Discipline Of Mutual Fund Dealer Based On Franchise Breach

Background about the Parties and Investigations

Maynes was registered as an “Approved Person” with MFDA in Ontario, as a mutual fund salesperson of Investia Financial Services Inc.  Investia is a mutual fund broker based out of Quebec City.  It wholly owns Money Concepts (Canada) Limited, which operates a large Canadian financial planning franchise network.  It has about thirty offices across Canada, of which approximately twenty are located in Ontario.

In 1987, Maynes started operating as a franchisee of Money Concepts Canada’s Oakville office.  In 2010, Maynes’ son and daughter, who were also involved in the operation of his business, complained about him for allegedly forging their signatures on some family mutual fund accounts which Maynes had earlier established for the benefit of his grandchildren.  Maynes had continued maintaining the accounts for the benefit of his grandchildren.

Investia, the franchisor of the Money Concepts franchise system, launched an investigation against Maynes and requested to audit his files.  Maynes ultimately refused to allow the audit.

Shortly afterward, Investia terminated its franchise agreement with Maynes.  The termination was based on Maynes’ failure to cooperate with Investia’s audit investigation, and for compliance deficiencies, among other issues.

In addition to Investia’s investigation, MFDA launched an investigation into the allegations.  Investia likely launched a formal complaint with the MFDA, as required under subrule 1.2.2(a) of MFDA’s Rules.

The MFDA investigation ultimately resulted in a disciplinary proceeding by MFDA’s hearing panel.

MFDA Rules and the Franchise Agreement

MFDA charged Maynes with essentially failing to cooperate with Investia’s audit investigation, and handover to Investia files that he controlled, contrary to various MFDA rules.

The franchise agreement required Maynes to allow Investia to inspect his operation, allow Investia to audit all his books and records.  The franchise agreement also required him to cooperate with Investia in its investigations and, upon termination, hand over his files to Investia.

The charges were based on MFDA’s rules and policies which required Maynes, as a registered salesperson, to comply with his franchise agreement with Investia, a member of MFDA.

Maynes’ breach of his franchise agreement with Investia rendered him in breach of MDFA’s rules and policies.  The main breach that was the basis of MFDA’s disciplinary sanctions against Maynes was a breach of his reporting obligations under the franchise agreement.

While this decision demonstrates the power of a franchise agreement between a mutual fund dealer Member (franchisor) and an Approved Person (franchisee) in the mutual fund dealers industry, the disciplinary action and the terms of the franchise agreement should be taken in the context of the regulatory regime, and in particular, the Rules of the MFDA.

Among various strict rules designed to protect the public, facilitate the investigation of complaints, deter improper conduct, and maintain investor confidence (see para. 27 of the decision), the following rules underscore Maynes’ reporting obligations:

• Under subrule 1.1.5(f), all of Maynes’ books and records are deemed Investia’s property and must be available for its review and possession;
• Under subrule 1.1.5(k)*, Investia and Maynes, as member and agent, respectively, are required to enter into a written agreement, namely the franchise agreement, that contains various prescribed terms and conditions, including the requirement in subrule 1.1.5(f) relating to books and records, and
• Under subrule 1.2.1(a)*, Maynes, as an approved person, was required to, and presumably did, sign an agreement with Investia agreeing to comply with MFDA’s By-Laws and Rules.

While the franchise agreement between Investia and Maynes was the key basis for MFDA’s finding of misconduct against Maynes, the franchise agreement was in part the result of requirements in MFDA’s rules.

Yet, the inspection and audit clauses contained in the franchise agreement between Investia and Maynes are not unique to the mutual fund dealership industry and are commonly found in most Canadian franchise agreements.

* These subrules were not referred to in the decision of the disciplinary panel.