Registrant Responsibilities PDF

Canadian Investment Funds Course Unit 2: Registrant Responsibilities Introduction Dealing Representatives have responsibilities to their clients, and they have ethical standards and legislation that they must follow. This unit introduces the standard of conduct of the Mutual Fund Dealers Association...

Canadian Investment Funds Course Unit 2: Registrant Responsibilities Introduction Dealing Representatives have responsibilities to their clients, and they have ethical standards and legislation that they must follow. This unit introduces the standard of conduct of the Mutual Fund Dealers Association of Canada (MFDA) , as well as discussing how your mutual fund dealer’s Compliance Department will provide guidance. This unit takes approximately 1 hour and 30 minutes to complete. Lessons in this unit: Lesson 1: Ethics Lesson 2: Compliance Lesson 3: Conflicts of Interest Lesson 4: Compliance Issues Lesson 5: Registration Requirements © 2021 IFSE Institute 27 Unit 2: Registrant Responsibilities Lesson 1: Ethics Introduction Dealing Representatives have ethical standards to which they must adhere. Many of these standards are defined through legislation and codes of conduct. It is important for you to have an overall understanding of ethics and ethical behaviour. This lesson takes approximately 15 minutes to complete. By the end of this lesson, you will be able to: define ethics describe the MFDA’s standard of conduct rule discuss best practices for proper conduct 28 © 2021 IFSE Institute Canadian Investment Funds Course Ethics Defined The Merriam-Webster online dictionary defines ethics as “the principles of conduct governing an individual or a group”. In other words, ethics defines the standards of conduct to which you and members of your group are expected to adhere. Ethical conduct conforms to the approved standards, whereas unethical conduct does not. In order to decide whether a proposed course of action is proper, we need a yardstick. In everyday life, the yardstick is provided by our values. An unethical action may or may not also be a regulatory breach. Example Tom and Peter are using their office computers to book movie tickets during their lunch breaks. Tom’s company policy prohibits personal internet use on office computers. Peter’s company policy prohibits personal internet use on office computers during office time. Tom has performed an unethical act since his action is in violation of his company’s standard of conduct. Peter has not violated his company’s ethical standard as his action is within his company’s rules. Example Marianne, a Dealing Representative, has been given a cheque for $25,000 by one of her clients, with specific instructions to buy additional units for $5,000 in each of the 5 mutual funds in the client’s portfolio. Marianne deposits the cheque in her personal account. Marianne has acted unethically and has also committed an illegal act of misappropriation of client funds. Example 1 is an illustration of behaviour that is unethical, but does not involve a regulatory breach. Example 2 illustrates conduct that is both unethical and in breach of regulations. In the case of example 2, the mutual fund dealer must take disciplinary action, including reporting the breach to the MFDA. Companion Policy (CP) 31-103, Registration Requirements Under Companion Policy (CP) 31-103, Part 1.3 (Fitness for Registration (b) Integrity) it states: "Registered individuals must conduct themselves with integrity and have an honest character." © 2021 IFSE Institute 29 Unit 2: Registrant Responsibilities Further in CP 31-103, under Part 11.1 (Compliance System (a) Day-to-Day Monitoring) it states: "Anyone who supervises registered individuals has a responsibility on behalf of the firm to take all reasonable measures to ensure that each of these individuals: deals fairly, honestly and in good faith with their clients addresses conflicts of interest in the best interest of their clients puts the client’s interests first when making suitability determinations for their clients complies with securities legislation complies with the firm’s policies and procedures, and maintains an appropriate level of proficiency." MFDA Standard of Conduct Rule MFDA Rule 2.1.1 outlines the standard of conduct for ethical behaviour for you, as a Dealing Representative. You are expected to: deal fairly, honestly, and in good faith with clients observe high standards of ethics and conduct in the transaction of business not engage in any business conduct or practice which is unbecoming not engage in any business conduct or practice which is detrimental to the public interest be of proper character and have proper business repute have appropriate experience and training The MFDA Standard of Conduct assumes that you will have the training and experience that is expected of a Dealing Representative. The expectation that you will adhere to the standard of conduct applies not only to the letter of the regulation but also to the spirit of the regulation as well. 30 © 2021 IFSE Institute Canadian Investment Funds Course Rule 2.1.1 is actually an expression of plain business sense. Even in the absence of the rules, mutual fund dealers and their Dealing Representatives would adopt the standard of conduct to: Protect their reputation and that of the industry as a whole. Attract and retain clients. Be successful in the long as well as the short term. Best Practices for Proper Conduct Here is a list of best practices that follow from the standard of conduct: Understanding the client’s financial circumstances. Presenting all investment recommendations fairly and without false or misleading statements. Always making recommendations in the best interests of the client. Clearly distinguishing fact from opinion when making recommendations. Protecting the confidentiality of client information. Maintaining your proficiency by acquainting yourself with new laws and regulations and new products in the market. Some of these practices have been codified in specific rules, but they all follow logically from the standard of conduct. © 2021 IFSE Institute 31 Unit 2: Registrant Responsibilities Lesson 2: Compliance Introduction All mutual fund dealers are required to establish compliance practices that adhere to securities legislation. This lesson provides information about the role and responsibilities of a mutual fund dealer’s Compliance Department, and how the compliance function and processes support you as a Dealing Representative. This lesson takes approximately 15 minutes to complete. By the end of this lesson, you will be able to: discuss the Compliance regime of a mutual fund dealer describe the role of the Compliance Department and compliance officers explain the requirements under the client relationship model (CRM) and the client focused reforms (CFR) explain the requirements for Relationship Disclosure Information (RDI) explain the requirements for Client Communications explain prohibited practices including: - pre-signed forms - excess trading 32 © 2021 IFSE Institute Canadian Investment Funds Course The Compliance Regime All mutual fund dealers are required to establish, maintain and apply a system of controls and supervision to make sure that the firm complies with securities legislation and manages the risks associated with its business. This system is known as a compliance regime. The compliance regime includes a Compliance Department, as well as policies, procedures, documentation, and training. While the primary goal of the compliance regime is to ensure adherence to legislative and regulatory requirements, the other essential aspect of compliance is effective risk management, with the objective of identifying potential risks and proactively developing strategies to mitigate them. Role of Compliance Officers Everyone in a mutual fund dealer firm has a role to play in managing compliance. The importance of compliance can be judged by the fact that the regulators have assigned responsibility for oversight of the compliance function to the CEO or equivalent within the firm. MFDA rules require all mutual fund dealers to have an Ultimate Designated Person (UDP), usually the CEO of the firm, registered with the securities commissions. The UDP must supervise the firm’s compliance activities and promote compliance with securities legislation within the firm. In addition, all mutual fund dealers must designate a Chief Compliance Officer (CCO) who is an officer, partner or sole proprietor of the mutual fund dealer firm, and registered with the securities commissions. The CCO is responsible for establishing and maintaining compliance policies and procedures as well as monitoring and assessing compliance. The CCO must submit an annual report to the Board of Directors detailing the compliance assessment. Role of the Compliance Department The Compliance Department’s major role is to ensure that all individuals within the firm comply with the regulations, most of which are contained in the Policies and Procedures Manual of the firm and/or the MFDA’s Rules and Policies. © 2021 IFSE Institute 33 Unit 2: Registrant Responsibilities Example Giovanni is a Dealing Representative who joined from another firm six months ago. Since his arrival he has been found to have advised his clients to leverage their accounts, even when it was not appropriate. Compliance should impress upon Giovanni the importance of following the Policies and Procedures Manual. They will need to perform suitability reviews for all his leveraged clients. He may also be issued a warning letter and be required to compensate any clients who have suffered losses due to his inappropriate leveraging recommendations. If Giovanni continues with these activities, stronger action will be necessary such as additional training, close supervision and in extreme cases, termination. Example In order to better manage compliance risk, Giovanni’s firm has previously decided to manage the risks of inappropriate leveraging through policies, procedures and supervision rather than simply not permitting leveraged investments. The Compliance Department also manages compliance risk, which is the possibility of the firm facing losses due to its failure to manage its compliance function. The Compliance Department also provides guidance. When faced with an unfamiliar situation you can and should ask your Compliance Department for advice. How the Compliance Department Supports Dealing Representatives The Compliance Department performs vital business support functions by: overseeing and supervising all registerable activities of Dealing Representatives to ensure that they meet regulatory requirements, and internal policies and procedures monitoring the outside activities of Dealing Representatives to ensure that conflicts of interest are properly addressed or avoided educating and training Dealing Representatives to allow them to maintain, grow and protect their business in a compliant manner helping Dealing Representatives manage risks to their reputation and business operations providing advice