2007 Annual Report - Mutual Fund Dealers Association of Canada · Management Discussion and...

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Mutual Fund Dealers Association of CanadaAssociation canadienne des courtiers de fonds mutuels

MFDA Vision

Raising the standard of firm, fair and transparent regulation in Canada

for the protection of investors through commitment to collaboration,

staff excellence and regulatory best practices.

ContentsJoint Message from the Chair and President & Chief Executive Officer 1

MFDA Membership Information 3

Corporate Governance 6

MFDA Regulatory Operations 11

Compliance 11

Enforcement 13

Policy 18

Membership Services 20

Management Discussion and Analysis 21

Management’s Responsibility for Financial Reporting 24

Financials 25

MFDA Organizational Chart 36

We are pleased to present the MFDA’s

2007 Annual Report.

During the past year we continued our

proactive efforts to consult with Members

and other key stakeholders on a range

of matters with a view to enhancing

regulation and strengthening the mutual

fund dealer industry, including:

• Initiating the first comprehensive

review of our MFDA Rulebook

to ensure that our regulatory

requirements are current and

appropriate. We surveyed all our

Members and based on a preliminary

review of the feedback, we are

encouraged that our Rulebook

continues to be practical and flexible.

We will be issuing a separate report on

the results of this initiative,

• Collaborating with regulators and

other organizations to better ensure

that investor complaints are directed

to the appropriate agency on a

timely basis,

• Expanding our Member Regulation

Forum sessions to facilitate greater

information-sharing and discussion

of current trends and issues with

Members across Canada, and

• Participating with securities commissions

in the reform of Canada’s securities

industry registration framework.

We are mid-way through our second

cycle of sales compliance examinations of

our Members. In July 2007, we extended

our web-based reporting by Members to

include investor complaint matters, which

provides our Enforcement Department

with more current information and

enables us to respond to investor

protection concerns more effectively.

Enhancements to our Communications

Strategy have seen the introduction of a

new annual regulatory summary, entitled

“The Year in Review”, which is posted to

our website.

During the year, the Manitoba Securities

Commission and the New Brunswick

Securities Commission issued orders

formally recognizing the MFDA as a self-

regulatory organization in those provinces.

We would like to take this opportunity

to thank the MFDA staff for their

professionalism, hard work and ongoing

commitment to excellence.

robert J. Wright, C.M., Q.C.

Chair, MFDA Board of Directors

larry M. Waite

President and Chief

Executive Officer

Joint Message from the Chair of the Board and President and Chief Executive Officer

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MFDA Strategic Plan: �006 – �008

Raising the standard of firm, fair and transparent regulation in Canada for the protection of investors through commitment to collaboration, staff excellence and regulatory best practices

Collaboration

Consult with Members

for input and feedback

Improve consistency

of knowledge and

understanding of MFDA

Rules by Members

Improve internal teamwork

across all MFDA Departments

Develop framework to

support company-wide,

cross-functional

collaborative culture

Enhance framework for

Member awareness and

feedback

Raising the Standard of Regulation

Ensure efficient and

effective regulation

Proactively develop and

issue rules and notices

Take leadership role in

national regulatory initiatives

Increase level of investor

protection

Raise awareness of

MFDA’s role

Adopt proactive approach

to policy development

Explore extension of

regulatory mandate

Enhance and formalize

communication strategy

Staff Excellence

Enhance training in core skills

and continuing education

Attract and retain

quality staff

Consult with staff for

input and feedback

Enhance staff training

and development

Ensure attractive

and competitive work

environment

Regulatory Best Practices

Identify and implement

regulatory best practices and

continuously monitor for

appropriate enhancements

Achieve a culture

that always questions

if there is a better,

more efficient and cost

effective way

Implement best practices to

ensure MFDA effectiveness

and efficiency

Enhance monitoring

of Member conduct and

compliance

VISIon

GoalS

StrateGIC oBJeCtIVeS

aCtIonS

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The MFDA is Canada’s national

self-regulatory organization responsible

for regulating the activities and operations

of 162 Member mutual fund dealer firms

and their 75,000 Approved Persons. These

Member firms account for approximately

$310 Billion of the approximately

$707 Billion of client assets under

administration (“AUA”) in the Canadian

mutual fund industry.

There are four principal categories of

MFDA Membership. A Level 1 Member is

an introducing dealer. There are currently

no Level 1 Members. A Level 2 Member

does not hold client cash, securities or

other property (i.e. the Member does

not operate a trust account and conducts

business in client name only). There are

currently 54 Level 2 Members. A Level 3

Member does not hold client securities or

other property except client cash in a trust

account. There are currently 63 Level 3

Members. A Level 4 Member includes

all other Members (including a Member

that acts as a carrying dealer). There are

currently 45 Level 4 Members.

During the 12-month period ended

June 30, 2007, three firms became

new Members of the MFDA. As well,

nine firms, representing an aggregate of

$1.9 Billion in AUA and 293 Approved

Persons, became branches of larger

Members. In addition, two firms,

representing an aggregate of $53 Million

in AUA and three Approved Persons,

ceased to be Members of the MFDA.

The following Tables provide comparative

statistical information respecting MFDA

Members as at August 31, 2005, June

30, 2006 and June 30, 2007. The MFDA

presently operates in the Province of

Quebec pursuant to a Cooperative

Agreement with the Autorité des marches

financiers and the Chambre de la sécurité

financière. Accordingly, the information

set out in the tables below does not reflect

Member activities based in the Province

of Quebec.

MFDA Membership Information

Table 1: MFDA Membership Profile

2005 2006 2007

Number of Member firms 179 175 16�

Number of Approved Persons 75,000 75,000 75,000

Assets Under Administration of all Members $ �6� B $ �76 B $ �10 B

Total Industry Assets Under Administration $ 547 B $ 589 B $ 707 B

Table 2: Location of Member Head Offices

2005 2006 2007

Ontario 1�0 119 111

British Columbia 16 15 15

Quebec 14 14 9

Alberta 9 8 8

Manitoba 8 7 7

Saskatchewan 6 6 6

Nova Scotia � � �

New Brunswick � � �

Total 179 175 16�

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Table 3: Member Assets Under Administration per Head Office

2005 2006 2007

Ontario $ 187.� B $ �01.1 B $ ��0.� B

Manitoba $ 48.6 B $ 46.7 B $ 55.8 B

British Columbia $ 1�.4 B $ 1�.5 B $ 16.4 B

Quebec* $ 5.8 B $ 6.4 B $ 7.8 B

Saskatchewan $ 4.� B $ 4.4 B $ 5.0 B

Alberta $ �.8 B $ �.1 B $ �.9 B

New Brunswick $ 0.4 B $ 0.5 B $ 0.6 B

Nova Scotia $ 0.� B $ 0.� B $ 0.� B

Total (rounded) $ �6� B $ �76 B $ �10 B

* The figures reflect assets outside the Province of Quebec for dealers with a Head Office in the Province of Quebec.

Table 4: Number of Members by Assets Under Administration

2005 2006 2007

$100 Million and Under 84 79 65

$101 Million to $500 Million 50 5� 51

$501 Million to $1 Billion 1� 11 11

Over $1 Billion �� 5

Total 179 175 16�

Table 5: Number of Members by Firm Size

2005 2006 2007

10 Approved Persons or Fewer 78 74 67

11 to 100 Approved Persons 54 57 5�

101 to 500 Approved Persons �7 �4 �1

501 to 1,000 Approved Persons 6 6 7

Over 1,000 Approved Persons 14 14 15

Total 179 175 16�

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Raising the standard of firm, fair and transparent regulation in Canada for the protection of investors through commitment to collaboration, staff excellence and regulatory best practices.


Public Directors

robert J. Wright, C.M., Q.C. Chair (1) (�)

Deputy Chairman

Teck Cominco Limited

(Toronto, Ontario)

robert B. Maclellan (4)

Partner

Burchell MacDougall

(Truro, Nova Scotia)

Martin l. Friedland, C.C., Q.C. (�)

Professor of Law Emeritus

& University Professor

University of Toronto

(Toronto, Ontario)

Helen M. Meyer (4)

Corporate Director

(Erin, Ontario)

William D. Grace, FCa (1) (�)

Corporate Director & Consultant

(Edmonton, Alberta)

Janet K. pau (�)

Corporate Director

(Vancouver, British Columbia)

Corporate Governance

The MFDA Board of Directors is comprised of 13 Directors:

• Six Public Directors,

• Six Industry Directors (five of whom must be officers or employees of a Member), and

• President and Chief Executive Officer of the MFDA.

The Chair of the Board can be an Industry or a Public Director and is presently a Public Director.

