddenly switched to different regulations in the midst of an enforcement investigation.
Robert Brush, a partner with Crawley Meredith Brush LLP, said this can happen if the regulator doesn’t feel the offer the dealer has made to the investor is sufficient or fair.
“The regulator will threaten to and will open an investigation into the quality of the complaint handling [if they don’t like the offer],” said Brush. “So there you’ve got enforcement stepping in and saying: we’re going to determine our view of whether or not your offer was fair and if we can’t work with you to get to a point where we’re comfortable then there may in fact be consequences. All the clients I have worked with have reached the point where there are actually consequences.”
Mark Gordon, president and CEO of the Mutual Fund Dealers Association (MFDA), who was not present during the lawyers’ presentation, said he’s aware that some people believe the self-regulatory organization is tougher now than in the past.
“At the MFDA, when we come across a material investor catching concern, you can fully expect that we are going to be firm. Some might say that’s tough. And I’m OK with that. That’s our job,” Gordon told the conference attendees. “But that is always subject to the condition that in addition to being firm, we are also fair, balanced and reasonable, and we are fully transparent in our approach. That too is part of our job.”
Gordon said the MFDA has typically been firm when it comes to higher risk protection areas such as leverage suitability, exempt product suitability and complaint handling. “I don’t think that’s surprising anyone.”
He invited any member who believes the MFDA is tough “for no good investor protection reason,” to come and talk to his staff.
Regulators like the MFDA and the Investment Industry Regulatory Organization of Canada (IIROC) cannot order a dealer to reimburse a client or to settle in any way, nor can complaint-handling organizations like the Ombudsman for Banking Services and Investments (OBSI), which has run on the “name and shame” tenet. Since the summer of 2014, all registered dealers and registered advisors outside of Quebec have had to make OBSI available to their clients as their dispute resolution provider. An independent evaluation process is currently taking place on how OBSI handles investment-related disputes.
Investors unhappy with a settlement must go to court and sue if a settlement isn’t made to their satisfaction, said Ellen Bessner, a partner with Babin Bessner Spry LLP.
However, Bessner said there are times when OBSI comes out with a recommendation that the dealer does not honour and a regulator thinks the case should be settled on different terms. “Then they [regulators] will effectively muscle you into resolving with the client because they will say that as part of the settlement that has to happen,” said Bessner. “That to me is not principles-based… it seems to me it’s against the very principle we know which is that the regulators are not permitted to do that.”
Shaun Devlin, senior vice president, member regulation enforcement at the MFDA, said its dealer members follow stated policies on complaint handling.
That includes ensuring they have procedures in place to handle complaints fairly and promptly. The MFDA has also set out rules on the process that members must follow when assessing and responding to a client complaint, Devlin said in an email.
“There is often an informal open dialogue between case assessment staff and members in these cases, which prompts a productive consideration of the issues and in part serves [as] an educational purpose for both parties,” he said.
In addition, he said “the MFDA has no authority to compel a member to settle a complaint and we train our staff carefully on this point. Our staff are well aware that there is no such authority and do not engage in any such efforts.”
IIROC also does not suggest or order member firms to settle with investors, said an IIROC spokesperson and requires member firms to handle investor complaints to a specified standard.
IIROC requires all investors to deal with their investment firm first if there is a complaint but if the investor is not satisfied the investor may then bring their case to OBSI.
“Clients of IIROC-regulated firms are encouraged to make complaints to IIROC if they believe an advisor or someone working at an IIROC-regulated firm has broken the rules so that we may take appropriate regulatory action,” said the spokesperson.
At the conference, Dave DiPaolo a partner with BLG, said some lawyers feel that regulators are making policy through their powers of authority in enforcement. DiPaolo said regulators tend to say that their rules are principles-based, not rules-based, and they want to maintain the principle.
“That’s a very common response,” said Laura Paglia, a partner with BLG. “It’s been around for a while and I don’t predict that that is going to change. The question then becomes: is the principle that the regulator is espousing in this particular case a fair principle? Does it make sense on these facts; as the dealer, are you reasonable in accepting that principle or is that principle flawed?”
Bessner said she tells her dealer clients that settling with an investor can go a long way with regulators.
Time limits for complaints
A number of the lawyers expressed frustration with the fact that Ontario regulations call for a two-year time limit for investors to launch a complaint, but OBSI has a six-year time limitation. Past the two-year limit in Ontario, insurers will not pay compensation to the dealers if a settlement is paid out to an investor, said Brush. He said he was unsuccessful arguing this issue in a case with OBSI. However, Brush said he did approach OBSI afterwards and asked the agency to explain to the client that because of the Ontario time limit, the dealer had no insurance and instead wanted to make a counter-proposal. He also asked OBSI to explain to the client that should that settlement not suffice, the client would have to go to court and would then have to abide by the two-year limit. Brush praised OBSI for its willingness to help out, and in the end, the investor settled.