to Dealing Representatives in situations in which they are in doubt as to the right course of action 34 © 2021 IFSE Institute Canadian Investment Funds Course reviewing trades and business practices periodically Client Relationship Model (CRM) and Client Focused Reforms (CFR) Under the Client Relationship Model (CRM), harmonized legislation has been enacted under National Instrument (NI) 31-103 (Registration), the Rules of the Mutual Fund Dealers Association of Canada (MFDA), and the Rules of the Investment Industry Regulatory Organization of Canada (IIROC) governing: Relationship Disclosure Information (RDI) Conflicts of Interest Enhanced Suitability Assessment Reporting to Clients Further amendments to the rules and legislation concerning conflicts of interest, suitability, and Relationship Disclosure Information (RDI) have since been enacted under the Client Focused Reforms (CFR). Client Relationship Model (CRM) and Client Focused Reforms (CFR) Relationship Disclosure Information (RDI) © 2021 IFSE Institute CRM introduced the Relationship Disclosure Information (RDI) requirement. The RDI must be provided to clients to provide them with key information about the account they open at the time they open the account. The standards for Relationship Disclosure Information (RDI) have since been amended further under the Client Focused Reforms (CFR) which requires registrants to: - include specific disclosure about conflicts of interest - disclose the registered firm’s obligation to put the client’s interests first when making a suitability determination 35 Unit 2: Registrant Responsibilities Client Relationship Model (CRM) and Client Focused Reforms (CFR) Conflicts of Interest CRM introduced higher standards for the treatment of conflicts of interest which established that conflicts of interest must be: - Enhanced Suitability Assessment 36 addressed in a fair, equitable, and transparent manner, consistent with the best interests of the client The standards for the treatment of conflicts of interest have since been amended further under the Client Focused Reforms (CFR) which require that registrants must: - address all material conflicts of interest in the best interest of the client - avoid all material conflicts of interest where the conflict cannot be addressed in the best interest of the client CRM introduced new standards and suitability “triggers” for assessing the suitability of investment products and strategies. The standards for Know Your Client, Know Your Product, and Suitability Determination have since been amended further under the Client Focused Reforms (CFR) which requires registrants to: - put the client’s interests first when making a suitability determination - disclose, in the Relationship Disclosure Information (RDI) provided to clients, the registered firm’s obligation to put the client’s interests first when making a suitability determination © 2021 IFSE Institute Canadian Investment Funds Course Client Relationship Model (CRM) and Client Focused Reforms (CFR) Reporting to Clients Pre-Trade Cost Disclosure CRM introduced new standards for reporting to clients as summarized below: - Trade Confirmations: must be issued to clients for each trade and must include prescribed details about the costs and charges. - Account Statements: must be issued to clients on a quarterly basis and in each month that there is activity in the account, and must include prescribed details about position cost, market value, deferred sales charge (DSC) indicators, and other information and disclosures. - The Report on Charges and Compensation: must be issued to clients annually and must provide clients with easy-tounderstand information about the amounts, in dollars and cents, of the charges and compensation paid to the dealer. - The Performance Report: must be issued to clients annually and must provide clients with easy-to-understand information about the cost-adjusted performance return of their investments following prescribed standards. CRM introduced the new standard for pre-trade cost disclosure. Registered individuals, including the Dealing Representatives of mutual fund dealers, are required to disclose: - the costs associated with the purchase or sale of a security before the transaction is made - whether there are any investment fund management expense fees or other ongoing fees that the client may incur in connection with the security As with all other market participants, mutual fund dealers and their Dealing Representatives are subject to the regulatory requirements established under the Client Relationship Model and Client Focused Reforms. © 2021 IFSE Institute 37 Unit 2: Registrant Responsibilities Relationship Disclosure Information (RDI) The objective of the relationship disclosure requirement is to ensure that clients: understand their obligations and those of the mutual fund dealer know what to expect with respect to products, service levels, and costs The Relationship Disclosure Information (RDI) requirements are established in: National Instrument (NI) 31-103, s. 14.2, (k), Relationship Disclosure Information MFDA Rule 2.2.7, Relationship Disclosure Information When a new account is opened for a client, your mutual fund dealer is required to provide written disclosure of the Relationship Disclosure Information (RDI). As a Dealing Representative, you are expected to provide the RDI to your clients, discuss the RDI information with them, and be prepared to answer any questions. The RDI will include, at minimum, the following elements: Relationship Disclosure Information (RDI) RDI Section Account Type Description describes the nature/type of account includes an explanation of how and where the client’s assets are held Advisory Relationship describes the nature of the advisory relationship establishes responsibility for investment advice and investment decisions Products & Services describes the products and services provided by the registered firm provides specific disclosure about: - 38 liquidity and resale restrictions investment fund management expense fees and ongoing fees other ongoing fees and expenses proprietary products mutual funds of a related investment fund manager © 2021 IFSE Institute Canadian Investment Funds Course Relationship Disclosure Information (RDI) RDI Section Cash & Cheques Description describes how the registered firm receives and handles deposits and cheques from clients establishes who the payee is for deposits and cheques Risks describes the risks that a client should consider when: Conflicts of Interest making investment decisions borrowing to invest describes the conflicts of interest that the registered firm is required to disclose to the client Suitability describes the registered firm's suitability obligation including: - Know-Your-Client (KYC) the events that will trigger a suitability assessment the obligation to put the client’s interest first when determining suitability defines the terms for the KYC information collected describes how the KYC information will be used in relation to specific investments that may be recommended or accepted for the client's account describes how the KYC information will be used when assessing suitability Client Reporting describes the frequency and content of reporting that will be sent to the client for: - © 2021 IFSE Institute Trade Confirmations Client Account Statements Report on Charges and Other Compensation Performance Report 39 Unit 2: Registrant Responsibilities Relationship Disclosure Information (RDI) RDI Section Compensation and Benefits Description describes the nature of compensation that the firm may receive, for example: - commissions at the time of purchase trailer fees on an ongoing basis refers to other sources for more specific information on compensation describes the benefits to the firm from other parties in connection with the client’s investment with the firm Transaction Charges describes the types of transaction charges that the client may be required to pay Impact on Returns explains the impact on a client’s investment returns from: - expenses and ongoing fees (described under Products and Services) charges (described under Transaction Charges) includes the effect of compounding over time Benchmarks explains how investment performance benchmarks might be used to assess the performance of the client's investments provides investment performance benchmarks available from the firm Complaint Obligations describes the firm’s obligations with respect to complaints and the process for pursuing recourse with the Ombudsman for Banking Services and Investments (OBSI) When you open a new account for a client, you are required to provide and explain the Relationship Disclosure Information (RDI). You are responsible for helping the client understand the nature of the relationship between you, your firm, and the client. Under the RDI requirements, you are expected to: spend sufficient time with your clients to explain the RDI information discuss the RDI information with your clients in an in-person or telephone meeting 40 © 2021 IFSE Institute Canadian Investment Funds Course be prepared to answer any questions follow their firm’s policies and procedures to evidence that you have done so You are expected to go through the RDI with your client at the beginning of your relationship to ensure that the client understands the information in the RDI. It may also be a good practice to re-visit the RDI with the client in subsequent meetings (e.g. in regular meetings or in subsequent meetings to discuss new investment products). Setting Expectations As part of the relationship discussion, you should discuss expectations and encourage the client to actively participate in the relationship. You should encourage clients to: Keep you and your dealer up to date about their Know-Your-Client (KYC) information. Clients should be encouraged to promptly notify you or your dealer about any change to their information that could result in a change to the types of investments appropriate for them, such as a change to their personal circumstances, financial circumstances, investment needs and objectives, risk profile, or time horizon. Be informed about their investments. Clients should be encouraged to fully understand their investments by asking questions, consulting professionals, and carefully reviewing the literature provided to them. Stay informed about their investments. Clients should be encouraged to review all account documentation provided to them and to regularly review portfolio holdings and performance. Clients should also be encouraged to request information from the dealer if they have concerns about their accounts, transactions, their relationship with the dealer, or their relationship with you. Maintaining Evidence of Relationship Disclosure You are required to maintain evidence that the RDI has been provided to your clients. If the relationship disclosure is incorporated into the New Client Application Form (NCAF) or account documentation and it is signed by the client, a copy of the relevant document in the client file is