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Chapter 17 Mutual funds: structure and regualtion - Coggle Diagram

- - - - make investment decisions based on their outlook for the markets and securities in which they invest, which should be clearly identified in the fund’s investment mandate
      - “active fund managers intend to outperform the return on a specific benchmark index.”
    - - “do not make security selections; they assume only the systematic risk associated with investing in a particular asset class”
      - “most common type of passively managed fund is one that attempts to replicate the returns of a market index.”
  - - - Professional management
      - Economies of scale
        
        “The asset size of the pooled investment funds allows for negotiation of lower fees and transaction costs.”
      - Low cost diversification
        
        “Investors with relatively small sums to invest have access to diversification, which they could not otherwise achieve.”
      - Liquidity and flexibility
        
        “Some managed products, such as mutual funds, can be bought and sold at their net asset value at any time.”
      - Tax benefits
        
        “Products such as LSVCCs can provide tax benefits, including provincial and federal tax credits.”
      - Low cost investment options
        
        “Products such as exchange-traded funds have some of the lowest management costs in the fund universe”
    - - Lack of transparency
        
        “Because of the largely unregulated and competitive nature of their business, products such as hedge funds rarely disclose their portfolio holdings on a timely basis.”
      - Liquidity contraints
        
        “Some managed products prevent investors from accessing their funds until a specified time, or only when certain conditions are met.”
      - High fees
        
        “Active fixed-income and foreign equity mutual funds can charge 2% to 5% in management fees. Some private equity funds and hedge funds typically charge a 20% performance fee.”
      - Volatility of returns
        
        “Some mutual funds and hedge funds can be subject to market instability, as well as volatility associated with their underlying securities.”
- - - - “continually managed by a fund manager who is an investment specialist”
        
        “analyze the financial markets and select securities that best match a particular fund’s investment objectives”
        
        “continuously monitoring fund performance and fine-tuning a fund’s asset mix as market conditions change.”
      - “an advantage for both small and wealthy investors who do not have the time, willingness, or expertise to monitor a portfolio of securities”
    - - “provides an inexpensive way for small investors to acquire a diversified portfolio.”
      - “A typical large fund might have a portfolio consisting of 60 to 100 or more different securities in 15 to 20 industries. ”
      - “fund investors have access to a wider range of securities that can trade “more economically than they would as individual investors.”
    - - “The many types of mutual funds, ranging from fixed-income funds through to aggressive equity funds, enables investors to meet a wide range of objectives. ”
      - “permit investors to transfer between two or more different funds managed by the same sponsor, usually at little or no added fee”
      - “ Transfers are also usually permitted between different purchase plans under the same fund.”
    - - “Investors can make a one-time, lump-sum investment in a mutual fund”
      - “they can make regular purchases in small amounts under a pre-authorized contribution plan”
        
        e.g. “an investor can open an account through a pre-authorized contribution plan with as little as $100 and then continue to contribute the same amount monthly.”
      - “At redemption, similarly flexible options are available.”
    - - “Mutual fund shareholders have a continuing right to redeem shares or units for cash at NAVPS.”
      - “Payments must be made within two business days, in keeping with the securities industry settlement requirements.”
    - - “Shares or units in a deceased person’s mutual fund continue to be professionally managed during the probate period until estate assets are distributed. In contrast, other types of securities may not be readily traded during the probate period, even when market conditions are changing drastically.
        
        “estate refers to all the assets owned by a person at the time of his or her death. Estate planning is the process of arranging ahead of time for the administration and disposal of such property when the time comes”
        
        “Probate is the process of validating the person’s will after death before distributing the estate assets.”
    - - “Fund shares or units are usually accepted as security for a bank loan. They are also acceptable for margin purposes, thus giving aggressive fund buyers the benefit of leverage in their financial planning. Note that the use of fund assets for this purpose also poses risk.”
    - - Reinvestment and contributions
        
        “Most mutual funds offer the opportunity to compound an investment through the reinvestment of dividends. Other mutual funds allow investors to make monthly contributions in amounts as low as $50 per month.”
      - Regulatory filing
        
        “Sponsors of mutual funds file a variety of reports annually to meet their regulatory disclosure requirements.”
        
