Mutual Fund Organization￼￼
As a mutual fund dealing representative, you are expected to know how mutual funds are structured. The mutual fund organization is the core of MFD.
The mutual fund is a separate entity from the company that manages the fund. Mutual funds may be structured either as a corporation or as a trust. Investors in a mutual fund corporation are referred to as shareholders. Investors in a mutual fund trust are referred to as unitholders. Currently, the majority of mutual funds are structured as trusts. As a result, the term unitholders will be used throughout this unit to refer to mutual fund investors. The table below summarizes the characteristics of each type of mutual fund organization.
Mutual Funds Complex
Behind every mutual fund is a series of organizations and individuals that are responsible for the day-to-day operations of the fund. Their duties range from investment strategy and selection, to the safekeeping of investor assets, to the sale and redemption of fund units.
This group of organizations and individuals is known as the mutual funds complex. The relationship between the mutual funds complex and the rest of the mutual fund organization is as follows:
Role of the Investment Fund Manager
Depending on how a fund is structured, either the board of directors (in a corporation) or the trustees (in a trust) are responsible for the management of the fund’s investments, as well as the day-to-day operations of the fund. Some funds hire a separate investment fund manager rather than hiring staff in-house. The investment fund manager may be a wholly-owned subsidiary of a parent corporation. Banks often do this.
Typically, the investment fund manager looks at the fund’s investment objectives and selects a portfolio manager with related experience. Some investment fund managers provide internal portfolio management based on similar criteria, while others use a combination of internal and external portfolio managers.
Investment fund managers are paid an annual management fee for their services. The name of the investment fund manager for a fund is disclosed in a document called the prospectus. The prospectus will be discussed in detail later in this unit.
The investment fund manager can also be referred to as the investment fund management company or mutual fund company.
Role of the Portfolio Manager
A portfolio manager is responsible for the investment decisions of a fund, including purchasing and selling securities and determining the mix of assets. In return, the portfolio manager receives management fees from the mutual fund that he or she oversees.
Portfolio managers are guided by the fund’s investment objectives as stated in the prospectus. Portfolio managers may use specialists to help them make investment decisions. The aim of all portfolio managers is to generate the best rate of return for the fund’s investors while operating within the fund’s investment objectives.
The name of the portfolio manager for a fund is disclosed in the prospectus.
Role of the Custodian
The custodian is responsible for safekeeping the cash and securities belonging to the fund. The custodian is also responsible for holding the income earned by the fund until it is reinvested or distributed to fund investors. The custodian makes payments and receives monies or securities as directed by the investment fund management company.
By law, to protect investors, custodial functions of a mutual fund must be kept separate from those of the investment fund management company. This way, the management company does not have access to the securities held by the mutual fund. They are not available for any purpose other than the investment objectives of the fund. The name of the custodian for a fund is disclosed in the prospectus.
Under National Instrument 81-102, a mutual fund custodian must be one of the following:
- a Canadian chartered bank
- a Canadian trust company with shareholder equity of not less than $10 million
- a Canadian chartered bank or Trust company affiliate with shareholder equity of not less than $10 million, and incorporated under Federal or Provincial law
A custodial agreement between the fund and the custodian outlines how the custodian holds the fund assets and how the two parties interact with each other.
Custodians can appoint a sub-custodian to hold assets of the fund. This is more common for funds that have assets in other countries.
Role of the Distributor
The distributor is the sales and marketing arm of the mutual fund company responsible for bringing assets to the fund through sales to investors. The distributor sells units to investors and transmits redemption requests to the investment fund management company.
As a dealing representative, you are part of the distribution network. The actual distribution can be structured in different ways:
- Proprietary, or in-house, organizations that sell only their own mutual funds. They may also offer complementary products, such as insurance and GICs.
- Dealing representatives associated with a mutual fund dealer that has distribution agreements in place with multiple mutual fund companies. The dealing representatives are either employees or agents of the mutual fund dealer.
- Stockbrokers employed by investment dealers.
- Employees of financial institutions such as banks, trust companies, credit unions, or caisses populaires. These people are licensed to sell mutual funds, but likely perform other duties associated with their institution.
- Employees of mutual fund companies that deal directly with the public.
Market Share of Mutual Fund Assets
|This graph illustrates the market share of mutual fund assets by distribution channel.|
Role of the Transfer Agent
|The role of the transfer agent is usually performed by a trust company. This can be the investment fund management company itself, or the custodian, or is sometimes a contracted third party. The name of the transfer agent for a fund is disclosed in the prospectus.|
|The transfer agent maintains the register of unitholders and records all transfers of ownership. This register changes daily as fund units are purchased and redeemed. The transfer agent may also offer a dividend distribution service.|
Role of the Independent Review Committee
The securities regulation National Instrument (NI) 81-107 Independent Review Committee for Investment Funds is the harmonized regulation made by the Securities Regulators through the Canadian Securities Administrators. NI 81-107 requires all publicly offered mutual funds and investment funds to have an Independent Review Committee. The role of the Independent Review Committee is to oversee potential conflict of interest decisions involving the manager of an investment fund. NI 81-107 enhances investor protection by ensuring that an independent body focuses on the interests of the investment fund in situations where a manager of an investment fund is faced with a conflict of interest. In NI 81-107, a “manager” means a person or company that directs the business, operations and affairs of an investment fund.
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