The self regulatory organization for mutual fund dealers, the Mutual Fund Dealers Association of Canada ("MFDA"), made an interesting decision on May 8, 2012 on a motion by a branch manager to strike out a regulatory proceeding arising from allegations that he failed to adequately monitor and report the wrongful activities of an insurance salesperson who operated in his branch but did not actually work for the mutual fund dealer at issue.
In the MFDA proceeding Re: Gabriele Gentile, it is alleged that the Respondent failed to take adequate steps to monitor and investigate a licensed insurance agent who worked for an affiliate of the mutual fund dealer, but not for the dealer itself. It is alleged that the insurance agent had improperly borrowed money from his clients and failed to repay them and that the respondent, the branch manager, owed a duty to investigate the activities of the insurance agent and failed to conduct a reasonable supervisory investigation and to take "such other supervisory measures as may have been warranted in the circumstances."
It is well-accepted that a branch manager for a mutual fund dealer is expected to supervise the representatives of that mutual fund dealer that work at his or her branch. It is not well accepted that a similar duty exists to supervise others who happen to share office space within that branch, such as insurance agents who work for other, albeit affiliated, companies. As such, the branch manager brought a motion to dismiss the proceeding at an early stage – before any formal response was made or hearing held.
The MFDA staff opposed this motion on two bases:
1. There is no jurisdiction under the MFDA Rules to hear such a preliminary motion, which is akin to a motion to strike out a claim in civil action as disclosing no cause of action; and
2. If there is such jurisdiction, it is not plain obvious that a branch manager for an MFDA member firm cannot owe a duty to investigate the activities of others occupying the same office space as the mutual fund dealer.
The good news in this case for MFDA member firms and their registrants is that the MFDA panel did find that it had the jurisdiction under its Rules to strike out at an early stage proceedings for which it is plain and obvious that there has been no breach of the relevant rules. For truly spurious regulatory complaints, there may now be an avenue to get rid of those complaints without the need for capitulation to the regulator or a full-blown hearing.
The bad news for MFDA member firms and their approved persons is that the motion itself was dismissed. As the panel found:
"…when, as here on the assumed facts, an Approved Person brings to the attention of the Branch Manager information relating to the alleged activities of a person in the position of Schriver [the insurance agent], which might call into question whether the business conducted on behalf of the Member at the branch is in compliance with applicable securities legislation and the MFDA Bylaws and Rules, including Rule 2.1.1(c), does the Branch Manager have an obligation to make further inquiries? In our view, it is not plain and obvious that such an obligation could not exist."
It is important to note that the MFDA panel did not find that, in the case of Mr. Gentile, there had been any duty owed to investigate the activities of the insurance agent or that any such duty was breached. What was found was that such a duty could exist and that the issue could not be decided without a full hearing of the allegations, including consideration of the evidence.