        “These reports include the annual information form (AIF), audited annual and interim financial statements, and an annual report, among others.”
        
        “Reports must be provided to unitholders (or any person) on request. They are easily retrieved through the System for Electronic Document Analysis and Retrieval (SEDAR) website”
        
        “these reports contain useful educational features such as manager commentaries.”
      - Record keeping
        
        “assist with income tax reporting and other accounting requirements.”
  - - - initial sales charge or front-end load
        
        a sales charge applied to the purchase price of a mutual fund when the fund is originally purchased
        
        along with a management fee that was typically higher than the cost to purchase individual securities from a broker
      - “ If you pay this sales commission when you sell the fund it’s called a deferred sales charge or back-end load”
        
        a sales charge applied on the redemption of a mutual fund
      - “no-load funds have become commonplace as competition from lower cost index mutual funds and exchange-traded funds has intensified.”
        
        a fund that does not charge a fee to purchase or redeem units
      - “Competition in the market has subsequently reduced both front-end loads and management fees.”
    - - “sales charges are often deducted from a planholder’s contributions, purchasing funds on a short-term basis is generally not advised.”
      - “Mutual fund companies charge an early redemption fee to discourage short-term trading.
      - “The cost could range as high as 2% of the purchase cost of the securities redeemed.”
      - “However, these disadvantages typically do not apply to money market funds, which are designed with liquidity in mind given that these funds mainly invest in short-term fixed-income securities.”
    - - “Volatility in the market is extremely difficult to predict, and is thus not controllable by the fund manager.”
    - - “Unless the investor’s holdings are in a registered account, purchases and sales made by the fund manager creates a series of taxable events that may not suit that unitholder’s time horizon.
  - - - “It also establishes who the fund’s manager, distributor, and custodian will be.”
    - - “These issues include such matters as a change in the fund’s fundamental investment objectives, a change in auditor or fund manager, or a decrease in the frequency of calculating NAVPS.”
  - - - “The corporation’s holdings must consist mainly of a diversified portfolio of securities.
      - • The income it earns must be derived primarily from the interest and dividends paid out by these securities and any capital gains realized from the sale of these securities for a profit.”
  - - - “The directors of a mutual fund corporation, or the trustees of a mutual fund trust, hold the ultimate responsibility for ensuring that investments in the fund are consistent with the fund’s investment objectives.”
      - “To assist in this task, they may contract out the business of running the fund to an independent fund manager, a distributor, and a custodial organization.”
    - - “provides day-to-day supervision of the fund’s investment portfolio.”
      - “trading the fund’s securities, the manager must observe the guidelines specified in the fund’s own charter and prospectus, as well as constraints imposed by provincial securities commissions.”
        .
      - “The manager must also maintain a portion of fund assets in cash and short-term highly liquid investments.”
        thus able to redeem fund shares on demand , pay dividends and make new portfolio purchases
      - following responsibilities
        
        “Calculate the fund’s NAVPS
        
        • Prepare the fund’s Fund Facts documents, simplified prospectus, and reports
        
        • Supervise shareholder or unitholder record-keeping
        
        • Provide the custodian with documentation for the release of cash or securities.”
      - “The fund manager receives a management fee for these services, which accrues daily and is paid monthly”
        calculated as a percentage of the net asset value of the fund being managed
    - - “Mutual funds are sold by the following distributors”
        
        “Investment advisors employed by securities firms
        
        • A sales force employed by some organizations that control both management and distribution groups
        
        • Independent direct sales organizations”
        