sufficient evidence. If the relationship disclosure is provided as a stand-alone document, evidence of delivery may include: a signed client acknowledgement a copy of the RDI in the client file accompanied by detailed notes about the client meeting including that the RDI was provided © 2021 IFSE Institute 41 Unit 2: Registrant Responsibilities Disclosure and Transparency All disclosures provided to a client must be: Accurate – the disclosure must be accurate and up-to-date Complete – the disclosure must contain all material information and must not have any omissions of material information Clear and understandable – the disclosure provided to a client must be clear and understandable (e.g. plain language) Relevant and useful to the client – the disclosure must be relevant to the client’s specific circumstances (e.g. relevant to the client’s type of account) Timely – the timing of the disclosure must permit the client to act upon the information where necessary. Specifically, disclosure of conflicts of interest in respect of a particular transaction should be provided to the client before the transaction so the client can decide whether or not to proceed with the transaction. Client Communications MFDA rules define client communications as any written communication by a mutual fund dealer or Dealing Representative to a client of the mutual fund dealer, including trade communications and account statements. It does not include advertisements or sales communication. Client communications must not: be false or aimed at misleading the client make exaggerated claims or go against the interests of the client violate any law or regulation be inconsistent with information given by the mutual fund dealer on any other document There are specific rules dealing with how rates of return are to be communicated to the client. The rules also require that any client communication containing or referring to the rate of return must be approved and supervised by your mutual fund dealer. Prohibited Practices As a Dealing Representative your conduct is governed by a number of rules. Some of the rules that may affect you on a daily basis include those that govern: 42 © 2021 IFSE Institute Canadian Investment Funds Course pre-signed forms excessive trading Pre-Signed Forms The use of pre-signed forms is prohibited. MFDA rules prohibit Dealing Representatives and mutual fund dealers from using blank forms that have been pre-signed by their clients, known as pre-signed forms. You can only use forms that are duly executed by your client after you have completed the information. The mere presence of pre-signed forms will be reported to the MFDA Enforcement Department. Excessive Trading Excessive trading is a practice in which a Dealing Representative recommends a trade that provides little or no benefit to the client, and has little or no purpose other than generating commissions or similar benefits for the Dealing Representative. Excessive trading is sometimes called “churning” an account. Mutual fund investing is typically geared toward a long-term buy-and-hold strategy. As such, MFDA staff would not expect to see frequent trading in client accounts as a general rule. A pattern of frequent trading may suggest that transactions are being carried out for the sole purpose of earning commissions. Example Hari Prasad recommends to his client that he should redeem his units in a Deferred Sales Charge fund where there is a penalty for redeeming the units before a certain number of years, usually seven years. He advises the client to pay the DSC redemption fee and buy another DSC fund. Hari Prasad will have to explain how and why he recommended this sell and buy transaction as it appears unlikely to yield any benefit to the client, but will benefit Hari with additional commission. If the Compliance Department determines that the transactions are unsuitable or not in the best interest of the client, the department will unwind them and Hari will be required to pay for any associated costs and losses. Dealing Representatives need to be aware of the ban on Deferred Sales Charge (DSC) Funds effective June 1, 2022.3 3 DSC Funds will be banned in all jurisdictions effective June 1, 2022. Further updates will be reflected in the next version of this course. For exam purposes, the content in this version of the course will apply. © 2021 IFSE Institute 43 Unit 2: Registrant Responsibilities Lesson 3: Conflicts of Interest Introduction In this lesson you will learn about conflicts of interest and your responsibilities to identify and manage those conflicts. This lesson takes approximately 1 hour to complete. At the end of this lesson, you will be able to: provide an overview of conflicts of interest define conflict of interest explain the criteria to be considered when determining whether a conflict is material discuss how conflicts of interest must be identified discuss how conflicts of interest must be addressed provide an overview of common conflicts of interest 44 © 2021 IFSE Institute Canadian Investment Funds Course Conflicts of Interest All registrants in the Canadian capital markets have a duty to identify and address conflicts of interest. The obligations concerning conflicts of interest permeate throughout all levels of securities legislation and regulations including: National Instrument (NI) 31-103, s. 13.4, 13.4.1, Identifying, Addressing, and Disclosing Material Conflicts of Interest Mutual Fund Dealers Association of Canada (MFDA) Rule 2.1.4, Identifying, Addressing and Disclosing Material Conflicts of Interest Further interpretation and guidance is provided in: Companion Policy (CP) 31-103, Registration, s. 13.4, 13.4.1 The overriding theme in the regulatory requirements is the obligation for registrants to address conflicts of interest in the best interest of the client. Compliance with the conflict of interest requirements is an ongoing registrant obligation, not a one-time determination. You and your registered firm are required to take reasonable steps to identify both existing conflicts of interest and those conflicts of interest that are reasonably foreseeable. Definition of Conflict In general, a conflict of interest is a situation where there is a divergence between the interests of two or more parties. Under Companion Policy (CP) 31-103, Part 13, Division 2, s. 13.4.1, the Canadian Securities Administrators (CSA) specifically define a conflict of interest to include any circumstance where: the interests of a client and those of a registrant are inconsistent or divergent a registrant may be influenced to put their interests ahead of their client’s interests the trust that a reasonable client has in their registrant may be compromised as a result of: - monetary or non-monetary benefits available to the registrant potential detriments that the registrant may be subject to © 2021 IFSE Institute 45 Unit 2: Registrant Responsibilities As specified in the policy, you and your dealer are required to determine whether a conflict is material. When determining whether a conflict is material, you should consider whether the conflict may be reasonably expected to affect: the decisions of the client the recommendations or decisions you make Conflicts of Interest between Registrants and Clients The requirements governing conflicts of interest between registrants and clients have been developed under the Client Focused Reforms (CFR) and brought into force under NI 31-103 and the MFDA Rules. Under the reforms, you must take reasonable steps to: identify existing and reasonably foreseeable material conflicts of interest address all material conflicts of interest in the best interest of the client You, as a Dealing Representative, have specific responsibilities under the CFR requirements, as summarized below. Your Responsibilities for Conflicts of Interest You are responsible for: taking reasonable steps to identify existing and reasonably foreseeable material conflicts of interest promptly reporting material conflicts of interest to your firm addressing material conflicts of interest in the best interest of the client avoiding all material conflicts of interest where the conflict cannot be addressed in the best interest of the client You are prohibited from engaging in trading and/or advising activities unless: the conflict has been addressed in the best interest of the client; and your firm has approved the activity 46 © 2021 IFSE Institute Canadian Investment Funds Course Identifying Conflicts of Interest Conflicts of interest will arise in the ordinary course of business. Some conflicts are inherent to the firm’s business model. Other conflicts may arise from the business activities you carry out. Conflicts of interest may take various forms such as: existing - involving an actual conflict as a result of current activities potential - involving likely future conflicts perceived - involving circumstances creating the appearance of a conflict By their very nature, conflicts can interfere with your ability to deal fairly, honestly, and in good faith with clients. It is simply good business to know how conflicts arise and understand the duty to identify and address them. You are required to take reasonable steps to identify existing and reasonably foreseeable material conflicts of interest. As established in CP 31-103, reasonable steps to identify material conflicts of interest would include: taking proactive measures to anticipate reasonably foreseeable conflicts implementing policies and procedures to identify existing conflicts assessing the materiality of those conflicts to distinguish between those conflicts that are material and those that are not The duty to identify and address conflicts of interest is not viewed as a one-time exercise and compliance with the conflict of interest requirements is an ongoing obligation. Therefore, you are expected to assess and address new conflicts as they are identified. © 2021 IFSE Institute 47 Unit 2: Registrant Responsibilities Addressing Conflicts of Interest A conflict of interest can be addressed in one of three ways: avoidance control disclosure Where a conflict of interest between you and your client is identified, you are subject to specific regulatory obligations where the conflict is deemed to be material. You must: address all material conflicts of interest in the best interest of the client avoid all material conflicts of interest where the conflict cannot be addressed in the best interest of the client When addressing a material conflict of interest, you and your dealer are required to either: implement controls to mitigate the conflict sufficiently so that the conflict is addressed in the client’s best interest; or avoid the conflict. Your failure to identify and properly address a conflict could put you and your firm at risk of disciplinary action by the regulators or civil action by a client. Therefore, it is important that you understand and commit to the notion that you must address all material conflicts of interest in the best interest of the client and avoid those material conflicts of interest