The Mutual Fund Dealers Association has clarified the obligations of fund dealers and their reps regarding personal financial dealings with clients.

In a member regulation notice issued today, the MFDA reports that its staff have become aware of situations where reps have become involved with clients in “various private investment schemes that raise significant and direct conflicts of interest where the exercise of responsible business judgment would require prohibition of the arrangements.”

These include: investment clubs, where the rep and clients invest together, with the rep making decisions on behalf of the club; arrangements where client funds are put into investments that are to be directly or indirectly managed by the rep; co-investment in pyramid-like schemes; or other questionable investments.

The notice also suggests that borrowing from a client by either the firm or a rep raises a significant and direct conflict that in almost all cases will be impossible to resolve in favour of the client. It says that while it is not explicitly prohibited under MFDA rules, its staff are “unaware of any circumstances” where such a conflict could be properly dealt with.

Similarly, it says that lending or extending credit to clients or permitting the purchase of securities by clients on margin is generally prohibited, and reps are prohibited from directly or indirectly entering into arrangements that involve lending to clients.

The notice adds that non-monetary benefits such as gifts or charitable donations can be used to circumvent its guidelines and rules. “For example, they can be used as a way of negotiating private settlements aimed at concealing a breach of MFDA requirements on the part of the [rep]. They may also be used as off book compensation for activities being carried on in an inappropriate way. Substantial gifts to clients in exchange for referrals may be used to employ clients to engage in registerable activity.”

As such, it says that all monetary and non-monetary benefits provided directly or indirectly to or from clients must flow through the dealer. This is so the dealer is in a position to determine the significance of the benefit and to monitor the activity.

Finally, a rep may, under certain circumstances, properly be involved in a business arrangement as a partner, shareholder, director or officer of a business owned, co-owned or controlled by the client.

The notice adds that fund dealers must develop policies and procedures to ensure that it is aware in advance of any personal financial or business dealings between reps and clients. “Members must, if they have not done so to date, make reasonable inquiry to identify any situations that could be in contravention of the above requirements, and deal with those situations appropriately,” it says.