        “In-house distributors, including employees of trust companies, banks, or credit unions who have duties other than selling”
      - “explain the objectives and terms of various funds ”
        mail out confirmations of sales ; handle client inquiries; accept and transmit orders for fund share redemptions
      - “they offer clients financial planning assistance that involves “know your client” and suitability standards”
      - “As compensation for these services, the distributor usually receives a sales fee.”
    - - “When a mutual fund is organized, an independent financial organization, usually a trust company, is appointed as the fund’s custodian”
      - “The custodian collects money received from the fund’s buyers and from portfolio income, and arranges for cash distributions through dividend payments, portfolio purchases, and share redemptions.”
      - “Sometimes the custodian also serves as the fund’s registrar and transfer agent, maintaining records of who owns the fund’s shares. ”
      - “This duty is complicated by the fact that the number of outstanding shares is continually changing through sales and redemptions. Fractional share purchases and dividend reinvestment plans further complicate this task ”
- - - - “If a fund computes its NAVPS less frequently than daily, sales and redemptions are made at the next valuation date. If computed monthly, a fund may require that requests for redemption be submitted up to 10 days before the date of the NAVPS computation. ”
  - - - “The type of fund
      - • Its sponsor and method of distribution
      - • The amount of money being invested
      - • The method of purchase (i.e., lump sum purchases versus contractual purchases spread out over a period of time)”
    - - “vary from firm to firm. Because they are set by the distributor, they are often negotiable, especially if a large amount of money is involved. ”
      - “ front-end load effectively reduces the actual amount invested, which makes the overall offering price higher than the NAVPS”
      - “front-end loads be disclosed in the prospectus, both as a percentage of the purchase amount and as a percentage of the net amount invested”
      - Calculating
        
        offering price = NAVPS / (100% - sales charge)
    - - “Back-end sale charges are set by the dealer and are not negotiable”
      - “If the back-end load is based on the original purchase amount”
        
        “Selling/Redemption Price = NAVPS – ( original NAVPS * sales percentage) ”
      - “If the back-end load is instead based on the NAVPS at the time of redemption”
        
        “Selling/Redemption Price = NAVPS – ( current NAVPS * sales percentage) ”
    - - “Many mutual funds, primarily those offered by direct distribution companies, banks, and trust companies, have no sale charges when investors purchase or redeem units ”
      - “However, some self-directed brokers levy modest administration fees to process the purchase and redemption of no-load funds”
        charge some management fees and admin fees
    - - “he mutual fund manager may pay an annual trailer fee to the mutual fund sales representative who sold the fund, as long as the client holds the funds. ”
      - “the representative provides ongoing services to investors, including investment advice, tax guidance, and financial statements.”
      - oppose trailer fee :“encourage investors to stay in the fund, even when market conditions indicate that they should redeem their shares”
    - - “ small number of funds charge a set-up fee on top of a front-end or back-end load.”
      - “early redemption fee, which may be charged on some no-load funds.”
        
        “a fee is charged when the fund is redeemed within 90 days of the initial purchase. It could be a flat fee of $100 or 2% of the original purchase cost.”
        
        “discourage short-term trading, and to recover administrative and transaction costs.”
    - - “when an investor exchanges units of one fund for another in the same family or fund company”
      - “In many cases, the advisor may charge a negotiable fee to a maximum of 2% of the amount being transferred. Some advisors choose to waive this fee altogether.”
      - “Switching fees generally do not apply if a fund merges with another or is being terminated for any other reason”
    - - depending on type of fund
        
        Money market funds
        
        Low; typically range from 0.5% t o1%
        
        Equity funds
        
        “The management of equity funds (with the exception of index funds) requires ongoing research”
        
        “higher; typically, ranging from 2% to 3% (or higher)”
        
        Index funds
        
        “Index funds try to mirror the market with occasional rebalancing.
        
        “this strategy is largely a passive buy-and-hold strategy, management fees are usually lower than those of equity funds”
      - “Management fees are generally expressed as a straight percentage of the net assets under management”
        
        “This method of compensation has been criticized because it rewards fund managers not on the performance of the fund, but on the level of assets managed”
      - “it does not cover the following operating expenses”
        
        “Interest charges
        
        • Taxes, audit, and legal fees
        
        • Safekeeping and custodial fees
        
        • Provision of information to share or unitholders
        
        These expenses are charged directly to the fund”
      - MEP (Management expense ratio)
        
        MER= (aggregate fees and expenses payable during the year / average net asset value for the year ) * 100
        
        The MER represents the total of all management and other expenses, such as custodial fees, audit fees, legal fees, information expenses, charged to the fund, and expressed as a percentage of the fund’s total assets
      - “Another ratio used to measure fund performance is the trading expense ratio (TER).
        the TER represents only the amount of trading commissions incurred to manage the portfolio, compared to the total assets of the fund.”
      - “The NAVPS of the funds are calculated after the management fee has been deducted.
        By law, funds must disclose in the fund prospectus both the management fee and the MER for the last five fiscal years.”
        