that cannot be addressed in the best interest of the client. Avoidance You are required to avoid all conflicts of interest that are prohibited by law. Examples of conflicts of interest that must be avoided include those practices prohibited under securities legislation and regulations, or other activity that is sufficiently contrary to the integrity of the capital market and/or the interests of investor(s). Even where a conflict of interest is not legally prohibited, it must be avoided if there can be no other reasonable response. Under CP 31-103, Part 13, Division 2, s. 13.4.1, you would be expected to avoid material conflicts of interest: where there are no appropriate controls available that would address the conflict in the best interest of the client where avoiding the conflict is the only reasonable response in order to address the conflict in the best interest of the client 48 © 2021 IFSE Institute Canadian Investment Funds Course even if avoiding the conflict means foregoing an otherwise attractive business opportunity or type of compensation Where you determine that a material conflict of interest should be avoided, you may do so by: refusing to engage in the activity ceasing to provide the product or service declining to deal with the client Control When determining how to address material conflicts of interest, your firm must consider what internal structures or policies and procedures can be implemented in order to address the conflict of interest in the best interest of the client. Conflicts Arising from Compensation and Incentives It is important to note that the regulators assign a great deal of importance to conflicts arising from compensation and incentives. As such, you should focus specific attention to your firm’s policies and procedures governing conflicts that arise from compensation and incentives to ensure that: you adhere to the firm’s requirements conflicts of interest are addressed in the best interests of clients Conflicts arising from internal compensation arrangements and incentive practices As stated in CP 31-103, s. 13.4.1: “It is an inherent conflict of interest for registered firms to create incentives to sell or recommend certain products or services over others. It is also an inherent conflict of interest for registered individuals to receive greater compensation from their sponsoring firm for the sale or recommendation of certain products or services over others. In our experience these are almost always material conflicts of interest.” The CP goes on to state: “In addition to controlling these conflicts in the best interest of clients, registrants must comply with the suitability determination obligation under section 13.3. If certain products or services available at a firm compensate its registered individuals better than others, in addition to determining that the recommendation is suitable, registered individuals must put their clients’ interest first when deciding which product or service to recommend. As a result, the client’s interests, not the registrant’s interests, must guide the recommendations made by a registrant to its clients. Registrants must not recommend a product or service just because it pays them better than the alternatives. This is also consistent with a registrant’s obligation to deal fairly, honestly and in good faith with its clients.” © 2021 IFSE Institute 49 Unit 2: Registrant Responsibilities Disclosure The purpose of disclosing a conflict of interest is to provide the client with adequate information so that they can decide for themselves whether the conflict is serious enough to lead them to withdraw from the transaction or service. Firms are required to provide written disclosure to clients to disclose all material conflicts of interest identified and reported to the firm. Where required, you may likely be responsible for providing disclosures prescribed by the firm. Disclosure about conflicts of interest must be: prominent, specific, clear, and meaningful to the client, so that they can understand the conflict of interest and how it could affect the product or service that is being offered made prior to or at the time of the investment recommendation or service, so the client has time to assess the information Written disclosure of material conflicts of interest must include: the nature and extent of the conflict the potential impact and risk the conflict may pose how the conflict has/will be addressed Where a material conflict of interest is identified that has not been previously disclosed to the client, the firm is responsible for providing disclosure to the client in a timely manner. In some cases, you will be required to provide disclosure to the client when these circumstances arise. While disclosure can be effective in addressing certain conflicts of interest, disclosure alone is not considered sufficient to address a material conflict of interest between a registrant and a client. Disclosure is meant to supplement other measures and controls taken to address the conflicts. 50 © 2021 IFSE Institute Canadian Investment Funds Course Example Jonas has a client, Adrian, who bought and then sold the PanCanada Fund, a return of capital mutual fund. Adrian needs help filing her T1 Return because she has never calculated her adjusted cost base on a return of capital fund before. Luckily, Jonas has an ownership interest in Pro-Tax Services Ltd., a tax preparation firm. Before Jonas can refer Adrian to Pro-Tax Services he must: obtain approval from his dealer for his outside activity, Pro-Tax Services Ltd. obtain approval from his dealer for the written disclosure for Pro-Tax Services Ltd., which must clearly disclose Jonas’ conflicts of interest (e.g. Jonas will profit from his interest in Pro-Tax when Adrian uses the service) provide the written disclosure for Pro-Tax Services Ltd. to his client, Adrian, before he refers her to Pro-Tax Disclosure of Compensation Conflicts As set out in CP 31-103, s. 13.4.1, you are expected to disclose to your clients any commissions or other compensation that you will receive for a transaction, before the transaction is executed. The CP also explicitly states: “If a representative’s compensation differs depending on the products or services provided, then this is a material conflict that must be disclosed to clients. With respect to the nature and extent of the conflict, the registrant should disclose a summary of the compensation conflict in plain language. For example, if particular products pay a larger percentage-commission than other products available to the client, the extent of the compensation difference should be explained.” Limitations of Disclosure In some cases, disclosure can play an effective part in addressing conflicts of interest. However, disclosure alone would not be considered sufficient to address a material conflict of interest. For example, compensation and transaction charges are disclosed in the Relationship Disclosure Information (RDI) that is provided to clients when they open an account and in the Pre-Trade disclosure before an order is executed. However, there is an added expectation that there is adequate supervision by the firm to ensure that the fees are competitive, reasonable, and appropriate for clients. There are also circumstances where disclosure would be clearly insufficient to address a conflict of interest. In such cases, you would need to avoid the conflict of interest. For example, disclosure may not be used to justify an unsuitable recommendation. © 2021 IFSE Institute 51 Unit 2: Registrant Responsibilities Example As established in the guidance provided by the MFDA under MFDA Staff Notice MSN - 0069, Suitability, disclosure cannot negate the obligations of registrants under regulatory requirements. As stated in the notice: “The obligation to make a suitability determination is a fundamental obligation owed by Members and Approved Persons to their clients and is critical to ensuring investor protection. It is a cornerstone of the registration regime and an extension of the duty to deal fairly, honestly and in good faith which Members and Approved Persons owe to their clients. It cannot be satisfied through the provision of disclosure or by obtaining a client waiver.” Once a conflict of interest has been identified and addressed, you must document the reasonable basis for your determination that the conflict of interest has been addressed in the best interests of the client(s). As the materiality of a conflict increases, there should be greater detail in the records maintained to demonstrate compliance. For example, the regulators would expect to see more detailed records for material conflicts related to sales practices, compensation arrangements, incentive practices, referral arrangements, and the use of proprietary products and services. Bottom Line You need to be mindful of any conflicts of interest, be very familiar with your obligations under MFDA Rule 2.1.4, and follow your dealer's policies and procedures for managing conflicts. You must position your practice to minimize, recognize, and manage conflicts and keep records of any conflicts that have arisen and how they were resolved. Transitional Relief related to Deferred Sales Charge (DSC) Investment Funds On June 23, 2021, the CSA issued a Notice which provides relief from the enhanced conflict of interest and suitability requirements under the Client Focused Reforms (CFR) which relate to the sale of investment funds with a deferred sales charge (DSC) option. The Order provides registrants with an exemption from the CFR requirements provided that you: comply with all other amendments related to the Client Focused Reforms (CFR) provide disclosure to clients, in a timely manner, of the nature and extent of the conflict of interest related to the sale of the DSC investment fund The order will cease to have effect and the transitional relief and exemptions will expire on June 1, 2022. At that time, DSC investment funds will be banned in all jurisdictions. 