Posted by Anjali Kaur on Jun 14, 2022

Mutual Fund Legislation

Mutual Fund legislation remains in order through 3 pillars. Let’s learn more about it:

How are mutual fund dealers regulated?

The mutual fund dealers industry is mainly regulated through the following:

  1. The Securities Acts – Securities Acts, are extensive pieces of legislation that cover the entire field of securities. The Securities Acts contain important provisions regarding mutual funds.
  2. National Instruments developed through the CSA

National instruments are harmonized regulations made by the Securities Regulators through the CSA. The main instruments affecting mutual funds are:

  1. NI 31-103 – Registration Requirements and Exemptions; provides the harmonized registration rules for the registration of firms and individuals with the provincial or territorial securities commissions.
  2. NI 81-101 – Mutual Fund Prospectus Disclosure; ensures that mutual funds disclose the information that investors should consider when deciding whether to invest or remain invested, in a fund. It prescribes the content of key disclosure documents including the simplified prospectus, the fund facts document, and the annual information form.
  3. NI 81-102 – Mutual Funds; is the main instrument regulating mutual funds. It regulates how mutual funds are managed, bought, and sold.
  4. NI 81-105 – Mutual Fund Sales Practices; ensures that mutual funds are sold on the basis of what is suitable for, and in the best interests of, investors. It sets minimum standards of conduct to be followed by managers, principal distributors, registered dealers, and dealing representatives when distributing mutual funds.

3. MFDA Rules – The MFDA regulates the operations, standards of practice, and business conduct of its members in order to protect investors.

MFDA Rules set out detailed requirements for members, including particulars regarding:

  1. business structures
  2. capital requirements
  3. insurance
  4. books and records
  5. client reporting
  6. business conduct
  7. supervision
  8. suitability and trade review

The MFDA also regulates dealing representatives by virtue of their relationship with their sponsoring mutual fund dealer.

Restrictions on MF Dealers

As a dealing representative, you need to be aware of other important regulations that affect you. These include Anti Money Laundering (AML), Privacy (PIPEDA), and the Do Not Call List (DNCL). These regulations affect how you interact with your customers, the type of information you collect, and certain reporting responsibilities.

Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is an Act to combat the laundering of proceeds of crime and the financing of terrorist activities. This legislation was introduced to:

  1. help detect and deter money laundering and terrorist financing activities
  2. provide law enforcement officials with tools to investigate and prosecute money laundering or terrorist financing offenses
  3. and respond to Canada’s international commitments to participate in the fight against multinational crime

The Act implements reporting and other requirements for entities susceptible to being used for money laundering or terrorist financing. This includes financial entities, life insurers, money service businesses, those involved in real estate, securities dealers, dealers in precious metals and stones, and casinos.

Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)

Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. It collects, analyzes, and discloses information to help detect and prevent money laundering and the financing of terrorist activities in Canada and abroad. FINTRAC’s mission is to contribute to public safety and help protect the integrity of Canada’s financial system by detecting and deterring money laundering and terrorist financing.

Under Canadian law, money laundering is any act intended to disguise the source of money or assets derived from criminal activity inside or outside Canada. The dirty money produced through criminal activity is transformed into clean money by making its criminal origin difficult to trace and integrating it into the legitimate economy.

Once illegal money has entered the financial system and is held in cash accounts with financial institutions, a common money laundering method is to use it to purchase securities.

Terrorist financing provides funds for terrorist activity. Terrorist groups must develop sources of funding and ways to obscure the links between those sources and the activities the fund support. There are two primary sources of financing for terrorist activities:

  1. countries, organizations, or individuals
  2. revenue-generating activities

The methods terrorist groups use to generate funds from illegal sources often resemble those used by traditional criminal organizations. Like criminal organizations, terrorist groups have to find ways to launder these illicit funds to be able to use them without attracting the attention of the authorities.

Role of MF Dealers

As a dealing representative, you have four key areas of responsibility under the PCMLTFA. These areas are:

  1. reporting to FINTRAC
  2. record-keeping
  3. confirming your client’s identity
  4. identifying politically exposed foreign persons

How to report to FINTRAC?