        “Published rates of return on mutual funds are calculated after deducting the MER.”
    - - “An F-class fund is a type of fee-based fund with a lower MER.”
      - “the client is charged a percentage of the assets under management, rather than a commission or fee for each transaction.”
      - “These funds reduce or eliminate the double charge”
        
        “financial advisors now provide fee-based, rather than commission-based, accounts”
- - - - “note that any reference to province or provincial encompasses not only Canada’s 10 provinces, but also its three territories.”
    - - “The Autorité is responsible for overseeing the operation of fund companies within the province”
      - “the Chambre is responsible for setting and monitoring continuing education requirements and for enforcing a code of ethics”
  - - - “investors must receive a Fund Facts document before making any purchase. The actual requirements are set out in NI 81-101.
    - - “A Fund Facts document
      - • A simplified prospectus
      - • The AIF
      - • The annual audited statements or interim unaudited financial statements
      - • Other information required by the province or territory where the fund is distributed, such as material change reports and information circulars”
  - - - “Investors have the right to withdraw from the purchase within 48 hours after confirmation of the purchase is received.
      - • Depending on the province, they maintain their right of damages or to rescind the purchase if the Fund Facts document, simplified prospectus, AIF, or financial statements contain a misrepresentation.
      - • Each province specifies a time limit within which investors must act to claim the right to damages or rescission.
      - • Investors can request a copy of the simplified prospectus at no charge.”
    - - Section 1: fund information
        
        Introduction
        
        “This subsection provides the document date, fund name, fund manager name, and name of class or series, if the mutual fund has more than one.
        
        Quick facts
        
        “key background points, including the date the fund was created, the total value of all units of the fund, the MER, the identity of the portfolio manager, the expected frequency and date of distributions, and the minimum investment needed for both the initial and repeat purchases.”
        
        Investment of the fund
        
        “the fundamental nature of the mutual fund under the heading “What Does the Fund Invest In?” It provides a list of top the 10 investments and the percentage of net asset value for each investment, as well as the investment mix and a breakdown of the fund’s investment exposure.”
        
        Risks
        
        “investors that the fund is subject to a certain degree of risk. It rates the extent of the fund’s risk on a scale that ranges from low, low-to-medium, medium, medium-to-high, and high. It also reminds investors that the fund does not guarantee a return and that they may not get back the amount of money invested.”
        
        Past performance
        
        “A chart showing returns, after expenses have been deducted, over the previous 10 years on a year-by-year basis (or since the date of its inception, if under 10 years).
        
        • A table showing both the best and worst returns for the fund in a three-month period over the previous 10 years (or since the date of its inception, if under 10 years).
        
        • An average return calculation based on an investment of $1,000 into the fund 10 years ago (or since the date of its inception, if under 10 years) and its worth today, together with the percentage annual compound return during this period.”
        
        Suitability
        
        “Who is this fund for?” It describes the characteristics of the investor for whom the fund may or may not be appropriate, and the portfolios for which the fund is and is not suited.”
        
        Impact of income taxes on investor returns
        
        “highlights the tax consequences of the fund under the heading of “A Word About Taxes”.”
      - Section 2 : costs, rights, and other information
        
        Cost of buying, owning, and selling the fund
        
        “Sales charges—This item discloses the types of fees charged to the investor, whether they are front load, low load, deferred sales charges, or no load.
        
        • Fund expenses—These expenses may include the MER and the TER. Both ratios are expressed as a percentage value and translated to a dollar figure relative to every $1,000 invested. Trailing commissions are also highlighted in this area.
        
        • Other fees—Fees may include short-term trading fees, switch fees, change fees, or a combination.”
        