52 © 2021 IFSE Institute Canadian Investment Funds Course Common Conflicts of Interest As is inherent with any compensation-based industry, it is not uncommon for conflicts of interest to arise through the normal course of business conducted by you and your dealer. The important thing to do is to properly identify and address conflicts of interests that arise. Summarized below are some of the common conflicts of interest that can be expected to emerge at registered firms. Common Conflicts of Interest* Type/Activity Proprietary Products such as: Potential Conflicts of Interest can Arise From: conflicts which stem from the competing interests of the firm, wanting the proprietary products to be successfully distributed, and clients’ needs to be suitably invested in appropriate investment products conflicts stem from the compensation structure of a given product which may motivate the sale of that product, for example: deposit products structured products investment funds Compensation-Related Conflicts - Referral Arrangements and Service Arrangements trailing commissions/fees deferred sales charge (DSC)4 commissions syndication fees performance fees managed account/fee-for-service fees embedded fees the product offers a higher commission rate or an ongoing stream of income over time while other products offer lower or finite commission potential referral fees, trailer fees, split commissions other fees (e.g. syndication fees) other benefits 4 DSC Funds will be banned in all jurisdictions effective June 1, 2022. Further updates will be reflected in the next version of this course. For exam purposes, the content in this version of the course will apply. © 2021 IFSE Institute 53 Unit 2: Registrant Responsibilities Common Conflicts of Interest* Type/Activity Dual Occupations and Outside Activities Gifts, Gratuities, and NonMonetary Benefits Potential Conflicts of Interest can Arise From: compensation from the dual occupation/outside activity position of influence gained from the dual occupation/outside activity that could impact the relationship with clients gifts, gratuities, and non-monetary benefits received from clients * This is not meant to be an exhaustive list of all conflicts of interest. Other conflicts of interest may arise that are not included on this list, but would be material and would require that the registered firm and Dealing Representative address the conflict of interest in the best interest of the client. When making a determination of how the firm will address a conflict of interest, the steps that the dealer must take to address the conflict of interest will most often be established in the legislation, regulations, and guidance from the securities regulators. It is your responsibility to follow your firm’s policies and procedures, and any decisions the firm makes, to address conflicts of interest. 54 © 2021 IFSE Institute Canadian Investment Funds Course Lesson 4: Compliance Issues Introduction In your role as a Dealing Representative, you will face a number of compliance issues relating to your job duties and your dealings with clients. For the most part, your mutual fund dealer will have policies and procedures in place to guide you. This lesson provides information about common compliance issues, and instructions on what to do. This lesson takes approximately 30 minutes to complete. By the end of this lesson, you will be able to: discuss compliance issues that may affect a Dealing Representative and how to deal with them including: - personal financial dealings with clients and control or authority over client accounts benefits to or from clients dual occupations and outside activities dual licensing referral arrangements discretionary trading sales communications trade names and business titles NOTE: If you are ever unsure about how to deal with a given situation, check with your firm’s Compliance Department. © 2021 IFSE Institute 55 Unit 2: Registrant Responsibilities Common Compliance Issues In your role as a Dealing Representative, you are likely to come across a number of compliance issues. It is important that you are aware of these issues, and that you understand the steps you must take when you encounter them. Activities that may cause compliance issues include: personal financial dealings with clients control or authority over a client’s account or financial affairs benefits to or from clients dual occupations and outside activities dual licensing as a life insurance agent referral arrangements discretionary trading sales communications trade names and business titles business cards and stationery Personal Financial Dealings and Control or Authority over Client Accounts Personal financial dealings with clients or having control or authority over a client account will often create a conflict of interest that can potentially impair your ability to fulfill your obligations to your clients. You must be aware of the restrictions and limitations imposed by the regulators and strictly follow your firm’s policies and procedures related to personal financial dealings with clients and control or authority over client accounts. Personal Financial Dealings with Clients & Control or Authority over Client Accounts Complete or Partial Control or Authority acting under a Power of Attorney (POA), as trustee, as executor, or under any other similar authorization, or over a Client Account otherwise having full or partial control or authority over the client’s account or financial affairs under MFDA Rule 2.3.1, you are prohibited from having authority over client accounts such as POA, trustee, etc. you are required to disclose your authority over any account to your firm the firm is required to re-assign the account to another Dealing Representative who does not have authority 56 © 2021 IFSE Institute Canadian Investment Funds Course Personal Financial Dealings with Clients & Control or Authority over Client Accounts Lending to Clients lending to clients is not permitted (Limited exceptions for advancing funds for redemptions may be permitted if permitted by your firm. You must follow your firm’s policies and procedures.) Borrowing from Clients borrowing from clients is not permitted (You must follow your firm’s policies and procedures for exceptions, where your firm allows such exceptions) Purchasing Assets from a Client purchasing an asset from a client outside the normal course of business (e.g. real property or other assets of significant value) would represent a material conflict of interest that should be avoided (You must follow your firm’s policies and procedures for exceptions, where your firm allows such exceptions) Private Investment Schemes private investment schemes include: - investment clubs where you and your clients invest together - co-investment by you and your clients in pyramid-like schemes or other questionable investments these arrangements are prohibited securities-related business outside of the firm is a breach of regulations Private Settlements Dealing Representatives are prohibited from entering into a private settlement with a client (for example, to resolve a dispute) all settlements must go through the dealer © 2021 IFSE Institute 57 Unit 2: Registrant Responsibilities Personal Financial Dealings with Clients & Control or Authority over Client Accounts Monetary or Non-Monetary Benefits non-monetary benefits such as gifts or charitable donations cannot flow directly or indirectly to or from you and your client all monetary and non-monetary benefits to or from clients must be approved by your dealer and flow through the dealer Positions of Influence in the Community you occupy a leadership role in the community (e.g. pastor at a local church, nurse at a nursing home) you must disclose your role to your firm the regulator will usually impose terms and conditions on you to restrict you from dealing with clients related to your role (e.g. restrict you from dealing with members of the church, patients of the nursing home, etc.) at minimum, the firm must implement procedures to protect clients from undue influence Power of Attorney A power of attorney (POA) is a legal document that allows a person to act on another person's behalf. There are two kinds of POA: limited POA general POA A limited POA restricts permitted actions to those of a specific nature, such as financial matters, whereas a general POA permits a broader range of activities. You should be fully aware of your firm’s policies and procedures for accounts which have appointed a POA for the account. Restrictions from having Control or Authority Under MFDA Rule 2.3.1, you are strictly prohibited from having partial or full control or authority over the financial affairs of a client including appointment as a: power of attorney 58 © 2021 IFSE Institute Canadian Investment Funds Course trustee executor any other similar authorization Subject to certain conditions, there is a limited exception which allows you to accept an appointment to have control or authority provided that all of the following conditions are met: the client is directly related to you, as defined under the Income Tax Act (i.e. spouse, parent, or child) you notify your dealer of the appointment you obtain written approval from your dealer prior to accepting or acting upon the control or authority For these special cases only, you may be allowed to accept an appointment to have control or authority. However, you must follow your dealer’s policies and procedures and certain conditions will apply. It is very important to remember that the exception above cannot be extended to other clients or other family members. Accepting or acting as a control or authority over the financial affairs of any other family member, client, or account is strictly prohibited. Example Derek has received an overseas assignment and wants his brother Justin, who is a Dealing Representative at the mutual fund dealer where Derek holds his accounts, to take care of his mutual fund investments held while he is away from the country. Derek gives a general power of attorney to Justin giving him full authority to manage his financial affairs. Although Derek is Justin’s family, the exception permitted under the MFDA rules applies to the immediate family – spouse, children and parents. Justin cannot accept the POA. Benefits To or From Clients Non-monetary benefits such as gifts or charitable donations are sometimes used as compensation for inappropriate activities carried on by Dealing Representatives. When used inappropriately, they are used as a means of private settlement where MFDA regulations may have been breached or in exchange for referrals. You are required to ensure that all such benefits of a material amount flow through your mutual fund dealer. You must get your mutual fund dealer’s approval prior to carrying out any such arrangement since the firm is responsible for ensuring that: any conflicts of interest are addressed in the best interests of clients: © 2021 IFSE Institute 59 Unit 2: Registrant Responsibilities activity is properly monitored In general, benefits of nominal value are not normally seen as a conflict of interest. Regardless, you are required to strictly follow your firm’s procedures for monetary and non-monetary benefits to or from your clients. Example Larry, a Dealing Representative with ABC Financial, has a condo in Florida. One of his high-net-worth clients was planning a month-long family holiday in Florida. Larry gave his client the keys to his Florida condo, and invited him to stay there at no charge for the duration of the client’s month-long stay. Larry did not see the need to inform his mutual fund dealer, since he owns the condo and he is free to let anyone use it. Larry has violated the MFDA requirements pertaining to monetary or non-monetary benefits from or to clients, since the rental cost of the condo for a month is clearly of material value. Dual Occupations and Outside Activities Dual occupations and outside activities are permitted under securities legislation and regulations where prescribed conditions are satisfied. Dual occupations are business activities that are not carried out on behalf of the