The Investment Dealers Association of Canada is reminding its members that they can’t unilaterally substitute one flavour of a mutual fund with a different flavour of the same fund.

In a notice to its members, the IDA notes that many mutual funds are in all most respects identical, save for such differences as their respective commission loads (e.g., deferred loads, front-end loads, low-loads, no-loads, etc.) and their trailer fee payouts. However, it reminds brokers that “for all their other similarities each fund type remains a separate and distinct security”.

And, it adds, “one may neither replace nor be substituted for the other except at an accountholder’s express direction and not without triggering all the recordkeeping and client notification requirements that accompany any other normal course, non-automatic mutual fund transaction.”

It also warns firms to look out for signs of churning of near-identical funds, noting, “given that such funds are virtually identical in all other respects, there would be little justification for recommending or soliciting switches from one type to another.” It therefore reminds dealers to ensure their policies and procedures include the “means necessary to guard effectively against such practices.”

The IDA adds that this notice is not directed at automatic conversion programs where a mutual fund has made full disclosure of and provision for the requisite information in the fund prospectus. It is also not directed at re-org type situations, such as where one class of a particular fund is being entirely superseded by another.