        Statement of rights
        
        “What if I change my mind?” It advises the investor of their rights and options within a defined period, including the right to cancel a purchase within 48 hours after receiving confirmation of the purchase.”
        
        More information about the fund
        
        “provides contact information for investors who may wish to obtain more information, such as the simplified prospectus and other disclosure documents.”
    - - “The simplified prospectus must be filed with the securities commission annually, but need not be updated annually unless there is a change in the affairs of the mutual fund.”
      - “must be written in plain language and presented in an easy-to-understand format. ”
      - 2 sections
        
        “Part A provides introductory information about the mutual fund, information about mutual funds in general, and information applicable to funds managed by the mutual fund.
        
        “ Part A of each prospectus must be substantially similar, and the funds must belong to the same mutual fund family, administered by the same entities, and operated in the same manner.”
        
        • Part B contains detailed information about the specific mutual fund”
      - must contain the following information
        
        “Introductory statement describing the purpose of the prospectus and identifying the other information documents that the fund must make available to investors
        
        • Name and basic information about the issuer, including a description of the issuer’s business
        
        • Risk factors and description of the securities being offered”
        
        “Method used to set the price of the securities being sold or redeemed, and disclosure of any sales charges
        
        • Method of distribution
        
        • Statement of who has the responsibility for management, distribution, and portfolio management
        
        • Fees paid to dealers
        
        • Statement of management fees and other expenses, including the annual MER for the past five years
        
        • The fund’s investment objectives and practices
        
        • Information on the amount of dividends or other distributions paid by the issuer
        
        • In general terms, the income tax consequences to individuals holding an investment in the fund
        
        • Notice of any legal proceedings material to the issuer
        
        • Identity of the auditors, transfer agent, and registrar
        
        • Statement of the purchaser’s statutory rights
        
        • Summary of the fees, charges, and expenses payable by the security holder”
      - “Financial statements that are unaudited at the end of six months after the fund year-end must also be submitted to the securities commissions, usually within 60 days after the reporting date.”
    - - “Much of the disclosure required in the AIF is similar to that provided in the simplified prospectus.”
      - AIF contains the following information
        
        “Significant holdings in other issuers
        
        • The tax status of the issuer
        
        • Directors, officers, and trustees of the fund and their indebtedness and remuneration
        
        • Associated persons, the principal holders of securities, and the interests of management and others in material transactions
        
        • The particulars of any material contracts entered into by the issuer”
- - - - “they be informed within five business days of any important change in personal circumstances, such as a change of address or a bankruptcy.”
    - - “ must have successfully passed a mutual funds course such as the Canadian Securities Institute’s Canadian Securities Course, “the Investment Funds in Canada course, or another qualifying education program.”
    - - “An application for registration must be filed electronically with the National Registration Database (Form NRD 33-109F4), with the appropriate fee”
      - “Provincial securities acts set the requirements for initial and continuing registration.
        
        In Quebec, the representative must register with the Autorité des marchés financiers.”
      - “mutual fund sales representative, you must also meet the following requirements”
        
        “Generally, you must be employed by the distribution company.
        
        • You are not permitted to carry on other forms of employment without the prior approval of the appropriate securities administrators and any industry associations of which your firm is a member. However, many provinces have issued policy statements permitting persons to be dually registered as mutual fund representatives and life agents.
        
        • You must complete a detailed report about your past businesses, employment, and conduct and submit it to a police review. The report must include the following information:”
        
        “Any companies with which you have been associated in certain capacities
        
        ◦ Any action against you regarding any government licence to deal in securities
        
        ◦ Any action against you regarding any government licence to deal with the public in any other capacity requiring registration
        
        ◦ Any disciplinary action regarding an approval by any securities commission or similar professional body
        
        ◦ Any past criminal convictions or current charges or indictments
        
        ◦ Any bankruptcies or proposals to creditors
        
        ◦ Any civil judgment or garnishment”
    - - “As a mutual fund representative, you must notify the provincial securities administrator within five business days (or 10 days in Quebec) of any of the following changes in your provincial application”
        