firm and involve the payment of compensation. Generally speaking, dual occupations are those business activities that do not fall under your role with your firm, for example: insurance, mortgage brokerage, real estate, tax preparation, etc. Outside activity means any business carried on by you other than business done on behalf of your mutual fund dealer. Outside activities include dual occupations, and also include activities that are not dual occupations (with or without compensation), for example: acting as a board member, officer, director, or equivalent (whether or not remuneration or other benefit is received for the position) acting a member of a charitable organization acting as a volunteer in the community holding a position of influence, such as: - 60 religious leaders health care providers military officers any other positions of influence © 2021 IFSE Institute Canadian Investment Funds Course As can be reasonably expected, there is a potential for conflicts of interest to arise when you engage in outside activities. For example, conflicts of interest can result from: compensation from the activity the nature of your relationship with the outside entity and/or any members of the outside entity conflicting duties of your role with your dealer and your role with the outside entity possible knowledge of insider information conflicting demands on your time You are required to disclose your outside activities to your dealer: upon registration application: Form 33-109F4 Registration of Individuals and Review of Permitted Individuals before you commence new outside activities during the term of your registration: Form 33-109F5 Change of Registration Information Your dealer is responsible for: reviewing and approving outside activities disclosed to the firm ensuring that outside activities, and associated trade names where applicable, are reported to the securities regulators ensuring that outside activities, and any associated conflicts of interest, are properly addressed in the best interest of client(s) and are disclosed to clients having supervisory controls in place in order to detect undisclosed outside activities You must not engage in any outside activities without obtaining written approval from your mutual fund dealer. Depending on your firm’s policies and procedures, your outside activity may be approved provided that: you are permitted, under legislation, to devote less than your full time to the business of the dealer the activity is not prohibited by the securities regulator in the jurisdiction conflicts of interest are identified and addressed in the best interest of the client(s) © 2021 IFSE Institute 61 Unit 2: Registrant Responsibilities the activity does not bring the MFDA, its members, or the mutual fund industry into disrepute proper disclosure is provided to clients to: - clearly communicate that the outside activity is not the business of the dealer and is not the responsibility of the dealer - disclose any conflicts of interest For instance, your dealer may permit an outside activity involving the sale of deposit instruments, such as Guaranteed Investment Certificates (GICs), through an entity other than your mutual fund dealer where deposit instruments do not fall within the definition of "securities" under provincial/territorial securities legislation. Inappropriate Outside Activities An outside activity carries the potential for conflicts of interest. Before approving any outside activities, a mutual fund dealer is required to take conflict of interest considerations into account, including: the compensation to be paid under the arrangement, the nature of the relationship between the Dealing Representative and the outside entity, and any other potential conflicts that are identified. If a conflict cannot be addressed in the best interest of the client(s), the outside activity cannot be permitted by your mutual fund dealer. Undisclosed outside activities strictly prohibited including, but are not limited to, those involving the sale of investment products outside of the mutual fund dealer such as: principal-protected notes private placements limited partnerships other securities sold pursuant to exemptions from securities legislation undisclosed referral arrangements involving the referral of securities-related business outside of the mutual fund dealer Bottom Line Remember that you must inform your dealer of any outside activities and you must also disclose all outside activities to the securities regulators: when you first become registered before you commence new outside activities during the term of your registration 62 © 2021 IFSE Institute Canadian Investment Funds Course Your dealer has the authority to decline approval for any outside activity which they determine is not acceptable. If your dealer declines an outside activity that you have proposed, you are not permitted to engage in that outside activity under any circumstances. Dealing Representatives that engage in outside activities that have not been approved by their dealers can be subject to disciplinary action by the dealer, the MFDA, or both. Dual Licensing as a Life Insurance Agent All provinces have regulations that permit individuals to be both licensed life insurance agents and registered Dealing Representatives. The sponsoring mutual fund dealer is responsible for supervising the activities of the individual in matters pertaining to the sale of mutual funds and is expected to monitor the activities of the individual with respect to insurance activities. Referral Arrangements A referral arrangement is an arrangement in which a mutual fund dealer or Dealing Representative pays or receives a referral fee for the referral of a client. A referral fee is any form of benefit or compensation, direct or indirect, for the referral of a client and includes the splitting of a commission or fee from a transaction. Referral arrangements can involve securities-related business (between registrants) and non-securities-related business (involving non-registrants). Conflicts of interest can be expected to arise from referral arrangements due to the financial interests that emerge from receiving referral fees, splitting commissions, and other forms of compensation and benefits. It is also critically important to ensure that clear disclosure about the roles and responsibilities of all parties are provided to clients. In order for a referral arrangement to be permissible under securities regulations, certain conditions must be satisfied. As established in Section 13 of NI 31-103 and MFDA Rule 2.4.2, the following provisions apply with respect to referral arrangements: Referral Arrangements there must be a written referral agreement in place before any referrals take place the registered firm(s) must be a party to the referral agreement all referral fees must be recorded on the books and records of the registered firm(s) © 2021 IFSE Institute 63 Unit 2: Registrant Responsibilities Referral Arrangements written disclosure of the referral, in prescribed form, must be provided to clients before accounts are opened or services are provided to clients the registered firm must satisfy itself that the person/company that is accepting the referrals has the appropriate qualifications and/or registration to provide the services before any referrals take place the “Know Your Product” obligations apply to referral arrangements and registered firms are required to conduct due diligence to determine whether referral arrangements should be approved by the firm Even if you directly negotiate a referral arrangement with another party, your dealer must be a party to the referral agreement. This is because the dealer is obligated to supervise and monitor your activities under referral arrangements. Although referral arrangements are a widely used and permissible practice in the industry, they require the active involvement of the mutual fund dealer. You are not permitted to enter into referral arrangements or receive referral fees of any nature “outside” of your dealer. Referral Arrangements with other Registered Firms When a referral arrangement involves another registered firm, such as an investment dealer, portfolio manager, or exempt market dealer, there are limitations on the activities that you may conduct. You are not permitted to carry out any of the following activities: completing new account opening documents or Know Your Client (KYC) information for the other registered firm participating in meetings where clients are given investment advice with respect to the accounts at the other registered firm accessing clients’ account information and/or trading activities from the other registered firm As set out in MFDA Staff Notice MSN-0071, a Dealing Representative who engages in activities such as those above, or otherwise acts as the relationship manager for a client of the other registrant, is in breach of MFDA Rule 1.1.1 (a), to conduct all securities-related business through their dealer. Even where the other registered firm is an affiliate firm of your dealer, you are not permitted to engage in those activities which are restricted. 64 © 2021 IFSE Institute Canadian Investment Funds Course Example John has an arrangement with Thomas in which John refers clients having specific stock investment needs to Thomas, who is an investment advisor with an investment dealer. John has informed his dealer’s Compliance Department and the referral is being done through the dealer. The mutual fund dealer and the investment dealer must have a written agreement. However, John is strictly prohibited from advising on or recommending any specific stocks to his clients. This can only be done by Thomas. John cannot act beyond the limits of his registration through a referral arrangement. Conflicts related to Referral Arrangements It is important to note that the regulators assign a great deal of importance to conflicts arising from referral arrangements. Conflicts related to referral arrangements As stated in CP 31-103, s. 13.4.1: “Paid referral arrangements are inherent conflicts of interest which, in our experience, are almost always material conflicts of interest, and must be addressed in the best interest of the client. Before a registrant refers a client, in exchange for a referral fee, to another party, the registrant must determine that making the referral is in the client’s best interest. In making that determination, we expect registrants to consider the benefits to the client of making the particular referral over alternatives or at all. In making a referral, registered firms and individuals must be guided only by the client’s interests. We therefore expect that a registrant will not make a client referral to a party solely because of the referral fee that they will receive from that party, or because the amount or duration of the referral fee that they will receive from that party may be greater than the amount or duration of the referral fee that they would receive from a competitor to that party. If a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, we