The Mutual Fund Dealers Association of Canada has issued guidance to fund dealers and their reps about proper compliance with the rules regarding referral arrangements, after compliance exams revealed some concerns with the practice.

In a notice published Wednesday, the MDFA said that during compliance examinations it found that many fund dealers have referral arrangements with investment dealers and investment counsel/portfolio management firms. And, it reports that MFDA staff have identified situations where reps are acting as “relationship managers” on behalf of the other registrant.

“In some cases, the other registrant may not meet the client or have little, if any, direct involvement with the client referred,” it says.

The MFDA says it has seen cases where fund dealer reps are completing account opening documents, including obtaining Know-Your-Client information, for the other registrant; receiving or accessing account information from the other registrant detailing the trading activities conducted outside the fund dealer; and, participating in meetings where clients are given investment advice on accounts at the other registrant.

It warns that these sorts of things may be contrary to MFDA rules requiring reps to conduct all securities related activities on behalf of their dealer and through the facilities of the dealer. Reps that obtain KYC information to open an account at another registrant or advises in securities on behalf of another registrant, are “acting contrary” to MFDA rules and securities licensing requirements “regardless of whether such arrangements are with affiliates of the [MFDA member],” it says.

Reps are allowed to provide biographical information (for example, name, address, age, net income and net worth) at the request of the client to other parties. Clients may also give permission for reps to obtain copies of account statements held outside their dealer and allow reps to participate in meetings or conversations with other registrants. “However, such activity increases the risk that [reps] will act beyond the limits of their license,” it says, adding that dealers should have policies and procedures to prevent and detect non-compliant activity.

It says that firms should have policies and procedures for reps outlining activities that are not acceptable to engage in when referring a client to another registrant. Additionally, if they receive a complaint with respect to activity of a rep in an account outside the firm, the firm is expected to investigate to determine if the rep has acted within the scope of their license. It also reminds firms that all referrals for securities related activities must comply with the MFDA rule that requires an agreement be in place with the MFDA member, disclosure must be provided to the client, and fees recorded on the books and records of the MFDA dealer.

IE