        “Change of address
        
        • Disciplinary action of a professional body
        
        • Personal bankruptcy (Ontario and Quebec)
        
        • Criminal charges or civil judgments”
    - - as soon as a mutual fund sales representative ceases to work for a registered dealer“
        
        The employer must notify the provincial securities administrator of the termination of employment and, in most provinces, the reason for termination.”
      - “Before a representative’s registration can be reinstated, notice in writing must be received by the securities administrator from another registered dealer of the employment of the representative by that other dealer. ”
      - “If the securities administrator does not receive a request for reinstatement and transfer to a new company within the permitted period, the registration lapses and the representative must reapply for registration.”
      - “The permitted period is 30 days in most provinces and six months in Quebec.”
  - - - “Purchases of no more than 10% of the total securities of a single issuer or more than 10% of a company’s voting stock
      - • No purchases of shares in the manager’s own company (e.g., a fund owned by a bank cannot buy shares in that bank)
      - • Purchases of no more than 10% of the net assets in the securities of a single issuer or 20% of net assets in companies engaged in the same industry (except specialty funds)
      - • No purchases of the shares of other mutual funds, except in certain cases where no duplication of management fees occurs
      - • No borrowing for leverage purposes
      - • No margin buying or short selling
      - • No commodity or commodity futures purchases
      - • Limitations on the percentage of holdings in illiquid securities, such as those sold through private placement and unlisted stocks”
    - - “mutual fund managers are allowed to incorporate specific permitted derivatives as part of their portfolios.”
        
        “For example, options (such as puts or calls), futures, forwards, rights, warrants, and combination products are among the permitted derivatives that mutual fund managers can include.”
      - “Derivatives are most commonly used by mutual fund managers for two purposes”
        
        hedge risk
        
        facilitate market entry and exit
      - “It is often cheaper and quicker to enter the market using derivatives rather than by purchasing the underlying securities directly”
      - “Derivatives regulation covers the following requirements:”
        
        “The total amount that can be invested in derivatives (10% maximum as a percentage of the net assets of a fund)
        
        • How derivative positions must be hedged by the assets of the fund (based on daily portfolio valuations)
        
        • Expiry dates on different option products
        
        • Permitted terms
        
        • The qualifications required by portfolio advisors to trade these instruments”
      - Hedge funds are exempted from these rules. Another exception is alternative mutual funds, which are permitted to use derivatives in a leveraged manner for speculation”
        
        “The use of permitted derivatives must be disclosed in a mutual fund’s simplified prospectus.”
        “It must also describe the limits of and risks involved with the planned use of derivatives.”
    - - Quoting a future price
        
        “The general practice is to price orders entered before 4:00 p.m. ET at the end of the current business day. Orders received after 4:00 p.m. ET are priced at the end of the next business day”
        
        “ it is unlawful for a representative to backdate an order in an attempt to buy or sell shares or units at a previous day’s price.”
      - Offer to repurchase
        
        “As a sales representative, you may not make offers to repurchase securities in an attempt to insulate your clients from downturns in price. Of course, investors have the normal right of redemption, should they wish to sell their mutual fund investments.”
      - Selling without a licence
        
        “it is against the law to sell products you are not registered to sell.”
        
        “as a mutual fund representative, you cannot sell stocks, bonds, or insurance in any province unless you are licensed to do so in that province.”
      - Advertising the registration
        
        “You may not advertise or promote the fact that you are registered with a securities authority. Doing so could imply that regulatory authorities sanction your conduct or the quality of the funds you offer, which is not relevant”
      - Promising a future price
      - Sales made from one province into another province or country
        
        “Despite ease of electronic access to out-of-province investors, you may not fill orders, even unsolicited orders, unless you are registered in the investor’s province. If you sell mutual funds to clients in a province in which you are not registered, or to a non-Canadian resident, your registration may be cancelled.”
      - Sale of unqualified
        
        “any mutual funds you sell must be approved in the province in which you are registered.”
    - - “you need to consider the impact of the following prohibitions on your role”
        
        “The commission rate on a fund cannot be changed unless the simplified prospectus for that fund is renewed. (However, the commission rate for a new fund may differ from commission rates set for already established funds.)
        