The 2007 Board of Directors, and the Committees of which they are members, are as follows:

L to R: Larry Waite, Janet Pau, Helen Meyer, Robert Wright, Ed Legzdins, Peter Glaab, William Grace, George Aguiar, Robert MacLellan, David Wood, Kevin Regan, Robert Sellars, Martin Friedland.s


Industry Directors

W. David Wood, Vice Chair (1) (�)

Executive Vice President

Partnerships & Vice Chairman

National Bank Financial Group

(Montreal, Quebec)

robert B. Sellars (4)

Executive Vice President & CFO

Dundee Private Investors Inc.

(Toronto, Ontario)

George aguiar (1) (�) (4)

President & Chief Executive Officer

GP Wealth Management Corporation

(Toronto, Ontario)

edgar n. legzdins (4)

President & Chief Executive Officer

BMO Investments Inc./BMO Mutual Funds

(Toronto, Ontario)

peter W. Glaab (�)

Chairman & Director

Sun Life Financial Investment

Services (Canada) Inc.

(Waterloo, Ontario)

Kevin e. regan (4)

President & Chairman of the Board

Investors Group Financial Services Inc.

(Winnipeg, Manitoba)

Notes:(1) Member of the Executive Committee. There were five meetings held during the fiscal year: July 1, 2006 to June 30, 2007.(2) Member of the Governance Committee. There were eight meetings held during the fiscal year: July 1, 2006 to June 30, 2007.(3) Member of the Audit & Finance Committee. There were three meetings held during the fiscal year: July 1, 2006 to June 30, 2007.(4) Member of the Regulatory Issues Committee. There were five meetings held during the fiscal year: July 1, 2006 to June 30, 2007.

L to R: Larry Waite, Janet Pau, Helen Meyer, Robert Wright, Ed Legzdins, Peter Glaab, William Grace, George Aguiar, Robert MacLellan, David Wood, Kevin Regan, Robert Sellars, Martin Friedland.


Director Board meetings attended Committee meetings attended

Robert Wright, Chair 5 of 6 14 of 14

George Aguiar 6 of 6 18 of 18

Martin Friedland 5 of 6 8 of 8

Peter Glaab 6 of 6 � of �

William Grace 6 of 6 8 of 8

Thomas Hockin (Retired Sept �7/06) 0 of 1 N/A

Ed Legzdins 6 of 6 5 of 5

Robert MacLellan 6 of 6 5 of 5

Helen Meyer (Joined Board Nov 1/06) 5 of 5 � of �

Janet Pau 6 of 6 � of �

Kevin Regan 6 of 6 5 of 5

Robert Sellars (Joined Board Dec 1/06) � of � 1 of 1

Larry Waite 6 of 6 N/A

David Wood 6 of 6 8 of 1�

1. Director Compensation

Public Directors on the MFDA Board are

compensated in accordance with the

following framework:

• Annual Retainer: $15,000 per annum.

• Meeting Attendance Fee: $1,500

per meeting.

• Committee Chair Retainer: $2,500

per annum.

In the event that an out-of-town Public

Director attends a Board or Committee

meeting in person, an additional $1,000

supplementary travel fee is paid.

In circumstances where a Public Director

serves as the Chair of the Board, the

Board of Directors has the discretion to set

the amount of the Chair Retainer, which

is reviewed annually during the tenure

of the individual. Presently, the retainer

for the Chair of the Board is $70,000

per annum.

Industry Directors are not compensated

for their participation on the MFDA

Board.

All Directors are reimbursed for related

travel and out-of-pocket expenses.

The Governance Committee of the

MFDA Board of Directors is responsible

for reviewing, on an annual basis, the

adequacy and form of the compensation

for Public Directors to ensure such

compensation realistically reflects the

responsibilities and risk involved in being

an effective Public Director.

�. Board Meetings and Attendance

A total of 28 corporate meetings, including

six Board meetings and the Annual

General Meeting, were held during the

12-month period ended June 30, 2007.

The following chart outlines individual

Director attendance at these meetings:


�. Summary of Directors’ Terms of Office

The following table summarizes the

dates on which Directors joined the

MFDA Board and the dates on which

their respective terms of office will expire,

if they serve their maximum terms of

office as specified in the MFDA By-laws.

Under MFDA By-laws, Public Directors

are eligible to serve two successive terms

of 3 years, and Industry Directors are

eligible to serve three successive terms

of 2 years.

Regional Councils and Hearing Panels

The MFDA has four Regional Councils

that are separate and distinct from the

Board of Directors and organized by

region: Atlantic, Central, Pacific and

Prairie. The composition of Regional

Council is as follows:

• Elected representatives of Members

who are resident in the applicable

Region.

• Appointed Public representatives

who are either retired judges or

practicing lawyers.

• Appointed Industry representatives

who are individuals with securities

industry experience and typically

retired from the industry or not

associated with a Member.

• Ex officio representatives who are senior

officers of the MFDA and immediate

past Chairs of the Regional Councils.

In February 2007, Regional Council

meetings were held in Toronto,

Vancouver, Calgary and Halifax to review

hearings and policy-related matters.

All four MFDA Regional Councils will be

reconstituted in early 2008 and Members

will be invited to propose candidates for

election to each of the Regional Councils

at that time.

MFDA Regional Council activities are

administered and coordinated by the

Office of the Corporate Secretary.

Board Member Category Year Became Director Final Year of office (if elected to serve all terms of office)

Robert Wright Public �00� �008

Janet Pau Public �00� �008

David Wood Industry �00� �008

Martin Friedland Public �00� �009

William Grace Public �00� �009

Robert MacLellan Public �00� �009

George Aguiar Industry �00� �009

Peter Glaab Industry �004 �010

Kevin Regan Industry �005 �011

Ed Legzdins Industry �005 �011

Helen Meyer Public �006 �01�

Robert Sellars Industry �006 �01�

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Hearing Panels

A principal responsibility of MFDA

Regional Council representatives is to

stand ready to serve as members of

impartial three-person Hearing Panels

that preside over MFDA enforcement

proceedings. In this capacity, Regional

Council representatives fulfill an

adjudicative responsibility that is

independent of MFDA staff, management,

and the Board of Directors. They are

aided in this work by the participation of

Appointed Public representatives (retired

judges or lawyers with administrative

law experience) who chair MFDA

Hearing Panels.

The Corporate Secretary is responsible

for the administration of all hearings-

related activities at the MFDA, separate

and independent from the Enforcement

Department. The Corporate Secretary’s

responsibilities include: vetting and

selecting the members of each hearing

panel from among the representatives on

the Regional Councils; issuing all Notices

of Hearings; scheduling all appearances

before hearing panels; serving as the

Registrar and maintaining formal records

of hearings.MFDA Management Team

Front Row: L to R: Mark Gordon, Executive

Vice-President, Wendy Royle, Vice-President,

Pacific Region, Larry Waite, President and CEO

Back Row: L to R: Paige Ward, Director, Policy

& Regulatory Affairs, Gregory Ljubic, Corporate

Secretary, Jim Wahl, Director, Prairie Region,

Karen McGuinness, Vice-President, Compliance,

Shaun Devlin, Vice-President, Enforcement,

Paul Reid, Director, Finance & Administration

s

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MFDA Regulatory Operations

Compliance The MFDA Compliance Department is

principally responsible for monitoring

Member firms’ adherence to MFDA

requirements. The Department

is comprised of two groups: Sales

Compliance and Financial Compliance.

The Sales Compliance group’s key

responsibility is performing regular

on-site examinations of Members and

reporting and resolving findings. The

Financial Compliance group monitors

Member financial filings, both monthly

and annual, and performs on-site financial

examinations of Level 4 Members.

The Compliance Department is also

responsible for reviewing and approving

Member resignation and reorganization

requests, reviewing new membership

applications and assisting in policy and

enforcement initiatives as required.

1. Sales Compliance Activity

A. Second Compliance

Examination Cycle

MFDA Members are subject to a 3-year

examination cycle. The MFDA’s second

examination cycle commenced in January

2006 and staff has performed a total of 79

compliance examinations through to June

30, 2007 — including examinations of 97

branch locations.

The following is a breakdown of

compliance examinations by Province as

at June 30, 2007:

B. Benchmarks

In January 2006, the MFDA Compliance

Department revised its benchmark for

issuing examination reports:

• 70% of the examination reports to be

issued within 15 weeks of completion

of field work, and

• All reports to be issued within 22

weeks of the completion of field work.

To date, 83% of reports have been issued

within the 15-week benchmark and

all reports have been issued within

22 weeks.

C. Referrals to the

Enforcement Department

As at June 30, 2007, a total

of 31 referrals have been

made to the Enforcement

Department originating

from information obtained

during the second cycle of

compliance examinations.

