The Mutual Fund Dealers Association of Canada is proposing to require that clients be told of sales charges upfront.
The MFDA is proposing a rule change that would require dealers to inform clients of the fees associated with a proposed trade before accepting the client’s order.
Currently, MFDA rules require that information about commissions, sales charges and other fees be reported on trade confirmations. There is no requirement to disclose these charges before the trade takes place.
The regulator reports that it has received “a significant number” of complaints where clients claim that they were not informed of the fees and charges when they decided to trade, and only learned of them when they received their trade confirmation or account statement.
“To make informed decisions, clients require information in respect of transaction fees and charges prior to the acceptance of their order,” the MFDA says in a notice seeking comment on the proposed rule change.
The MFDA is proposing a new rule that would require dealers to advise clients of direct transaction fees and charges upfront (including redemption, switch and transfer fees), but the rule is not intended to capture indirect fees or charges, such as trailer commissions or funds’ management expense ratios. It says these sorts of embedded fees and charges are being considered by the Canadian Securities Administrators as part of its proposed point-of-sale initiative.
Earlier this month, the CSA said that it will be implementing that initiative in stages, although it has not set a deadline for when it will begin requiring delivery of new point-of-sale disclosure documents.
Also, the MFDA says that one of the main reasons for the proposed new rule “is to ensure that redemption fees and charges are properly disclosed to clients prior to the acceptance of their redemption order”; whereas the CSA initiative, if adopted, will only require disclosure at point-of-sale.
The MFDA board approved the proposed amendments on June 3, and they are out for comment until September 23.
Proposed change to cash co-mingling rule
The MFDA is also proposing a change to one of its rules regarding co-mingling of client money for mutual funds and other products. Currently, MFDA members are required to hold client cash in trust and segregate client cash for the investment in mutual funds separately from client cash for other investments. Additionally, MFDA members are prohibited from earning interest on client funds held in trust. Whereas, firms that belong to the Investment Industry Regulatory Organization of Canada are not required to maintain a trust account and are able to earn interest on client cash.
The MFDA is proposing to follow the IIROC in this area. “With the establishment of the MFDA and MFDA IPC, there no longer appears to be a regulatory policy rationale for treating MFDA members differently than members of IIROC,” it says.
The amendments, as proposed, would remove the existing restrictions to hold client cash for investment in mutual funds separately from client cash for other investments. “The protection of client assets would not be impacted as existing requirements to segregate client cash held in trust from member property would be maintained,” it says.
Also, the existing requirements regarding the distribution of interest on client cash held in trust would be replaced with a requirement that MFDA members disclose whether interest will be paid and, if so, at what rate. “From a regulatory perspective, these proposed amendments would not detract from investor protection and would introduce clarity and transparency that would benefit clients by requiring members to provide interest rate disclosure to clients at account opening,” it says.
The MFDA notes that the proposed rule amendments cannot be in effect until similar changes are made to the corresponding provisions of the national mutual fund rules; changes which were proposed today by the CSA. The changes were approved by the MFDA board on June 4, and are out for comment until September 24.
IE
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