On January 10, 2011, the British Columbia Securities Commission (the “Commission”) overturned the proxy solicitation process employed by the Mutual Fund Dealers Association of Canada (MFDA) in connection with a special meeting of its members. It is a rare case in which the governance standards of a self-regulated organization were subjected to review by a higher authority, and ironic given the MFDA’s role as regulator of the operations, standards of practice and business conduct of its member-dealers. The MFDA’s mandate is “to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry.”
The case involved a proposal to alter MFDA’s by-laws respecting the length of terms of directorship (“Proposal”). BCSC panel directed the MFDA to cease improperly soliciting proxies regarding a pending and controversial vote.
The Proposal was written by a four-person task force including two sitting directors whose very continuation in office was contingent upon approval of the proposal, giving rise to an inherent appearance of self-interest.
Although the task force believed that the proposal was supported by a “significant majority” of its members, they worried that they were at risk of defeat by a minority of opposed members who could prevent approval if the attendance at the meeting was low. To mitigate this risk, the MFDA contacted members and asked them their opinions about the proposal, and offered them the opportunity, in the event they could not be present, to provide a proxy in favour of an MFDA director supportive of the Proposal. However, no alternate or non-director proxy was offered.
The conflict of interest was refuted by the MFDA saying they acted with the “sincere intention of encouraging member participation in an important process and with absolutely no intention of pressuring any member. However, the Commission appeared to doubt this intention, noting the MFDA’s failure to contact known opponents to the proposal.
Managing the Potential Conflict
The Commission drew a clear distinction between the proxy solicitation process among corporations and regulators. A shareholder of a corporation is entitled to vote arbitrarily, motivated only by self-interest. However, it was held that the very relationship between the MFDA and a member creates an “inherent and foreseeable” risk that the member may feel pressure to vote in favour of management-sponsored resolutions if MFDA directors are involved in the proxy solicitation process.
In holding that this process would have led an objective observer to question the integrity and credibility of the MFDA, the Commission directed that any proxy solicitation be conducted through independent proxy solicitation service providers. Further, the Commission directed that the MFDA board’s role should be limited to ensuring that this independent process is appropriate and is being followed; and directed that MFDA members’ votes be kept confidential from its officials.
MFDA as SRO
In its judgment, the Commission panel did praise the MFDA as an effective and credible regulator of mutual fund dealers generally, and emphasized that despite this finding on a narrow internal governance issue it was “not making any adverse findings about the MFDA’s overall integrity or credibility as” a self-regulatory organization.