As a dealing representative, you must advise your dealer of completed and attempted suspicious transactions and certain other financial transactions. Your dealer must report these suspicious transactions to FINTRAC. FINTRAC publishes guidelines for when to file reports and offers instructions on how to file them.

How to keep a record?

Securities dealers, portfolio managers, and investment counselors must keep the following records:

  1. Large cash transaction records – cash transactions of $10,000 or more
  2. Account-related records – account opening records and client statements
  3. Other records – other records designated by your compliance department such as records of suspicious transaction reports

Records must be kept in such a way that they can be provided to FINTRAC within 30 days of a request to examine them.

How to confirm the client’s identity?

ou and your employer have to confirm your client’s identity in the following circumstances:

  1. when opening a non-registered account
  2. when a client conducts a large cash transaction if you do not recognize the client
  3. when a client conducts or attempts to conduct a suspicious transaction
  4. when an individual is authorized to give instructions for an account about which you have to keep a record

An individual may be identified by means of his or her birth certificate, driver’s license, passport, record of landing, permanent resident card, social insurance number, old age security card, certificate of Indian status provincial identification card, or similar document. The documents may be Canadian or foreign equivalents.

Note: Health Cards from Ontario, Manitoba, and PEI is not allowed to be used for identification purposes. In Québec, you are not allowed to ask to see a client’s health care, but you may accept it if the client volunteers to use it for identification purposes.

If you are unable to identify an individual at the time of opening an account you may accept an initial deposit, but may not carry out any further transactions until the client has been properly identified. If a client is evasive or unwilling to provide sufficient information for adequate identification, you must inform your compliance department.

How to identify a Politically Exposed Foreign Person?

Individuals are considered politically exposed foreign persons if they or any of their immediate family hold or held any of these positions in a foreign country:

  1. head of state or government
  2. member of the executive council of government or legislature
  3. deputy minister (or equivalent)
  4. ambassador or ambassador’s attaché or counselor
  5. military general (or higher rank)
  6. president of a state-owned company or bank
  7. head of a government agency
  8. judge
  9. leader or president of a political party in a legislature

Test Your Knowledge

2. Your Work colleague Jose approaches you for advice on how to handle a situation with a prospective client named Bob Jones. Jose knows Bob informally through his local gym. At the gym, Jose has talked to Bob about investments, and now Bob is here to open an account but only has his gym membership card to offer Jose as identification. When asked if he has a driver’s license, Bob reveals that he no longer has one.

What would you advise Jose to do in this situation?

Solution:

3. A client has arrived in your branch to open an account. You learn that she is a recent arrival to Canada from Switzerland and that her mother was a judge before retiring last year.

Should you identify this client as a politically exposed foreign person?

Solution: True

Useful Links

Provincial
Alberta Securities Commissionalbertasecurities.com
British Columbia Securities Commissionbcsc.bc.ca
Manitoba Securities Commissionmsc.gov.mb.ca
New Brunswick Securities Commissionnbsc-cvmnb.ca
Newfoundland and Labrador – Office of the Superintendent of Securitiesservicenl.gov.nl.ca/securities/index.html
Northwest Territories – Office of the Superintendent of Securitiesjustice.gov.nt.ca/
Nova Scotia Securities Commissionnssc.gov.ns.ca/
Nunavut – Office of the Superintendent of Securitiesnunavutlegalregistries.ca/sr_index_en.shtml
Ontario Securities Commissionosc.gov.on.ca
Prince Edward Island – Securities Officegov.pe.ca/securities
Québec – Autorité des marchés financierslautorite.qc.ca
Saskatchewan – Financial and Consumer Affairs Authorityfcaa.gov.sk.ca
Yukon – Office of the Superintendent of Securitiescommunity.gov.yk.ca/corp/securities_about.html
National
CSAsecurities-administrators.ca
MFDAmfda.ca

Thank You!

You can read more posts related to IFIC Exams:

  1. https://learnwithanjali.com/ific-exam/regulatory-environment/
  2. https://learnwithanjali.com/ific-exam/canadian-securities-administrators-csa/
  3. https://learnwithanjali.com/ific-exam/securities-regulatory-bodies-in-quebec/

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