Head office Branch total

Ontario 5� 5� 106

British Columbia 10 19 �9

Alberta 4 1� 16

Manitoba 4 � 6

Saskatchewan � 4 7

Quebec � 0 �

Nova Scotia � 4 6

New Brunswick 1 � 4

Total 79 97 176

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D. Common Deficiencies

The following are the most common sales

compliance deficiencies identified to date

in the course of conducting the second

cycle of sales compliance examinations:

• Inadequate written policies and

procedures.

• Suitability of investments.

• Incomplete Know-Your-Client

(“KYC”) information.

• Failure to maintain adequate evidence

of trade supervision.

• New account application forms/KYC

forms not on file.

• Failure to maintain adequate evidence

of client trade instructions.

• Discrepancies between KYC

information recorded in the client file

and the KYC information recorded on

the back-office system.

• Inadequate Know-Your-Product

due diligence.

• Inadequate branch/sub-branch

review program.

• Inadequate procedures to review

and approve amendments to KYC

information.

E. Suitability Database

During the year, MFDA retained the

services of an external consultant

to provide a web-based application,

containing prospectus-sourced risk

information for all public mutual funds.

This tool, which can be accessed by

Compliance staff in the field, facilitates

ready identification of risk information

respecting mutual funds thereby

improving the effectiveness and efficiency

of suitability testing. The program is

also used by the MFDA Enforcement

Department in analyzing complaints.

F. Acceptable Securities Locations

– Custodial Agreements

Following the issuance of Member

Regulation Notice MR-0058 in December

2006, MFDA staff coordinated a process

with Members to ensure that all mutual

fund companies, banks, trust companies

and other financial institutions that hold

client assets on behalf of Members execute

a bare trustee custodial agreement with

the MFDA, in prescribed form. A list

of these agreements is posted on the

MFDA website.

�. Financial Compliance Activity

A. Level 4 Member Examinations

During calendar 2006, the Financial

Compliance group satisfied its benchmark

to perform an annual on-site financial

examination of all active Level 4

Members. All examination reports were

issued within the established benchmark

timeframe: 70% of reports issued within

15 weeks of fieldwork completion, and

all remaining reports issued within 22

weeks of fieldwork completion. Of the 40

examinations conducted in 2006, 28 were

in Ontario, three in Manitoba, three in

British Columbia, two in Alberta and four

in Quebec. As at June 30, 2007, third-

round financial compliance examinations

were being performed for Level 4 dealers.

Twenty-three third round examinations

had commenced, with eight reports being

issued, by June 30, 2007.

The most commonly identified

deficiencies during the examinations

included:

• Reporting/accounting errors or

misclassifications.

• Inadequate written policies and

procedures.

• Failure to operate trust accounts in

accordance with MFDA requirements.

B. Referrals to the Enforcement

Department

During the six months ended June 30,

2007, the Financial Compliance group

made a total of six referrals to the MFDA

Enforcement Department.

The most common reasons for such

referrals were breaches of early warning

restrictions and significant repeat

deficiencies from prior examinations.

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EnforcementThe Enforcement Department is principally

responsible for addressing non-compliance

with regulatory requirements by Members

and Approved Persons. The Department is

comprised of four groups:

• Case Assessment – which responds

to public inquiries and complaints

and screens all intake cases to identify

those matters requiring further

investigation.

• Investigations – which conducts

in-depth reviews of cases, including

gathering documentation,

conducting interviews and making

recommendations for disposition.

• Litigation – which provides legal advice

during ongoing investigations, assesses

the appropriate disposition of matters

and where appropriate, commences

disciplinary proceedings before

independent 3-person hearing panels

of the MFDA’s Regional Councils.

• Policy – which develops enforcement

policies, written procedures, retains

records of research and other work

product to maintain knowledge

management and coordinates

department training.

The MFDA maintains a toll-free telephone

number (1-888-466-6332) which

investors may call to ask a question or

make a complaint.

1. Key Enforcement Enhancements

A. Referrals From Compliance

The risk-based procedures for referrals

address the appropriate level of regulatory

response to issues of non-compliance

identified during the second cycle of

sales compliance examinations, with

the highest ranking of risks being those

involving supervision, Know-Your-Client

documentation, concentration of repeat

deficiencies, and breaches of earlier

agreements and undertakings with

the MFDA.

B. Suitability Analysis

MFDA Compliance and Enforcement

staff developed internal procedures for

assessing the suitability of investment

and leveraging recommendations. These

procedures will form the basis for the

issuance of MFDA policy instruments to

provide guidance to Members.


C. Member Complaint-Handling

Procedures

MFDA staff continues to work with staff

of the OSC, IDA and the Ombudsman

for Banking Services and Investments

on a number of issues arising from the

2005 Investor Town Hall convened by the

OSC. The organizations have committed

to working together on four priority

areas and convened a follow-up Investor

Forum meeting in October 2007. The four

priorities are:

• Improving the complaint-handling

process for retail investors.

• Enhancing communications with

retail investors.

• Making access to information easier

for investors.

• Providing clarity on existing redress

mechanisms.

In support of this initiative, in December

2006 the MFDA issued Member

Regulation Notice MR-0059 (Complaint

Handling Obligations) detailing the

MFDA’s expectations regarding the

fairness and timeliness of Member

complaint handling and best practices

for communicating with complainants.

In June 2007, the MFDA approved

revisions to Policy 3 which incorporated

the substance of MR-0059 and covered

additional issues. The MFDA consulted

with IDA staff on this initiative, to

ensure consistency of complaint handling

standards between the MFDA and IDA.

D. Member Electronic Reporting

During the past year, revisions to MFDA

Rule 1.2.5 and new Policy 6 were

approved by the CSA and the MFDA

implemented Member electronic reporting

through a web-based portal known as

METS (Member Event Tracking System).

MFDA staff provided additional written

guidance and in-person training to

Members on the use of METS. Member

reporting through the system was

implemented on a transition basis

on July 3, 2007 and the reporting

requirement was fully implemented

on September 4, 2007.

E. Penalty Guidelines

In January 2007, Enforcement staff

published penalty guidelines to assist

Hearing Panels, MFDA Enforcement

counsel and Respondents in determining

relevant factors to identify appropriate

penalties in the settlement and litigation

of disciplinary hearings. The guidelines

set out general principles that may be

considered across a wide range of case

types. The penalty guidelines are posted

on the MFDA website.

F. Guide to the Disciplinary

Hearing Process

Enforcement staff developed a guide that

provides an overview of the disciplinary

hearing process. The guide is posted

on the MFDA website and provides

a description of all key steps that may

take place during the conduct of a

disciplinary hearing.

G. Further Development of

Case-Handling Benchmarks

The Enforcement Department assessed

its benchmarks as part of its annual

self-assessment process and shortened

its Litigation benchmark: 80% of all

cases are now expected to be closed or

the subject of a disciplinary proceeding

within 10 months of escalation from the

Investigations group.

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�. Ombudsman for Banking Services and Investments

The Ombudsman for Banking Services

and Investments (“OBSI”) acts as an

independent dispute resolution service for

customers of banks and members of the

MFDA, IDA and IFIC. The contact number

for OBSI is 1-888-451-4519. OBSI

investigates customer complaints and can

recommend that a complainant receive

monetary compensation.

The MFDA By-laws require that MFDA

Members participate in the dispute

resolution service provided by OBSI and

also require Members to inform all new

clients and clients who submit written

complaints about the dispute resolution

service provided by OBSI. Furthermore,

MFDA Enforcement staff notify all

persons complaining to the MFDA of the

existence of OBSI and provide OBSI’s

contact information.

�. Disciplinary Action

MFDA Enforcement staff issued Notices

of Hearing in 21 cases during the year.

Staff identified an additional 209 cases

involving violations of a minor nature

that did not warrant formal disciplinary

proceedings. Staff issues warning letters in

those cases where the minor violation has

ceased and where MFDA staff are of the

view that the Member could reasonably

be expected to avoid similar violations

in the future. Where such is not the

case, the MFDA enters into agreements

and undertakings that generally require

rectification of deficiencies within a

specified period of time, occasionally with

suitable expert assistance retained by the

Member at its own expense. Of the 209

minor violation cases, 192 were closed by

warning letter and 17 were closed with an

agreement and undertaking.

4. Enforcement Statistics

A. Cases Opened by Case Type

A breakdown of cases opened by primary

area of concern is as follows:

Cases opened by type July 1, 2006 – June 30 , 2007 number of cases

Suitability – Investments 50

Outside Business Activities / Dual Occupation �8

Falsification / Misrepresentation �7

Suitability – Leveraging �5

Conduct Unbecoming �4

Supervision �4

Forgery / Fraud / Theft / Misappropriation / Misapplication 14

Books, Records and Client Reporting 1�

Commissions and Fees 1�

Referral Arrangements 1�

Reporting Violations 1�

Sales Communication 10

Complaint Procedure 9

Financial Requirements 9

Transfer of Accounts 9

Business Standards 8

Personal Financial Dealings 8

Policy & Procedures 8

Unauthorized / Discretionary Trading 8

Conflict of Interest 7

Securities Regulator’s Order 6

All Other Case Types (All less than 5 Cases) �8

Total �61


B. Case Handling Activity

The number of cases opened by the MFDA

during the year was generally consistent

with case opening numbers from the

three previous years. The number of

cases escalated to the Investigations and

Litigation groups and the number of

formal proceedings increased, as it had in

the three previous years, primarily because

a higher percentage of client complaints

relate to post-membership events over

which the MFDA has jurisdiction.

