Maintaining Evidence of Relationship Disclosure
Mutual Fund dealers must maintain evidence that the required relationship disclosure has been provided to clients.
If the relationship disclosure is incorporated into the New Account Application Form (NAAF) 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 be provided by signed client acknowledgments, or copies of disclosure documents in client files, along with detailed notes of client meetings and discussions that prove that the disclosure has been provided.
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 the 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.
MFDA rules dealing with client reporting require that account statements are to be sent to each client at least once every 3 months.
The content of the account statement is also detailed in the rule. Account statements should only contain transactions executed by your mutual fund dealer.
Rules of Conduct
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:
- Use of pre-signed forms
- Excessive Trading
- Questionable Transactions
Rules of Conduct: Pre-signed Forms
Use of pre-signed forms is prohibited: MFDA rules prohibit dealing representatives and their mutual fund dealing firms 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 result in the deficiency being reported to the MFDA Enforcement Department.
Rules of Conduct: 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.
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 the additional commission. If the Compliance Department determines that the transactions are unsuitable for the client, the department will unwind them and Hari will be required to pay for any associated costs and losses. If the Compliance Department determines that the transactions are suitable, the department will require Hari to reimburse the client for the cost of the DSC redemption fee.
Time To Test Your Knowledge
- Which one of the following statements about the use of forms pre-signed by your clients is TRUE?
Answer: They could be interpreted as engaging in discretionary trading.
2. John, a dealing representative, wants to trade foreign currencies on behalf of clients as an after-office part-time activity. The Policy and Procedures Manual does not have any reference to the activity.
What should John do?
Answer: John should get the activity cleared with his Compliance Department
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