would not consider the inherent conflict of interest to have been addressed in the best interest of the client. This is also consistent with a registrant’s obligation to deal fairly, honestly and in good faith with its clients.” Vigilant effort is required to ensure that conflicts of interest related to referral arrangements are properly addressed, requirements are followed, and proper disclosure is provided. Discretionary Trading Your mutual fund dealer and you, as a Dealing Representative, are not allowed to accept discretionary trading authority from a client. Consequently, you must not place any trades in a client's account without first obtaining the client's authorization. © 2021 IFSE Institute 65 Unit 2: Registrant Responsibilities In order to facilitate trades when the investments are held at a mutual fund company in the name of the client, as opposed to being held in nominee name by the mutual fund dealer, it is permissible to use a Limited Authorization Form (LAF). When investments are held in client name, the client must normally sign the trade instructions before the mutual fund company is able to process the transaction. By signing the LAF, the client authorizes the execution of trades without the need to provide his or her signed written instructions to the mutual fund company. Note that a LAF does not confer discretionary trading authority on the mutual fund dealer or the Dealing Representative. The Dealing Representative and mutual fund dealer may only initiate a trade following receipt of specific instructions from the client, for example, by telephone, fax or other electronic means. Example Mrs. Earnshaw is a client of ABC Financial Services, a mutual fund dealer. She owns several mutual funds which are held in her own name at the mutual fund company. Her Dealing Representative is concerned at the difficulty of obtaining her signature to carry out trades while she is up north. A LAF may be appropriate in these circumstances. The LAF would enable trades to be executed without the fund company having to receive signed instructions from Mrs. Earnshaw in every case. Before placing a trade, the Dealing Representative would still need to contact the client, for example, by phone and obtain her authorization and would need to record the date, time and substance of her instructions. You are strictly prohibited from executing any trade under an LAF when you do not have the client’s prior authorization for the trade. An LAF does not, under any circumstances, give you discretionary authority. Sales Communications and Advertisements As a Dealing Representative, you may want to communicate with your clients through phone calls, letters, emails, and other sales material. There are strict rules governing what you can say in your sales communications, including advertising and statements you may make orally or in writing. Sales communications include any communications relating to a mutual fund that induces the public to invest in that mutual fund. Certain documents that must be delivered to investors are not considered sales communications. These include: the prospectus the Fund Facts annual information form 66 © 2021 IFSE Institute Canadian Investment Funds Course financial statements trade confirmations statements of account An advertisement is a sales communication that is published or designed for use on or through a public medium including: video and audio recordings infomercials displays billboards newspaper and magazine advertisements radio, television, websites, and blogs postings on social media (e.g. Twitter, Facebook, YouTube, Instagram, TikTok, etc.) All advertising and sales communications, including websites, must be approved by your dealer before you can publish or issue the communication. Be sure to consult your dealer’s policies and procedures on advertisements and sales communications and submit your marketing materials to the designated person for pre-approval. Your dealer will designate a partner, director, officer, compliance offer, or branch manager to review and approve advertising and sales communications. Sales Communication Dos and Don'ts What you may say As long as you follow the rules, you are permitted to: provide information on a fund's characteristics and attributes make certain comparisons promote the absence of fees and charges for a fund discuss investment performance of a fund, including ratings, rankings, provide quotations, rates of return, yield, volatility, or any other measurement of performance What you may not say The overriding principle for a sales communication is that it must not be misleading. As a result, you may not: make an untrue statement © 2021 IFSE Institute 67 Unit 2: Registrant Responsibilities omit any information that, if excluded, would make a sales communication misleading include a statement that conflicts with information in a fund's prospectus present information in a way that distorts the information contained in a prospectus include a visual image that gives a misleading impression include any unjustified promises or guarantees of specific results use misleading statistics include an opinion or forecast of future events that is not clearly labeled as such fail to fairly present the potential risks to the client Example Tony sends out emails to a few of his high-net-worth clients informing them about a new mutual fund that has just been launched. He states that he is very confident that the fund will reward its investors with a guaranteed return of 7%. Sending out a sales communication that states that a mutual fund has a guaranteed return is a violation of Rule 2.7. Example Tony has sent out the above emails without getting it pre-approved by his designated Branch Manager. He has committed another regulatory breach under MFDA rules and he will likely be disciplined for doing so. Trade Names and Business Titles Operating under a trade name is a common practice for Dealing Representatives. You are permitted to conduct business under a trade name as long as the following conditions are met: your dealer has given its prior written consent to use the trade name your dealer has notified the MFDA of the trade name the trade name is used together with the legal name of the dealer and the dealer’s legal name is at least equal in size and prominence to the trade name the trade name is not misleading in any way 68 © 2021 IFSE Institute Canadian Investment Funds Course You are not permitted to operate under any trade name or business title unless it is first approved by your dealer in writing. Trade names approved by your dealer must be used together with the legal name of the dealer. The purpose of this requirement is to ensure that clients are aware of the registered mutual fund dealer who is responsible for the management and supervision of securities-related business. Any trade name that you operate under must be duly registered with the province/territory, where required, and cannot be a corporate or legal name. For instance, Aardvark Financial Services Inc. is a legal name and cannot be approved as a trade name, but Aardvark Financial Services can be approved as a trade name. All Dealing Representatives are governed by the “holding out rule”, MFDA Rule 1.2.5. Any trade name or business title that you use cannot be misleading and you must observe the “holding out rule” at all times. This rule prohibits you from “holding yourself out” to the public in any manner which could reasonably be expected to deceive or mislead a client or other person about your: proficiency experience qualifications registration category nature of your relationship with the firm/individual products and/or services to be provided The rules establish that you are restricted from using any titles or designations which are: based partly or entirely on your sales activity or revenue generation a corporate officer title (e.g. Vice President, Director), unless you have been appointed to the office under applicable corporate law not approved by the firm You should be fully versed in your firm’s policies and procedures for business titles and learn which business titles and designations you may use, how they may be used, and those business titles and designations which would be restricted or prohibited. Any business address included on your business card or stationery must be registered with the applicable securities regulator/commission. Business cards and other stationary items, such as letterhead or fax cover sheets, are all subject to the “holding out rule”. As such, all stationary materials must be pre-approved by your dealer in the same way as sales communications and advertisements. © 2021 IFSE Institute 69 Unit 2: Registrant Responsibilities Example: Holding Out Rule Christopher Smith works as a Dealing Representative with ABC Investments Inc. Christopher is also a Chartered Professional Accountant (CPA). Christopher has business cards printed with the following information: ABC Investments Inc. Christopher Smith Chartered Professional Accountant 543 Finance Street, Suite #100 Capital City, Alberta, A1B 2C3 403-555-1212 [email protected] In the example above, Christopher is holding out a legitimate designation to the public in a misleading manner. Although he is qualified as a Chartered Professional Accountant, he is not employed by ABC Investments in that capacity. Instead, Christopher is permitted to add the “CPA” designation after his name, like this: ABC Investments Inc. Christopher Smith, CPA Dealing Representative 543 Finance Street, Suite #100 Capital City, Alberta, A1B 2C3 403-555-1212 [email protected] 70 © 2021 IFSE Institute Canadian Investment Funds Course Lesson 5: Registration Requirements Introduction Before you are permitted to sell securities to the public, you must be registered with the appropriate provincial securities regulatory authorities. This lesson provides information about the requirements for registration and describes the steps you must follow in order to register. This lesson takes approximately 15 minutes to complete. By the end of this lesson, you will be able to: describe the registration process and the National Registration Database (NRD) explain the passport system for multi-jurisdictional registration discuss the requirements to report material changes explain the client mobility exemption explain the registration categories and the products permitted © 2021 IFSE Institute 71 Unit 2: Registrant Responsibilities Registration Process Before you begin selling securities to the public you must be registered with the appropriate provincial securities regulatory authority. MFDA rules and by-laws, and provincial and territorial securities legislation require registration in jurisdictions where your clients are located. This applies regardless of where your client was located when the account was opened, and whether or not there is trading in the account. The registration process consists of five steps: Step Who does it Description 1 Dealing Representative Meet the proficiency requirements. To be registered as a Dealing Representative, you must pass a recognized certification course such as the Canadian Investment Funds Course. 