C. Case Handling Benchmarks

The performance benchmark for the

Case Assessment group is for 80% of

all cases to be closed or escalated to the

Investigations group within 120 days of

case opening. Performance against this

benchmark for the year was 80%.


Investigations group is for 80% of all cases

to be closed or escalated to the Litigation

group within one year of escalation from

the Case Assessment. Performance against

this benchmark for the year was 83%.


Litigation group is for 80% of all cases

to be closed or the subject of a Notice of

Hearing or Settlement Hearing within

ten months of escalation from the

Investigations group. Performance against

this benchmark for the year was 86%.

Additional Enforcement Statistics are

published on the MFDA website at

www.mfda.ca.

5. Enforcement Cases

The MFDA concluded 16 disciplinary

cases during the year. 15 of these cases

involved allegations against current and

former Approved Persons and resulted

in 11 permanent prohibitions, one

suspension, and total fines in the amount

of $1,385,065. The remaining case

involved allegations against a Member,

and resulted in a fine of $100,000 and

the imposition of a monitor to report

on and oversee certain of the Member’s

compliance activities. In addition, the

MFDA conducted suspension/termination

hearings of four inactive Members.

Of the $1,485,065 in fines during the

year, the MFDA was able to collect

$141,500 . For the period from inception

of discipline activity in 2004 to June 30,

2007, fines totaled $9,936,065, of which

the MFDA has collected $2,790,000, or

28%. The MFDA has to date collected

100% of fines from current Members and

Approved Persons. The MFDA presently

lacks effective powers in most provinces

to collect fines and costs from former

Approved Persons, but where a fine is not

paid such individuals may be denied

re-registration by securities commissions.

July 1 to June 30 total Cases escalated to escalated to notices of total Cases opened Investigation litigation Hearing Issued Closed

�006 – �007 �61 1�0 �0 �1 4�5

�005 – �006 �71 117 18 10 ��1

�004 – �005 441 98 1� 9 �5�

�00� – �004 ��1 44 1 0 159

�00� – �00� 1�9 8 0 0 99


Cases of Interest

IQON Financial Inc.

In a settlement, IQON admitted to

repeat compliance deficiencies identified

during two successive MFDA compliance

examinations, and a failure to properly

supervise the activities of one of its

Approved Persons. The repeat deficiencies

concerned the adequacy of IQON’s

head office and branch trade reviews,

new account approval procedures,

and documentation of client trading

instructions. IQON was fined $100,000,

plus costs and was required to retain KPMG

at its own expense to review its operations

and address the repeat deficiencies.

Joseph Zollo

Zollo admitted in a settlement that

over a two year period he accepted

approximately $1.5 million from 50

clients, for the purposes of conducting

discretionary trading for the clients

outside the member. During the MFDA

investigation, Zollo repaid each client the

full amount of their original investment,

including repaying all of the $225,000 fees

he had received and other amounts he had

loaned to himself, plus a return ranging

from 1% to 84%. Zollo was suspended for

three and a half years, and will be subject

to close supervision for a further one and a

half years upon his return to the industry.

Mary Elizabeth Rygiel

Rygiel admitted in a settlement that

she had, while acting as the compliance

officer of a Member, processed client trade

instructions received from an unregistered

individual who provided advice to the

Member’s clients. Rygiel was fined $5,000,

plus costs and was prohibited from acting

in a supervisory or compliance capacity

for three years.

Keith Oswald Wong

Wong on several occasions improperly

accessed a confidential client database

controlled by another Member to identify

and solicit business from 24 high net

worth clients of the other Member. He

was fined $7,000 and was prohibited from

working in a compliance or supervisory

capacity for three years. He was also

required to complete an ethics course

within one year of the hearing.

6. Upcoming Initiatives

A. Member Electronic Reporting

In addition to opening cases on certain

matters reported by Members through

METS, the MFDA will be implementing

procedures to proactively identify trends

in risk for the purposes of investigation

and to include METS information in the

MFDA’s Member Risk Model.

B. Enforcement Information

Upon approval from the CSA, the MFDA

will implement procedures to enter

general enforcement case information

into the National Registration Database

for the assistance of the CSA staff.

C. Business Process Management

Enforcement Department activity will be

included in the MFDA’s business process

management system, which will enhance

effectiveness, consistency and the flow of

management information.


PolicyThe Policy & Regulatory Affairs

Department is active in monitoring

the effectiveness of MFDA By-laws,

Rules and Policies; recommending

changes, where appropriate; drafting

new or amended By-laws, Rules and

Policies; and disseminating Notices and

Bulletins to Members to assist them

with the interpretation and application

of MFDA requirements. In addition,

the Department provides consulting,

legal, research and drafting support to

other MFDA departments. The Policy

Department collaborates with staff

of other departments at the MFDA,

particularly in the Compliance and

Enforcement areas.

1. Consultations with Industry

In the Fall of 2006 and Spring of 2007

13 Member Regulation Forum sessions

were held in cities across Canada: Toronto,

Vancouver, Calgary, Regina, Winnipeg,

Montreal, Halifax and St. John’s. MFDA

staff updated Members on the CSA

Registration Reform Project, including the

Client Relationship Model, the MFDA’s

proposed Policy No. 6 – Information

Reporting Requirements, Suitability,

Outside Business Activities, and the new

Member Event Tracking System which

was implemented on July 3, 2007.

�. By-law Amendments

During the past year, the MFDA amended

section 19.9 of MFDA By-law No. 1,

dealing with the conduct of hearings

in circumstances in which one hearing

panel member is unable to continue to

participate on the panel. The recognizing

securities commissions approved the

amendments to section 19.9 in July 2007.

In September 2006, the MFDA Board

of Directors approved amendments to

section 24.3 of MFDA By-law No. 1,

dealing with the process for expedited

hearings in certain situations involving

urgent regulatory concern, including

failure to meet regulatory financial

requirements, serious financial or

operating difficulty, failure to cooperate in

an examination or investigation, or failure

to comply with a previous order of a

disciplinary panel. Amendments to section

24.3 are currently awaiting the approval

of the recognizing securities commissions.

�. Rule Amendments

Amendments to MFDA Rules 3.2.2

(Member Capital) and 3.2.4 (Notice

Regarding Accelerated Payment of Long

Term Debt) were made in December

2006. The amendment to Rule 3.2.2

clarifies the requirement for Members

to maintain positive financial statement

capital (defined as shareholders equity

plus subordinated debt). MFDA Rule 3.2.5

is a new Rule requiring Members to notify

the MFDA of any request by a creditor

for accelerated payments over and above

the payments required under an existing

repayment schedule. The notification is

intended to alert the MFDA of situations

which may indicate a firm is experiencing

financial difficulty.

MFDA Rule 1.2.4 (Currency of Courses)

was amended in January 2007. The

amendments, which were housekeeping

in nature, clarified the application of

the Rule and provide MFDA staff with

discretion to consider whether individuals

who do not meet the prescribed course

requirements have met the objective of

ensuring that their proficiency remains

current by other means.

4. Form Amendments

In November 2006, the recognizing

securities commissions approved an

amendment to the MFDA Financial

Questionnaire and Report (“FQR”). The

amendment requires that all related party

debt must be recorded on the FQR as a

current liability unless a subordination

agreement in a form prescribed by the

MFDA has been executed by the Member

and other relevant parties in relation to

such debt.



amendments to the MFDA FQR dealing

with the Part II Auditors Report to

conform with changes made in the CICA

Handbook and added a line to Statement

D that will require Members to separately

disclose revenue earned from “referral

fees”. These amendments are currently

awaiting the approval of the recognizing

securities commissions.

5. Policy Amendments

MFDA Policy 5 (Branch Review

Requirements) was approved by the CSA

on July 13, 2006. The Policy establishes

minimum standards for the development

and implementation of branch and sub-

branch review procedures. The objective

is for Members to develop branch review

programs that maximize their ability to

detect potential compliance issues so that

corrective action may be promptly taken

before serious problems occur.

In the past year, the MFDA also developed

a new Policy 6 (Information Reporting

Requirements) and amended Rule 1.2.5.

