The Mutual Fund Dealers Association of Canada has issued a notice warning firms about “stealth advising”, after finding instances of unregistered individuals servicing clients.

The notice reports that MFDA staff has become aware of situations where non-registered individuals have engaged in securities related business through various arrangements with reps of MFDA member firms.

Under these sorts of arrangements, client accounts are set up at the firm with a registered rep as the rep of record, and trading activity is processed using their rep code. However, a non-registered individual services the account and this individual provides advice and makes recommendations to clients with respect to securities in the account, directing the registered rep to place trades.

The arrangements are structured so that the non-registered individual receives compensation, often a portion of the commissions paid to the rep by the firm. The compensation may be paid directly or through the division of revenue to the branch operating company, or through inflated rent or management fees. “Essentially, the non-registered individual maintains a book of business without registration, by executing trades through a registrant,” the MFDA says in the notice, adding, “This is done without notice to, or approval of the firm.”

The non-registered individual involved in the arrangements may have been terminated by or resigned from an MFDA member or may never have been registered, it says. The individual may also conduct other business with the clients, such as insurance, at offices that are shared with reps. “This may add to client confusion with respect to the registration status of the non-registered individual,” it says.

The MFDA says that these situations raise several significant regulatory concerns. Individuals are providing advice without registration; firms are constrained in their ability to properly supervise the trading activities taking place under such arrangements; there is a danger that individuals may use these types of sales arrangements to make recommendations to divert client money to unregulated investment schemes or other purposes; conflicts of interest may lead to situations where clients are exposed to significant potential harm; and, dealers may also be exposed to significant liability.

Individuals engaging in registerable activities without proper registration may be subject to sanctions by provincial securities authorities. And, reps that are involved in such arrangements may be subject to discipline under MFDA rules.

The notice points out that branch managers are in a much better position to detect unlicensed activity, so it is imperative that branch supervisory staff are properly trained on their responsibilities regarding branch oversight. The MFDA also cautions it members to be aware of referral arrangements which have been set up to, in effect, channel sales of exempt products outside of the firm.