The Mutual Fund Dealers Association has published a couple of regulatory notices, dealing with suitability for unsolicited orders and portfolio summaries.

In Member Regulation Notice MR-0025 – Suitability Obligations for Unsolicited Orders, the MFDA says that the suitability notice intends to clarify dealer and rep obligations in the event that they receive an unsolicited order that they determine is unsuitable for the client. It says that firms and reps are required to make clients aware that the proposed transaction is not suitable based on the information provided on the New Account Application Form or “Know-Your-Client” form and provide appropriate cautionary advice. And, it advises dealers to adopt “appropriate safeguarding procedures” where the client insists on proceeding with the trade.

Where an unsolicited order is determined to be unsuitable for the client, the record of the order must include, at a minimum, evidence that: the transaction was unsolicited; a suitability review was performed; and the client was advised that the proposed transaction was unsuitable.

Reps must clear unsuitable, unsolicited orders with their branch managers or compliance officer before proceeding with the trade. As well, dealers must set out procedures for dealing with unsuitable, unsolicited orders in their Policy and Procedures Manual. It notes that firms are not obligated to accept a purchase order from a client that is determined to be unsuitable.

A second notice aims to clarify the requirements for firms and reps that wish to issue consolidated information to clients. Current rules require firms to send account statements to clients that reflect only those transactions executed by the dealer. The rules don’t allow transactions that are not executed by the dealer to appear on an account statement.

Member Regulation Notice MR-0024 – Portfolio Summaries states that firms and reps may provide consolidated information or portfolio summaries to clients in addition to, but not in place of, the account statements required by MFDA rules.

Consolidated information must:

  • include a prominently displayed disclaimer that they are not official account statements;
  • clearly identify the legal entity at which each transaction occurred;
  • include a statement explaining that the MFDA’s Investor Protection Corp. (once it is operational) does not necessarily apply to all of the positions disclosed; and
  • include a statement to the effect that the firm cannot verify that the information relating to other financial service products is accurate.

    Members must have policies and procedures in place for the review of all client communications, including portfolio summaries, to ensure that they are not misleading and otherwise in compliance with MFDA rules.

    The MFDA says that it will permit members with related financial service firms to provide clients with a single document provided certain conditions are met, such as clear segmentation of the dealer transactions, among other things.