Policy 6, which was approved by the

recognizing securities commissions on

July 3, 2007, was developed to consolidate

many of the current MFDA reporting

requirements in a single instrument, to

expand the matters that must be reported

and to require electronic reporting of

enforcement and compliance-related

information.


amendments to MFDA Policy 3 dealing

with ‘Handling Complaints and

Conducting Supervisory Investigations’.

The amendments followed from the

OSC Town Hall meeting with investors

in the Fall of 2005 and subsequent

discussions with the OSC, IDA and OBSI.

These amendments were filed with the

recognizing securities commissions

for approval.

6. Member Regulation Notices

MFDA Notices set out MFDA staff’s

interpretation of MFDA requirements.

Key MFDA Notices issued during the

period July 1, 2006 to June 30, 2007

include the following:

title of notice reference number Date Issued

Undivided Interests in Land MR Notice #0055 July 6, �006

Business Continuity Planning MR Notice #0056 October ��, �006

Joint Regulatory Notice on the Role of MR Notice #0057 December 5, �006

Compliance and Supervision

Acceptable Securities Locations MR Notice #0058 December 14, �006

Complaint Handling Obligations MR Notice #0059 December �0, �006

Penalty Guidelines MR Notice #0060 January 18, �007

Member Obligations Regarding Outsourcing MR Notice #0061 February 14, �007

Exempt Securities of Non-Arm’s Length Issuers MR Notice #006� May �4, �007

7. Current Projects and Initiatives

A. Client Relationship Model

MFDA staff is working on amendments

to MFDA Rules to address certain core

principles and issues related to account

opening requirements and performance

reporting identified under the Client

Relationship Model project.

B. Investment and Leveraging

Suitability Framework

MFDA staff is currently preparing a

regulatory instrument with respect to the

suitability obligations of MFDA Members

and their Approved Persons under MFDA

Rule 2.2.1. The instrument will provide

guidance on establishing procedures

required to meet these obligations,

including the gathering of Know-

Your-Client and Know-Your-Product

information and the determination as to

whether a particular product is suitable

for a particular client in light of his or

her investment objectives. The Notice

will also provide guidance on

assessing suitability of

recommendations to clients

regarding the use

of leverage.

C. MFDA Rule Review Survey

In 2007, the MFDA solicited Member

views on the effectiveness of its Rules and

regulatory requirements through a rule

review survey. The MFDA will be using

the comments received to identify rules

which require amendment or further

clarification and to draft new requirements

necessary to reflect industry changes.

Membership ServicesThe Communications and Membership

Services Department is active in

maintaining Member files and responding

to inquiries from Members, the public

and the media. It is also responsible for

maintaining and updating the MFDA

website and facilitating Member events.

During the period July 1, 2006 to June

30, 2007, the Department responded

to approximately 960 inquiries by

telephone and e-mail. The majority of

inquiries come from MFDA Members and

Approved Persons respecting such topics

as registration of Approved Persons, the

Electronic Filing System and questions

about the latest Notices and Bulletins.

M U T U A L F U N D D E A L E R S A S S O C I AT I O N O F C A N A D A a n n u a l r e p o r t 2 0 0 7 � 1

7. Current Projects and Initiatives

A. Client Relationship Model

MFDA staff is working on amendments

to MFDA Rules to address certain core

principles and issues related to account

opening requirements and performance

reporting identified under the Client

Relationship Model project.

B. Investment and Leveraging

Suitability Framework

MFDA staff is currently preparing a

regulatory instrument with respect to the

suitability obligations of MFDA Members

and their Approved Persons under MFDA

Rule 2.2.1. The instrument will provide

guidance on establishing procedures

required to meet these obligations,

including the gathering of Know-

Your-Client and Know-Your-Product

information and the determination as to

whether a particular product is suitable

for a particular client in light of his or

her investment objectives. The Notice

will also provide guidance on

assessing suitability of

recommendations to clients

regarding the use

of leverage.

C. MFDA Rule Review Survey

In 2007, the MFDA solicited Member

views on the effectiveness of its Rules and

regulatory requirements through a rule

review survey. The MFDA will be using

the comments received to identify rules

which require amendment or further

clarification and to draft new requirements

necessary to reflect industry changes.

Membership ServicesThe Communications and Membership

Services Department is active in

maintaining Member files and responding

to inquiries from Members, the public

and the media. It is also responsible for

maintaining and updating the MFDA

website and facilitating Member events.

During the period July 1, 2006 to June

30, 2007, the Department responded

to approximately 960 inquiries by

telephone and e-mail. The majority of

inquiries come from MFDA Members and

Approved Persons respecting such topics

as registration of Approved Persons, the

Electronic Filing System and questions

about the latest Notices and Bulletins.

The financial statements present the

results of the MFDA for the fiscal

year ended June 30, 2007 with 2006

comparatives and accompanying notes.

RevenuesFor the fiscal year ended June 30, 2007,

MFDA revenues from operations were

$23,136,939 (compared to $18,796,085

for the 2006 fiscal year). The principal

source of revenue for the MFDA is

Membership fees, which are assessed

against Member firms and are calculated

to provide sufficient funding to the MFDA

to cover its yearly budgeted expenses.

Membership fees are calculated based

upon a formula that takes into account

the amount of assets under administration

(“AUA”) that each Member firm has

under its control. Each year, on or before

April 15th, MFDA Members are required

to report their AUA figures as at March

31st. AUA figures represent AUA from

operations in all provinces other than

Quebec and specifically exclude cash,

GIC’s, limited partnerships, and segregated

funds. A Member’s reported AUA for the

current year is then added to the previous

year’s reported AUA and an average of the

two years is calculated for billing purposes.

The MFDA uses a five-tiered AUA rate

schedule as the basis for its billing.

Members are billed a set fee amount

per $million of AUA based upon this

schedule. The fee rates on this tiered

schedule are set in order to provide

sufficient funding for the upcoming fiscal

year. The MFDA fee payable by a Member

is calculated by matching its average AUA

figure to this tiered fee schedule. For some

Members, a minimum MFDA fee will

apply. Each Member’s fees for the year are

broken down into four equal payments

that are invoiced on a quarterly basis.

Membership fees for fiscal 2007 were

$22,672,576. Other sources of revenues

for the MFDA include:

• Investment revenue of $376,093 that

is derived from the investment of

MFDA operating cash balances. These

balances are invested in the CIBC TAL

Imperial Money Market Pooled Fund.

• Administration recoveries of

$60,000 are costs recovered from the

MFDA Investor Protection Fund for

administrative services provided to the

Fund by MFDA staff.

• Late filing fees of $16,950 relate to

fees levied against Members that have

missed information filing deadlines.

• Enforcement recoveries of $11,320

are costs awarded by the MFDA

Regional Council Hearing Panels at

the conclusion of MFDA disciplinary

hearings or settlements and which

have been collected by the MFDA.

ExpensesOperating expenses were $21,711,811

for the fiscal year ended June 30, 2007

(compared to $17,961,931 for the 2006

fiscal year). Expenses for the MFDA

are now leveling off as the organization

has completed its growth stage. To

accommodate the final stage of growth

for the MFDA, the Toronto and Calgary

offices were expanded this past year.

Consequently, expenses were incurred for

leasehold improvements, furniture, and

additional rent relating to this expansion.

Management Discussion and Analysis

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The MFDA also experienced increased

travel expenses as more Compliance and

Enforcement related travel was required

than in the previous fiscal year. Similarly,

increased Hearing Panel activity was

evidenced by a year-over-year increase

in Hearing Panel expenses.

Lastly, in relation to information systems

development, the MFDA began successful

implementation of its Business Process

Management (“BPM”) system that

was purchased towards the end of the

previous fiscal year. The BPM system

is designed to streamline processes

and create workflow efficiencies. The

Compliance examination process was

the first process introduced into the BPM

system this year with other processes to

follow. As well, a search function was

built into the MFDA’s website as requested

by Members, the Electronic Filing System

(“EFS”) received further enhancements

and the Member Event Tracking System

(“METS”) was developed and released to

Members in July 2007.

Excess of Revenue over ExpensesThe MFDA finished fiscal 2007 with

an excess of revenue over expenses

of $1,425,128 (compared to $834,154

for the 2006 fiscal year). The largest

component of the excess of revenues over

expenses was attributed to budgeted staff

additions being hired later in the year

than anticipated due to an extremely

competitive labor market. These hiring

delays also impacted other expenses that

are directly affected by staff count such as

travel and training, further contributing to

the surplus position.

MFDA Discretionary FundThis Fund is an internally restricted

fund established by the MFDA Board of

Directors and receives monies from the

collection of enforcement fines and the

disgorgement of profits imposed by order

of an MFDA hearing panel. For fiscal 2007

the Fund received fines of $144,500 and

earned investment revenue of $7,801

derived from the investment of fund

balances in the CIBC TAL Imperial Money

Market Pooled Fund. The Fund had a

balance of $326,561 at June 30, 2007

(compared to $174,334 at June 30, 2006).