        • Fund managers may not provide co-operative funds for practices that are considered general marketing expenses, such as general client mailings.
        
        • Fund managers may not financially subsidize skill enhancement courses such as courses in effective communication or improving presentation skills development.
        
        • Fund managers may not provide non-monetary benefits of any significant value to a distributor firm or its representatives. Occasional rewards of minimal value may be permitted if they are unlikely to influence the behaviour of the recipient (e.g., pens, t-shirts, or golf balls).”
        
        “Fund managers may not provide money or goods to a distributor firm or its representatives in support of client appreciation.”
      - “The Investment Funds Institute of Canada (IFIC)publishes Sales Practices Bulletins, which interpret the rules and give examples of acceptable and unacceptable sales practices.”
    - - “Sales communications can include any of the following information:”
        
        “A description of the fund’s characteristics
        
        • A comparison between funds under common management or funds with similar investment objectives
        
        • A comparison of the fund to an index
        
        • Performance information (which must follow very specific rules with respect to how performance is calculated and presented)
        
        • Advertising that the fund is a no-load fund”
      - “It is of paramount importance that the communication not be misleading”
    - - “client communications must include a clear explanation of the method by which the rate of return was calculated. That method must be in accordance with standard industry practices.”
      - “Standard industry practice with regard to calculating a rate or return includes a time-weighted or dollar-weighted return, daily valuation, or any method approved under the Global Investment Performance Standards, as endorsed by the Chartered Financial Analyst Institute.”
      - “For those client accounts that have been opened for less than 12 months, the rate of return shown must be the total rate of return since the account was opened at the mutual fund dealer”
      - “any client communication that contains, or makes reference to, a rate of return has been reviewed and approved by appropriate supervisory staff at the mutual fund dealer”
    - - “As described under MFDA rule 5.3.4, the mutual fund representative must provide clients with an annual performance report that covers, at a minimum, a 12-month period”
      - “Performance reports provided to clients must include the following information”
        
        “The market value of the assets held in the client account at the beginning and end of the 12-month period covered by the report
        
        • The total assets deposited and withdrawn during the 12-month period and since opening the account
        
        • The annual change in the market value of the client’s account for the 12-month period
        
        • The cumulative change in the market value of the account since the account was opened
        
        • Annualized total percentage return using a money-weighted methodology for periods of one, three, five and 10 years, as well as since inception.”
- - - - “The client transfers their account to the dealer.
      - • The dealer or mutual fund representative becomes aware of a material change in the KYC information.
      - • A different mutual fund representative has taken over the client’s account.”
    - - “Evidence that the transaction was unsolicited
      - • Proof that you performed a suitability review
      - • Clear indication that you advised the client that the proposed transaction was unsuitable”
      - “Before proceeding with an unsuitable, unsolicited trade, you should consult with your branch manager or compliance officer. Mutual fund dealers must have written procedures for dealing with unsuitable, unsolicited orders, and there should be no obligation to accept an unsuitable purchase order from a client.”
    - - “representatives must fully understand the features of the products being recommended to clients. You must fully understand the characteristics of a fund, such as level of risk and investment objectives, before you can make suitable recommendations to your clients.
  - - - “you should obtain the investment experience and knowledge of all persons with trading authority over the client’s account, as well as KYC information for anyone with a financial interest in the account. ”
        
        “Such persons may include joint account holders and beneficiaries of trusts or trust accounts for children.”
        