2 Dealing Representative Obtain employment with a mutual fund dealer. Before or after passing the certification exam, you need to obtain employment with a mutual fund dealer who is a member of the MFDA. 3 Dealing Representative Contact the mutual fund dealer’s Compliance Officer to register with the province. 4 Mutual Fund Dealer Submit the Dealing Representative’s registration to the National Registration Database. In the context of mutual funds, firms are registered as mutual fund dealers. Mutual fund dealers then sponsor individuals who become registered as Dealing Representatives. You cannot be registered without a sponsoring mutual fund dealer firm. Firms and individuals who become registered are known as registrants. Your employer will send your application for registration through the National Registration Database (NRD). Depending upon business needs, your mutual fund dealer will submit applications to register you in one or more provinces. You must also complete the RCMP Records Request/Reply form, which authorizes the RCMP to investigate and determine if you have a criminal record. 5 Provincial or Territorial Securities Commission Grant your registration, if you have met applicable requirements and there are no objections to registration on other grounds. You may not begin to sell securities until you have received formal confirmation from the securities regulatory authority that your application for registration has been approved and registration granted. Objections may stem from unacceptable past employment history in the securities industry, or from a criminal record in which the crime involved integrity or conduct. Note: The MFDA also requires that you complete a training program within 90 days of your registration. This is concurrent with a six-month supervisory period. 72 © 2021 IFSE Institute Canadian Investment Funds Course Example Neil has been working with ABC Investments Inc. for the last 5 years in an unregistered position. He has recently passed the CIFC exam and his mutual fund dealer has submitted his application for registration for Ontario. Neil is very eager to call clients and start selling. However, he needs to wait until the provincial securities commission informs his mutual fund dealer, in writing, of the acceptance of his registration application. National Registration Database (NRD) The National Registration Database (NRD) is a web-based system containing registration information for mutual fund dealers, advisors, and individuals registered under securities legislation in the provinces and territories. NRD allows electronic filing of applications, notices, and other regulatory information. Use of NRD is mandatory for filings in all jurisdictions. Under the NRD only one application needs to be filed for registration in multiple jurisdictions. Through the NRD system, firms can review the application status of all of their employees online. Electronic filings of registration forms are made by an authorized firm representative (AFR), an individual authorized by your mutual fund dealer to submit information to NRD on behalf of the firm and its sponsored individuals. The AFR will review your application and file it on the NRD. The Passport System The Passport System is an initiative adopted by the securities commissions in all jurisdictions except Ontario to streamline the processes for making regulatory decisions. Under the Passport System, in most cases applications for registration in multiple jurisdictions need to be made with only one regulator, known as the principal regulator. In the case of a registration application for a Dealing Representative, the principal regulator is generally the regulator in the jurisdiction in which the individual has his or her working office. The working office is the office of the sponsoring firm where the individual does most of his or her business. In the case of the firm, it is generally the regulator in the jurisdiction where the firm has its head office. Example ABC Investments has its Head Office in Calgary, Alberta. Bill, a Dealing Representative with ABC, works in their Vancouver, British Columbia office. ABC wants to apply for registration for Bill in both British Columbia and Alberta. Under the Passport system, ABC will need to make an application to the British Columbia Securities Commission since Bill’s working office is in BC, even though the sponsoring company’s head office is in Alberta. © 2021 IFSE Institute 73 Unit 2: Registrant Responsibilities Renewal, Suspension, Re-activation No Renewal Requirement There is no registration renewal requirement for any province. Registration remains effective until it is suspended or terminated, although annual fees continue to be payable for your registration by your mutual fund dealer. Suspension of Registration If you cease to have a working relationship with a registered firm, your registration is suspended. Your mutual fund dealer must notify the appropriate securities commissions of the termination of the relationship. If your registration is suspended, you may no longer carry out the activity for which you were registered. However, you remain a registrant and continue to be subject to the jurisdiction of the securities regulators. Re-activation If you join another sponsoring firm more than 90 days after leaving your previous firm, automatic transfer will not apply. Instead, the new sponsoring firm will need to file an application for the reinstatement of your registration. This process is known as a reactivation and requires updating the individual information on the appropriate form. You are not allowed to conduct any activity requiring registration until your registration has been reinstated and you receive confirmation of this from the securities regulatory authority. Be sure to consult your firm's compliance officer when planning any changes of employment. Reporting Material Changes You must inform the securities regulatory authority of any material or significant change in your personal circumstances. The deadline depends on the type of information that has changed. These changes include: Name change resulting from a marriage or divorce Declaration of personal bankruptcy Change of address You should submit changes using NRD. Your compliance officer can provide you with more details. Client Mobility Exemption As a general rule, you and your mutual fund dealer must register in every jurisdiction where you and your mutual fund dealer want to operate. For instance, if you are an Ottawa-based Dealing Representative who has clients in Ottawa and Montreal, you need to be registered in both Ontario and Québec. 74 © 2021 IFSE Institute Canadian Investment Funds Course However, a provision exists for a limited exemption, called the client mobility exemption, which allows you to continue servicing an existing client who moves to a new jurisdiction, even if you are not registered there. The following conditions must be met in order for the client mobility exemption to apply: 1. Your mutual fund dealer is registered in the new jurisdiction, known as the local jurisdiction. 2. You have no more than five clients in the local jurisdiction. Before you act for a client in the local jurisdiction, you must disclose to your client that you are exempt from registration in the local jurisdiction and are not subject to requirements otherwise applicable under local securities legislation. Your dealer may also have client mobility policies and procedures that you will be expected to abide by. Where permitted by your dealer, you may deal with up to five eligible clients in each jurisdiction where you are not registered, after which registration in the jurisdiction is required. Registered firms are limited to a maximum of ten (10) eligible clients. Some registered firms, specifically those with large organizations, disallow the exemption altogether due to this limitation. It is important to note that the exemption is only available for your existing clients and not for acquiring new clients. Example Tony has been handling Erica’s portfolio for the last five years. Erica has been residing in Ontario during the period. After her recent marriage, she moved to New Brunswick. Erica wants Tony to continue handling her account, and wants Tony to handle her husband Robert’s portfolio as well. Tony can use the client mobility exemption and continue handling Erica’s portfolio, assuming he has not yet reached the maximum of five clients in that local jurisdiction, and his firm allows him to use the exemption. Tony cannot take over Robert’s portfolio as the Client Mobility Exemption is available only for existing clients and not for acquiring and handling new business. In order to take on Robert as a client, Tony must become registered in New Brunswick. Products You Can Sell Under securities legislation, every firm and individual must be registered if they are in the business of trading or advising in securities. Depending on the products that you intend to sell, registration in more than one category may be necessary. For example, a Dealing Representative who wants to sell mutual funds and limited partnerships will have to © 2021 IFSE Institute 75 Unit 2: Registrant Responsibilities register as a Dealing Representative in mutual funds and exempt markets. This is only possible if the dealer is registered as a mutual fund dealer and an exempt market dealer. It is important to confirm with your firm’s compliance, the list of products you can sell. Different mutual fund dealers may have different products that they permit their Dealing Representatives to sell. Registration Categories for Individuals Registrant Firm Dealing Representative Mutual Fund Dealer Permitted Products Investment funds including mutual funds Deposit products like GICs Principal protected notes (PPNs) Government of Canada, provincial and territorial government T-Bills, bonds and strip bonds Bankers’ acceptances Commercial paper *Dealing Representative Exempt Market Dealer Prospectus-exempt securities that the individual's sponsoring firm has approved and is permitted to trade *Registered Representative IIROC Trading and investment advising in securities such as: *Investment Representative IIROC Stocks Fixed income products Mutual funds Derivative products Trading in securities but does not provide investment advice for products such as: Stocks Fixed income products Mutual funds Derivative products *Additional proficiency and registration requirements apply. 76 © 2021 IFSE Institute Canadian Investment Funds Course Summary Congratulations, you have reached the end of Unit 2: Registrant Responsibilities. In this unit you covered: Lesson 1: Ethics Lesson 2: Compliance Lesson 3: Conflicts of Interest Lesson 4: Compliance Issues Lesson 5: Registration Requirements Now that you have completed these lessons, you are ready to assess your knowledge with a 10-question quiz. To start the quiz, return to the IFSE Landing Page and click on the Unit 2 Quiz button. © 2021 IFSE Institute 77