Investor Protection CorporationThe MFDA bills and collects assessments

on behalf of the MFDA Investor

Protection Corporation. From an

accounting perspective, these amounts

flow through the MFDA Balance Sheet

as an asset to reflect the assessment to be

received from Members, with an offsetting

liability to the MFDA Investor Protection

Corporation to reflect future remittance.

For the period from July 1, 2006 to June

30, 2007 the MFDA billed $5,047,619

to its Members on behalf of the MFDA

Investor Protection Corporation. As

of June 30, 2007, $8,727 relating to

assessments remained due to the MFDA

Investor Protection Corporation.

Outlook for �008For fiscal 2008, the MFDA will continue

to implement the elements of its strategic

plan in order to attain its Vision of raising

the standard of firm, fair and transparent

regulation in Canada for the protection

of investors through commitment to

collaboration, staff excellence and

regulatory best practices. A dedication to

staff training and education continues to

be a core component in the attainment

of this Vision. As well, opportunities for

increased collaboration with other industry

participants, Members, and MFDA staff

will be both sought and encouraged.

Lastly, the MFDA will continue to seek

ways to enhance Member understanding

while promoting Member feedback.

The MFDA has now reached a mature

state, which has several implications

for costs facing the organization. Most

departments have been operational for

several years now and so have sufficient

cost history upon which to draw budget

estimates. Therefore, management expects

budget variances experienced in the past

to continue to narrow going forward.

As well, a leveling out of costs for the

organization as a whole is anticipated at

this point in time.

Staff related expenses for salaries and

benefits have been and will continue

to be the most significant cost for the

MFDA. However, large increases in staff

count that were necessary in the past

during the MFDA’s growth phase will

not be required in the future barring any

changes in mandate or scope of regulatory

operations. The budgeted staff count was

156 at June 30, 2007 and is budgeted to

be 161 at June 30, 2008.

� � A S S O C I AT I O N C A N A D I E N N E D E S C O U R T I E R S D E F O N D S M U T U E L S r a p p o r t a n n u e l 2 0 0 7

Some departments and functions for

the organization may experience slight

increases in expenses in the next fiscal

year that are directly related to the

amount of activity required to fulfill their

regulatory functions. Two such examples

are travel expenses for the Enforcement

department for litigation and Hearing

Panel expenses.

Costs incurred in fiscal 2007 for leasehold

improvements and furniture and

equipment that related to the required

expansion of the MFDA’s Toronto and

Calgary offices will not be repeated in

the 2008 fiscal year. However, premises

related expenses will increase slightly

for the next fiscal year due to the larger

amount of office space now under lease.

These costs are expected to remain stable

for the intermediate term.

In terms of technology costs facing the

MFDA, the organization’s computer

network has reached a fully built state

and therefore core technology costs

are anticipated to remain stable and

consistent over the next few years. As

well, management has made a conscious

decision to defer the development

of information systems that are not

directly related to the organization’s core

regulatory mandate in order to spread

development costs over future fiscal

years. However, for fiscal 2008 Members

can expect further development and

refinement of various Member-facing

information systems. Development efforts

will focus on the Electronic Filing System,

the Member Event Tracking System, and

the MFDA’s website which is expected to

feature a Members only section as well as

an online complaint filing form

along with other similar functional

improvements. Some internal systems

under development include a further

implementation of the Business Process

Management system to include the

Enforcement case tracking database and

a call log system for the tracking and

management of all inquiries entering

the MFDA.

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The accompanying financial statements and all other information contained in this annual report are the responsibility of MFDA

management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles

(GAAP) and necessarily include some amounts based on the estimates and judgments of management.

In discharging its responsibilities for the integrity and reliability of the financial statements, management maintains and relies upon

a system of internal controls. These internal controls are designed to ensure that transactions are properly authorized and recorded,

assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The MFDA also maintains formalized

policies and procedures and an organizational structure that segregates duties. The MFDA employs standards and procedures

for hiring employees who are required to abide by a business code of conduct and receive ongoing training regarding the proper

execution of their duties. Mechanisms are also in place that enable reporting to the Audit & Finance Committee of any perceived

unethical behavior by employees.

In order to provide their opinion on the MFDA’s financial statements, Deloitte & Touche LLP reviews the MFDA’s system of internal

controls and conducts such tests and other audit procedures that they consider appropriate. The auditors also meet in-camera with the

Audit & Finance Committee, without management present, to discuss the results of their work. The independence of the auditors as

well as the effectiveness of their work is assessed by the Audit & Finance Committee annually.

The Audit & Finance Committee reviews the effectiveness of the company’s financial reporting and internal control systems, any

significant financial reporting issues, the presentation and impact of significant risks, and key estimates and judgments of management

that may be material for financial reporting purposes. Additionally, the Audit & Finance Committee meets periodically with MFDA

management and the auditors, and reports to the Board of Directors thereon. The Audit & Finance Committee also reviews the

annual financial statements and recommends them to the Board of Directors for their approval.

The accompanying financial statements have been audited by the auditors who are engaged by the Board of Directors on the

recommendation of the Audit & Finance Committee. The appointment of the auditor is ratified at the annual general meeting of

MFDA Members.

larry M. Waite paul reid

President & Chief Executive Officer Director, Finance & Administration

Management’s Responsibility for Financial Reporting

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Financials

Statements of Financial Position 27

Statements of Revenues and Expenses 28

Statements of Changes in Fund Balances 29

Statements of Cash Flows 30

Notes to the Financial Statements 31

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Auditors’ Report

To the Members of

Mutual Fund Dealers Association of Canada

We have audited the statements of financial position of Mutual Fund Dealers Association of Canada (“MFDA”) as at June 30, 2007

and 2006 and the statements of revenues and expenses, changes in fund balances and of cash flows for the years then ended. These

financial statements are the responsibility of MFDA’s management. Our responsibility is to express an opinion on these financial

statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan

and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also

includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of MFDA as at June 30, 2007

and 2006 and the revenues and expenses, changes in fund balances and cash flows for the years then ended in accordance with

Canadian generally accepted accounting principles.

Chartered accountants

Licensed Public Accountants

Toronto, Ontario

August 17, �007

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As at June �0

2007 �006

ASSETS

CURRENT ASSETS

Cash (Note �) $ 84�,188 $ 1,7��,6�6

Investments (Note �) 5,40�,440 4,�11,108

Membership fees billed in advance (Note 4) 6,01�,016 5,479,�85

MFDA Investor Protection Corporation assessments (Note 5) 8,7�7 �5,�8�

Other membership receivables 51,566 14,100

Prepaid expenses and other assets �16,607 �17,0�0

1�,6�4,544 11,690,5�1

Capital assets (Note 6) �,80�,�6� 1,480,980

Costs recoverable from MFDA Investor Protection Corporation (Note 7) 15,500 14,917

Employee benefit plan asset (Note 8) 559,000 �60,000

$ 16,011,406 $ 1�,546,418

lIaBIlItIeS anD FunD DeFICIt

CURRENT L IABIL IT IES

Accounts payable and accrued liabilities $ 1,181,0�� $ 1,1�7,78�

Unearned membership fees (Note 4) 6,01�,016 5,671,6�1

Membership application deposits ��,000 1�,000

Due to MFDA Investor Protection Corporation (Note 5) 8,7�7 4�,99�

Obligation under capital lease (Note 10) 80,754 46,77�

7,�06,519 6,901,168

Accrued employee benefit plans liability (Note 8) 997,400 591,700

Obligation under capital lease (Note 10) 19�,140 115,558

8,496,059 7,608,4�6

FUND BALANCES

Operating Fund

Invested in capital assets �,5�9,468 1,�18,649

Unrestricted net assets 4,659,�18 4,445,009

7,188,786 5,76�,658

Discretionary Fund (Note �) ��6,561 174,��4

7,515,�47 5,9�7,99�

$ 16,011,406 $ 1�,546,418

Statements of Financial Position

Approved on behalf of the Board

robert J. Wright, C.M., Q.C. larry M. Waite Director Director


For the years ended June �0

2007 �006

OPERATING FUND

REVENUE

Membership fees $ ��,67�,576 $ 18,481,60�

Investment �76,09� ��,458

Administration recoveries (Note 7) 60,000 60,000

Late filing fees 16,950 �1,0�5

Enforcement recoveries 11,��0 –

total revenue ��,1�6,9�9 18,796,085

EXPENSES

Salaries and benefits (Note 8) 15,4�1,66� 1�,698,67�

Rent and utilities 1,956,460 1,46�,5�8

Amortization of capital assets 798,116 781,945

Travel 71�,078 701,560

Office and general 495,�15 4�1,4�6

Computer software and maintenance 406,954 �49,14�

Board of Directors - fees �05,500 �81,6�5

Board of Directors - expenses 8�,195 7�,500

Education �99,861 198,89�

Consultants �94,644 �67,805

Hearing Panels ��,895 119,809

Legal ��,01� �14,598

Meetings, seminars and communication 174,�91 146,88�

Insurance 1��,670 119,601

Telecommunications 119,101 66,1�8

Bank charges and interest �6,417 �1,977

Regional Councils 6,0�4 �6,186

Loss on disposal of capital assets �,604 6��

total expenses �1,711,811 17,961,9�1

excess of revenue over expenses $ 1,4�5,1�8 $ 8�4,154

DISCRETIONARY FUND (NOTE 2)