        “The contributing spouse of a spousal registered retirement savings plan has no financial interest in the account, so KYC information is required only for the non-contributing spouse. However, if the contributing spouse has another account with you, you must obtain KYC information in regard to that account.”
    - - “KYC information be updated whenever a representative or other employee of the firm becomes aware of a material change in the client’s circumstances.”
      - at least once a year
    - - “Federal legislation regarding anti-money laundering (AML) and anti-terrorist financing (ATF) is set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is the agency authorized to facilitate this legislation.”
      - “AML and ATF requirements must be met before any client’s account is opened”
        
        “Every mutual fund dealer must have processes and procedures in place for this purpose, and it must provide appropriate training to all its employees and representatives. The firm must also appoint an AML compliance officer (often, the branch compliance officer)”
      - “ the need to verify the identity of every person authorized to provide instructions regarding a client’s account or who has a beneficial interest in that account”
      - “he freezing of accounts of individuals and organizations that appear on a FINTRAC-published list, the reporting of suspicious transactions and attempted transactions, and client identification requirements that apply in special circumstances.”
      - “Cash transactions (or a series of transactions) in a single account of $10,000 or more on any given day must be reported to the dealer’s compliance officer.”
- - - - “about the relationship between the client and the mutual fund dealer and its sales representative”
    - - The name or type of client account
      - the products and services offered
      - the procedures regarding the handling of cash and cheques
      - The dealer's obligation to the client
      - the circumstances in which a suitability review is needed
      - the terms with respect to KYC information
      - the terms of account reporting
      - the nature of compensation paid to the dealer
  - - - “A change in risk tolerance level
      - • A new investment time horizon
      - • A new investment objective or objectives
      - • A material change in assets or income”
  - - - Control registrant
        
        “An FI can sell mutual fund securities in its branches only through a corporation (i.e., dealer)”
        “The dealer must be registered in each province or territory in which the mutual fund securities are sold.”
      - Registration of employees
      - Dual employment
        
        “Employees of an FI who engage in financial services activities can also become registered mutual fund representatives of the dealer. Registration allows them to sell mutual fund securities provided that dual employment is permitted by the legislation to which the FI is subject.”
      - Conflicts interest
        
        “Conflicts of interest can arise as a result of dual employment”
        
        “For example, some FI employees may be compensated only on the basis of their sales of mutual fund securities. Such employees may be motivated to sell mutual funds to a client even when other products are more suitable.”
        
        “A conflict can also arise even when dually employed representatives are paid on a salary-only basis”
        “For example, a representative with the authority to approve a client loan may do so to fund the client’s mutual fund purchase”
        
        “Dually employed representatives are paid salary only, and one of the following two requirements also applies”
        
        “A dually employed representative cannot make loans to finance purchases of mutual fund securities sold by that representatives ”
        
        “Any loan made by a dually employed representative to finance the purchase of mutual fund securities sold by that representative must be approved by a senior lending officer of the FI.”
      - In-house funds
        
        “the securities sold through the FI must be issued by a mutual fund sponsored by the FI (or by the FI’s subsidiary or affiliated dealer). If an FI wants to sell mutual fund securities sponsored by a third party, the relevant securities regulator must be consulted”
        
        Rules regarding the distribution of mutual funds by a FI are based on the assumption that the FI will distribute only in-house mutual fund securities.
      - Proficiency
        
        “Officers, directors, and representatives of the dealer must satisfy normal proficiency requirements, as set out by the applicable securities commission.”
      - Premises and disclosure
        
        “he dealer must carry on its business in such a way that it is made clear to clients that the business of the dealer and the FI are separate and distinct. ”
        
        “Separate premises within a branch are not required, although adequate disclosure of the distinction must be made to customers of the FI.”
        
        “clients are further informed that those mutual funds are not guaranteed by the financial institution, are not covered by deposit insurance (e.g., the Canada Deposit Insurance Corporation), and may fluctuate in terms of value and returns. ”
        
        disclosure must be printed in bold face type and must appear on the following documents
        
        “Fund prospectuses: The disclosure must be contained in the body of prospectuses; on renewals, the disclosure must appear on the face page.
        
        •Subscription or order forms: If these forms are used, disclosure must appear on them. (Order forms may not be required for processing telephone transactions.)
        
        •Confirmation slips
        
        •Promotional material: The disclosure must appear on all promotional material appearing or handed out in any branch of the FI”
        
        “The FI may lend money to a client to facilitate the purchase of mutual fund securities sold by the dealer. The dealer must disclose to the client that the full amount of the loan must be repaid, even if the value of the mutual fund securities (purchased with the loan) declines”