All mutual fund dealers are required to establish compliance practices that adhere to securities legislation.
The Compliance System
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.
How does the Compliance Department Support Dealing Representatives?
- Overseeing and supervising all registerable activities of dealing representatives to ensure that they meet regulatory requirements, and internal policies and procedures.
- Monitoring activities of dealing representatives outside of their registration, to ensure that conflicts of interest that may arise with their registerable activities are either avoided or resolved.
- 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.
- Reviewing trades and business practices periodically.
Client Relationship Model
The Client Relationship Model (CRM) establishes the relationship and communications between the dealing representative and the client.
The Client Relationship Model deals with:
- Relationship Disclosure
- Client Communications
- Client Reporting
What are the objectives of Relationship Disclosure?
- understand their obligations and those of the mutual fund dealer
- know what to expect with respect to service levels and costs
The MFDA has formulated rules pertaining to relationship disclosure, to incorporate the disclosure requirements contained in National Instrument NI 31-103.
MFDA rules dealing with relationship disclosure require mutual fund dealers to provide written disclosures to the client, either on the account opening form or on a separate form or forms.
What are the responsibilities of DR?
As a dealing representative, you are required to provide the following information:
- The nature of the advisory relationship.
- The products and services that the mutual fund dealer offers.
- The procedure for cash and cheque handling.
- The mutual fund dealer’s obligation is to ensure that each order accepted is suitable for the client based on the Know Your Client information.
- The nature of any referral compensation that may be paid to or by the mutual fund dealer.
- The content and frequency of account statements.
The format of the relationship disclosure is not prescribed, but it must be provided to the client in writing and in plain language.
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