REVENUE

Fines $ 144,500 $ –

Investment 7,801 �,6�8

total revenue 15�,�01 �,6�8

EXPENSES

Investment management fees 74 –

total expenses 74 –

excess of revenue over expenses $ 15�,��7 $ �,6�8

Statements of Revenues and Expenses



2007 �006 operating Fund Invested in unrestricted Discretionary Capital assets net assets Fund total Total

FUND BALANCES

Balance, beginning of year $ 1,�18,649 $ 4,445,009 $ 174,��4 $ 5,9�7,99� $ 5,100,�10

Excess of revenues over expenses – 1,4�5,1�8 15�,��7 1,577,�55 8�7,78�

Purchase of capital assets 1,946,89� (1,946,89�) – – –

Proceeds on disposal of capital assets (676) 676 – – –

Loss on disposal of capital assets (�,604) �,604 – – –

Repayment of capital lease obligation 66,�� (66,��) – – –

Amortization of capital assets (798,116) 798,116 – – –

Balance, end of year $ �,5�9,468 $ 4,659,�18 $ ��6,561 $ 7,515,�47 $ 5,9�7,99�

Statements of Changes in Fund Balances



2007 �006

CASH PROVIDED BY (USED IN)

OPERATING ACTIVIT IES

Excess of revenue over expenses – Operating Fund $ 1,4�5,1�8 $ 8�4,154

Excess of revenue over expenses – Discretionary Fund 15�,��7 �,6�8

Items not involving cash

Amortization of capital assets 798,116 781,945

Loss on disposal of capital assets �,604 6��

�,�79,075 1,6�0,�59

Changes in non-cash working capital

Membership fees billed in advance (5��,6�1) (890,99�)

Other membership receivables (�7,466) 600

MFDA Investor Protection Corporation assessments �6,555 1,�6�,58�

Prepaid expenses and other assets (99,587) 61,471

Accounts payable and accrued liabilities 5�,�40 81,5�0

Membership application deposits 11,000 (5,000)

Unearned membership fees �41,�95 1,0��,4�9

Due to MFDA Investor Protection Corporation (�4,�65) (1,�55,87�)

Costs recovered from MFDA Investor Protection Corporation (58�) �4,0��

�,105,7�� 1,94�,1�0

Employee benefit plan asset (199,000) (184,500)

Accrued employee benefit plans liability 405,700 �87,�00

�,�1�,4�� ,044,8�0

INVESTING ACTIVIT IES

Purchase of investments (1,191,��) (4,�11,108)

Purchase of capital assets (1,946,89�) (6�6,640)

Principal payments on capital lease (66,��) (44,�44)

Proceeds on disposal of capital assets 676 1,�9�

(�,�0�,871) (4,880,699)

DeCreaSe In CaSH (891,4�8) (�,8�5,879)

CaSH, BeGInnInG oF Year 1,7��,6�6 4,569,505

CaSH, enD oF Year $ 84�,188 $ 1,7��,6�6

Statements of Cash Flows


1. Nature of the OrganizationThe Mutual Fund Dealers Association of Canada (MFDA) is the national self-regulatory

organization for the distribution side of the Canadian mutual fund industry. The MFDA does not

provide trade association activities for its Members. Its Members are firms that have been registered

by provincial securities commissions to carry on business as mutual fund dealers. The MFDA

regulates the activities of its Members and the approximately 75,000 Approved Persons sponsored

by them. The MFDA’s regulatory activities include developing rules and policies to govern

the business conduct and operations of its Members and their Approved Persons, monitoring

compliance with these requirements and applicable securities laws, and enforcing them through

disciplinary proceedings conducted before impartial and independent MFDA hearing panels.

The MFDA was incorporated as a not-for-profit corporation on June 19, 1998 under Part II of the

Canada Corporations Act and has been formally recognized as a self-regulatory organization by a

number of provincial securities commissions in Canada.

As of June 30, 2007, the MFDA had 162 Members (2006 – 175 Members).

�. Significant Accounting PoliciesThe financial statements have been prepared by management in accordance with accounting

principles generally accepted in Canada. Because the precise determination of many assets and

liabilities is dependent upon future events, the preparation of financial statements for a period

necessarily involves the use of estimates and approximations which have been made using careful

judgment. Actual results could differ from those estimates. The financial statements have, in

management’s opinion, been properly prepared within reasonable limits of materiality and within

the framework of the accounting policies summarized below.

Fund Accounting The MFDA uses the deferral method of accounting for not-for-profit organizations in the

preparation of its financial statements consisting of two funds, namely the Operating Fund and

the Discretionary Fund.

The Operating Fund accounts for the regular business and activities of the MFDA.

The Discretionary Fund is an internally restricted fund established by the MFDA Board of

Directors. The Discretionary Fund receives monies from the collection of enforcement fines and

the disgorgement of profits imposed by order of a MFDA hearing panel. Disbursements from

the Discretionary Fund are currently restricted to payments to the MFDA Investor Protection

Corporation, the investor protection fund, and payments for special projects that are in the public

interest and beneficial to the public and/or Canadian capital markets, as determined by the MFDA

Board of Directors.

Membership application deposits A non-refundable deposit is required on all membership applications. The deposit is applied to

membership fees when the applicant is accepted for membership.

Membership fees Membership fees are calculated annually using a defined formula based on each Members’ assets

under administration, invoiced to Members on a quarterly basis and recorded as revenue on a

monthly prorated basis.

Notes to the Financial Statements

� � A S S O C I AT I O N C A N A D I E N N E D E S C O U R T I E R S D E F O N D S M U T U E L S r a p p o r t a n n u e l 2 0 0 7� � A S S O C I AT I O N C A N A D I E N N E D E S C O U R T I E R S D E F O N D S M U T U E L S r a p p o r t a n n u e l 2 0 0 7

Membership fees billed in advance are reflected on the balance sheet as unearned

membership fees.

Late filing fees Members that do not submit the financial statements required by MFDA rules within the

specified due dates are charged late filing fees. The late filing fees are billed and recorded as

revenue on a monthly basis.

Capital Assets Capital assets are recorded at cost and are amortized on the following basis:

Computers and software development – Straight-line method over � years

Office furniture and equipment – Straight-line method over 10 years

Leasehold improvements – Straight-line method over the term of the lease

Equipment under capital lease – Straight-line method over the term of the lease

Employee benefit plans The MFDA accrues its obligations under employee benefit plans and the related costs, net of

plan assets. The MFDA has adopted the following policies:

• The cost of pensions and other retirement benefits earned by employees is actuarially

determined using the projected benefit method pro rated on service and management’s best

estimate of expected plan investment performance, salary escalation, retirement ages of

employees and expected health care costs.

• The discount rate used to determine the accrued benefit obligation is determined by

reference to market interest rates at the measurement date on high-quality

debt instruments with cash flows that match the timing and amount of expected

benefit payments.

• For the purpose of calculating the expected return on plan assets, those assets are valued at

fair value.

• The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation

and the fair value of plan assets is amortized over the average remaining service period

of active employees. The average remaining service period of the active employees is 27

years (2006 – 28 years) for the registered pension plan, 9 years (2006 – 10 years) for the

supplementary executive retirement plan and 19 years (2006 – 19 years) for other post-

retirement benefits.

Investments

Investments represent short-term investments and are carried at market.

Financial instruments

The estimated fair values of financial instruments, such as receivables, accounts payable and

accrued liabilities approximates their carrying amounts due to their short-term nature.

Provision for income taxes MFDA is a not-for-profit organization within the meaning of the Income Tax Act (Canada).

Accordingly, there is no provision for income taxes in these financial statements.

� � A S S O C I AT I O N C A N A D I E N N E D E S C O U R T I E R S D E F O N D S M U T U E L S r a p p o r t a n n u e l 2 0 0 7 M U T U A L F U N D D E A L E R S A S S O C I AT I O N O F C A N A D A a n n u a l r e p o r t 2 0 0 7 � �� A S S O C I AT I O N C A N A D I E N N E D E S C O U R T I E R S D E F O N D S M U T U E L S r a p p o r t a n n u e l 2 0 0 7 M U T U A L F U N D D E A L E R S A S S O C I AT I O N O F C A N A D A a n n u a l r e p o r t 2 0 0 7 � �

�. Cash and InvestmentsCash of $842,188 (2006 – $1,733,626) includes an amount of $1,754 (2006 – $2,648), which is

restricted in use for the Discretionary Fund.

