You may think that your clients’ mutual fund investments are safe in the event your fund dealer becomes insolvent. After all, the Investors Protection Corp., established by the Mutual Fund Dealers Association of Canada, covers client losses resulting from such insolvencies, right?

Well, maybe not. The availability of IPC coverage — up to $1 million for each of a client’s aggregated general and separate accounts — depends on the form in which the securities are held.

IPC coverage provides protection only to assets held in nominee or dealer name rather than client name. And as roughly 80% of client mutual funds assets at most fund dealers are held in client name, they are not protected.

“When the IPC first came out, I don’t think anyone asked questions about whether they were covered because no one knew otherwise,” says Mark Kent, president and CEO of Calgary-based Portfolio Strategies Corp. “I only recently found out from one of my branch managers, who had discovered that client-name accounts weren’t covered. When I mentioned it to other members, they had no idea; they were just as shocked as I was.”

The terms “held at the dealer,” “dealer name” and “nominee name” refer to investments held in the name of the dealer. In these cases, the mutual fund company records the dealer’s name — not the client’s — on its books. In the event of a dealer’s insolvency, the account would be protected by the IPC.

On the other hand, “client name” and “held at the mutual fund” refer to investments that are held in the name of the client. The fund company records the client’s name — not the dealer’s — in its books, and the investments will not be covered in the event of a dealer’s insolvency.

In both cases, the dealer records the quantity and description of securities purchased, sold or transferred and the dates of each transaction.

Kent notes that most purchases of mutual funds through a dealer are held in client name. The client is more than likely unaware how his or her investments are held and thus does not understand that IPC protection may not be available. The client has no control over how the account is set up. Most paperwork for client-name accounts is handled by the mutual fund company. Client-name accounts require a statement to be mailed out once a month, vs nominee-name account statements that are mailed out quarterly and sometimes monthly.

The potential lack of protection coverage is a concern for dealers for another reason. Dealers pay assessments — based on their assets under administration — to support the IPC. Firms contribute approximately $5 million a year and will continue to do so until the $30-million target is reached. Kent says there is concern about paying for protection that may not exist.

Portfolio Strategies has only 5% of total AUA in nominee-name accounts. With 95% of AUA held in client-name accounts, Kent says, there is no reason that his firm should have to pay into the fund based on 100% of its AUA.

“If you have a lot of dealers paying into this fund and many of them are client-name dealers only, then that is a problem,” Kent says. “If client-name accounts aren’t covered, then we should have less costs as a firm. It should be up to the dealers to decide if they want to pay those costs and go into nominee accounts. It is a reverse Robin Hood — they are stealing from the poor and giving it to the rich.”

Kent says MFDA members expressed their concern about this issue at the group’s annual meeting on Nov. 30, but were unable to get any clear answers as to under what circumstances, if any, the IPC would cover a client-name account.

The circumstance of funds being in transit between two mutual fund companies was brought up but not clearly defined, says Kent: “I asked the MFDA to tell us if there is any coverage and in what circumstance that would be. If they could tell us that, then there would be no issue.”

The IPC, established by the MFDA in November 2002, was approved by regulators in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia. Coverage of client accounts began on July 1, 2005. The current IPC coverage was designed to cover any product clients could buy through their mutual fund dealer, including mutual funds, segregated funds, bonds or other property — as long as they are held in nominee name.

@page_break@IPC president Joni Alexander says the IPC does not have a lot of history to draw upon, but adds it is possible that the fund might respond in certain circumstances that might include client-name situations.

“It is less likely that the fund would have to respond in that type of case,” she says, “because, normally, the asset would be in the possession of the issuer of the mutual fund itself and it would be separate and apart from the dealer.” IE