The Mutual Fund Dealers Association of Canada (MFDA) says that its reviews of firms’ upfront disclosure have turned up weaknesses in firms’ disclosure about proprietary products, suitability, and compensation.
The MFDA issued a bulletin Wednesday summarizing the results of its compliance sweep to review client disclosure. It notes that “generally” the disclosure provided by dealers was adequate to meet the MFDA’s requirements, but it also notes certain areas where it found deficiencies.
For example, it reports that, “in a few cases”, MFDA staff found disclosure that was not clear enough in informing clients that: only proprietary products are sold; or, in identifying specific proprietary products in the case of dealers that also sell third party products.
As for the requirement to disclose the suitability obligation to clients, the MFDA found, in certain cases, that elements of suitability disclosure are missing. It stresses that there are basic elements of suitability that should be included in this disclosure.
And, in terms of compensation disclosure, it found that in a few cases, firms’ disclosures just generally state that there are costs associated with investing in mutual funds, and explains basic compensation terms. This disclosure needs to go further, it notes.
“Instead of generally noting that there are costs associated with mutual fund investing and providing a general explanation of terms, disclosure should identify the general types of compensation that the [dealer] does or may receive,” it says. And, it notes there should also be some disclosure of any compensation that could be received from referral fees, and from selling specific products (such as placement fees or a percentage of performance fees in addition to sales charges or trailing commissions).