The MFDA has investments in the CIBC TAL Imperial Money Market Pooled Fund (the

“Fund”) in the amounts of $5,065,702 (2006 – $4,039,428) for the Operating Fund and

$336,738 (2006 – $171,680) for the Discretionary Fund.

4. Membership Fees Billed In AdvanceThe membership fees billed in advance represent billings issued in June for the quarterly

membership fees due July 15.

5. MFDA Investor Protection Corporation Assessments The MFDA Investor Protection Corporation (“IPC”) commenced coverage of customer

accounts on July 1, 2005. Member assessments are calculated annually on a defined formula

based on each Members’ assets under administration, and are invoiced to Members on a

quarterly basis. The MFDA invoices the Members on behalf of the IPC and is liable to the IPC

for the total of these Member assessments.

6. Capital Assets 2007

accumulated net Book Cost amortization Value

Computers and software development $ 2,678,575 $ 1,989,482 $ 689,093

Office furniture and equipment 1,313,789 427,010 886,779

Leasehold improvements 2,069,875 1,111,553 958,322

Equipment under capital lease 447,157 178,989 268,168

$ 6,509,396 $ 3,707,034 $ 2,802,362

�006

Accumulated Net Book Cost Amortization Value

Computers and software development $ �,1�9,80� $ 1,617,�66 $ 5��,5�6

Office furniture and equipment 877,7�� 6,�65 551,457

Leasehold improvements 1,1�6,706 889,4�5 �47,�71

Equipment under capital lease �70,�75 110,559 159,716

$ 4,4�4,505 $ �,94�,5�5 $ 1,480,980

7. Costs Recoverable From MFDA Investor Protection CorporationPursuant to a support agreement, the MFDA provides the IPC administrative, corporate

secretarial and other support during the year to allow the IPC to operate without its own

staff. The support costs charged to the IPC for the year amounted to $60,000 (2006 – $60,000)

and were recorded at the agreed upon amount. The outstanding amount of $15,500

(2006 – $14,917) is paid on a quarterly basis according to the support agreement.


8. Employee Benefit PlansMFDA has two defined benefit pension plans for eligible employees, being a registered plan

(“RPP”) and a supplementary executive retirement plan (“SERP”). The purpose of the SERP is

to supplement the registered plan for designated executive employees. As well, the MFDA has

post-retirement benefits (“PRB”) that include health care and dental coverage for retired

employees; such post-retirement benefits terminate at the age of 75.

The funded status of the MFDA’s benefit plans reconciled to the amounts recorded in the

financial statements at June 30 is as follows:

2007 �006

rpp Serp prB total Total

Fair value of assets $ 3,179,100 $ 1,830,400 $ – $ 5,009,500 $ �,�6�,�00

Accrued benefit

obligation 3,953,800 1,786,800 809,100 6,549,700 4,�71,600

Funded status

(deficit) (774,700) 43,600 (809,100) (1,540,200) (908,�00)

Unamortized

transitional (assets)/

obligation (5,100) 17,400 10,400 22,700 �5,500

Unamortized net

actuarial loss 377,400 498,000 203,700 1,079,100 651,100

Accrued benefit

plan asset (liability) $ (402,400)* $ 559,000 $ (595,000)* $ (438,400) $ (��1,700)

* The total of $997,400 represents accrued employee benefit plans liability as of June 30, 2007.

The RPP plan assets are invested in a balanced pool fund. RPP pension benefits transferred

out during fiscal 2007 totalled $123,329 (2006 – $8,298).

The SERP assets of $999,496 (2006 – $672,457) are invested in a balanced portfolio. The

balance of the SERP assets of $830,904 (2006 – $618,843) are being held in a non-interest

bearing retirement compensation arrangement account at the Canada Revenue Agency,

as required by law.

The most recent actuarial valuation was completed as of April 1, 2007. The next required

actuarial valuation will be as of April 1, 2010.

The net benefit expense, included in the salaries and benefit expense in the Statements of

Revenues and Expenses, and the annual contributions are as follows:

2007 �006

rpp Serp prB total Total

Net benefit expense $ 969,400 $ 209,000 $ 199,400 $ 1,377,800 $ 1,149,400

Contributions

Employer 763,100 408,000 – 1,171,100 1,046,700

Employee 166,000 – – 166,000 1�8,�00


The significant actuarial assumptions adopted in measuring the MFDA’s accrued benefit

obligations are as follows:

2007 �006

Weighted average discount rate for pensions 5.75% 6.00%

Weighted average discount rate for post retirement benefits 5.50% 6.50%

Weighted expected rate of return on plan assets 7.00% 7.00%

Weighted average rate of compensation increase 4.5 to 5% 4.5 to 5%

The post-retirement benefits reflect a 10% to 15% annual rate of increase in the cost of

medical benefits for 2008. These rates are assumed to decrease gradually to 5 percent by 2018

and remain at that level thereafter. The dental benefits are assumed to increase at an annual

rate of 3.5%.

9. Credit FacilityThe MFDA has a demand credit facility limited to a maximum of $3,000,000. The credit

facility bears an interest rate of prime plus 0.5% per annum. The MFDA has granted a general

security interest to the bank in connection with this facility. During the year ended June 30,

2007 the credit facility was not utilized.

10. Commitments and Contingent Liability

(a) Lease obligations

The MFDA has entered into various operating leases for its office premises and five capital

leases for office equipment. The capital leases have implicit interest rates of 7.1%, 4.9%,

5.4%, 0.0% and 6.2%, and expire in March 2009, March 2010, February 2010, October 2011

and August 2012, respectively. The aggregate future minimum lease payments associated

with these five leases is $285,746 which includes interest charges of $12,854.

Operating and capital lease obligations, excluding operating costs for future years and sales

tax, are as follows:

2008 $ 1,09�,�95

�009 1,08�,748

�010 1,061,848

�011 1,04�,740

�01� 1,005,86�

Thereafter �,168,�95

$ 8,456,788

(b) Guarantee

The MFDA provided a guarantee of the $30 million line of credit granted to the IPC by

the bank.


Executive Officers

Robert J. Wright, C.M., Q.C. Chair of the Board

W. David Wood Vice-Chair of the Board

Larry M. Waite President and Chief Executive Officer

Mark T. Gordon Executive Vice-President

Officers

Shaun Devlin Vice-President, Enforcement

Karen McGuinness Vice-President, Compliance

Wendy Royle Vice-President, Pacific Regional Office

Gregory J. Ljubic Corporate Secretary and Director, Regional Councils

Paul Reid Director, Finance and Administration

Dale Pratt Controller

Bernadette Devine Assistant Corporate Secretary

Management Directors

Jim Wahl Director, Prairie Regional Office

Paige Ward Director, Policy and Regulatory Affairs

Board of Directors

President and ChiefExecutive Officer

ExecutiveVice-President

PacificRegional

Office

Vice-President RegionalDirector

Director, Policy& Regulatory

Affairs

Vice-President,Compliance

Director,Communications& Membership

Services

Vice-President,Enforcement

Director,Finance &

Administration

Corporate Secretary &

Director, RegionalCouncils

PrairieRegional

Office

Policy &Regulatory

Affairs

Compliance Communications& Membership

Services

Enforcement CorporateSecretary &

Regional Councils

Finance &Administration

MFDA Organizational Chart


Contact Information

Toronto Office 121 King Street West, Suite 1000 Toronto, ON M5H 3T9 Phone: 416-361-6332 or 1-888-466-6332 Fax: 416-943-1218

Communications & Membership Services Phone: 416-361-6332 or 1-888-466-6332 (Option #1) Fax: 416-943-1218 Email: [email protected]

Enforcement Phone: 416-361-6332 or 1-888-466-6332 (Option #2) Fax: 416-361-9073 Email: [email protected]

Financial Compliance Phone: 416-361-6332 or 1-888-466-6332 Fax: 416-362-6382 Email: [email protected]

Pacific Office 650 West Georgia Street Suite 1220, P.O. Box 11603 Vancouver, BC V6B 4N9 Phone: 604-694-8840 Fax: 604-683-6577 Email: [email protected]

Prairie Office Suite 850 800-6th Avenue S.W. Calgary, AB T2P 3G3 Phone: 403-266-8826 Fax: 403-266-8858 Email: [email protected]

For more information on the MFDA, please visit our website: www.mfda.ca

2007 Annual Report - Mutual Fund Dealers Association of Canada · Management Discussion and...

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