MUTUAL FUNDS IN CANADA

Question 1

Under NI 31-103, a dealer must be registered by the securities administrator or provincial regulator in one or more of the following categories:

Answer 1

Under NI 31-103, a dealer must be registered by the securities administrator or provincial regulator in one or more of the following categories:
Investment dealer

Scholarship plan dealer

Restricted dealer

Exempt market dealer

Mutual fund dealer

Question 2

INVESTMENT DEALER

Answer 2

Investment dealers can deal in any type of security. The primary business lines of investment dealers are investment banking, private client and discount brokerage.

Question 3

SCHOLARSHIP PLAN DEALER

Answer 3

The scholarship plan dealer deals in securities including scholarship plans, educational plans or educational trusts.

Question 4

TWO TYPES OF SCHOLARSHIP PLANS?

Answer 4

Scholarship plans are offered by scholarship plan dealers, banks and other financial institutions. There are generally two types of plans:

Individual, or self-directed, plans AND Group plans

Question 5

RESTRICTED DEALER?

Answer 5

ANSWER

**Restricted Dealer
Restricted dealers are limited by registration conditions. They are limited to trading in a specified security, class of security or the securities of a class of issuers. An example of a restricted dealer is a dealer specializing in real estate securities.**

Question 6

EXEMPT MARKET DEALER?

Answer 6

Exempt Market Dealer:
An exempt market dealer or underwriter trades or advises in the exempt market.

This market largely consists of the underwriting and sale of securities to the following investors:

Institutional investors (such as pension funds) Accredited investors
Investors whose minimum purchase is $150,000

Question 7

Exempt market dealers typically deal in securities that are _ _ _ _ _ _ _ _

Answer 7

Exempt market dealers typically deal in securities that are prospectus exempt.

Question 8

TRUE OR FALSE?

Exempt market dealers can also deal in securities that are prospectus qualified, such as mutual funds.

Answer 8

ANSWER: TRUE

Question 9

Types of securities sold in the exempt market dealer category include?

Answer 9

ANSWER:

Private placements
Real estate syndications

Mortgage investments

Structured products

Hedge funds

Question 10

MUTUAL FUND DEALER?

Answer 10

ANSWER: In Canada, a mutual fund dealer is a company registered with the provincial securities commissions to distribute mutual funds to Canadian investors.

Question 11

TRUE OR FALSE?

The mutual fund dealer and the mutual fund company that manufactures, manages and administers mutual funds are two separate entities.

However, some companies may be part of the same ownership group as mutual fund dealers. ​

Answer 11

ANSWER: TRUE

Question 12

Mutual fund companies are registered and regulated directly by ________________ — not by the MFDA.

Answer 12

ANSWER: Mutual fund companies are registered and regulated directly by the provincial securities commissions—not by the MFDA.

Question 13

SALES FEES

Answer 13

ANSWER:

These fees are paid by investors to the financial advisors and dealers who sell the funds on behalf of the mutual fund companies.

Front-end load fees are paid upon purchase.

Back-end load, or deferred sales charge, fees are paid upon redemption.

Generally, sales fees are negotiable between the client and the advisor. Some mutual fund dealers do not charge sales fees, offering no-load funds

Question 14

MANAGEMENT FEES?

Answer 14

ANSWER:

Management fees:

These fees pay for the management and operation of funds, as well as ongoing dealer or advisor compensation.

These are separate from sales fees. They are usually expressed as a percentage of a fund’s net asset value. They are known as management expense ratio (MER).

The mutual fund dealer typically receives approximately 40% of the MER.

The dealer’s share of the MER is often referred to as a trailer fee, which is paid to the dealer for its ongoing services.

The dealer retains a portion of the fees, and pays the rest to the representative responsible for the sale.

The remainder of the MER (60%) goes to the mutual fund company, divided as follows: 40% to investment management services and 20% to administrative costs.

MERs have largely declined over the past ten years. Currently, they fall in the range of 1% to 2.5%, depending on the type of fund.

Question 15

TRUE OR FALSE?

The number of mutual fund dealers (MFDA member firms) has been declining in recent years.

Answer 15

ANSWER: TRUE

Question 16

NOTE ONLY / Competitive Environment

Many independent dealers are successful because of long-established client relationships, top-notch advisors and broad product lines. This comes as a result of additional regulatory licenses and commercial relationships, which provide additional expertise or products.

However, many independent dealers feel that they are being squeezed between competing against the mutual fund distribution network of banks (which account for approximately 35% of mutual fund sales) and full service IIROC dealers (who provide a complete range of financial products, including mutual funds).

Another source of competition has been the tremendous popularity of Exchange Traded Funds (ETF). EFTs can only be sold by IIROC firms, because they are only traded on a stock exchange. These funds have taken a significant market share away from index mutual funds.

Increased competition in Canada, largely as a result of the banks and the growth of IIROC sold ETFs, has made it a struggle to attract new clients. The growth of ETFs, and the sheer number of mutual fund product available, has resulted in downward pressure on fees and commissions.

Traditionally, Canadian fees and commissions on mutual funds have been significantly higher than U.S. fees. In recent years, however, the gap has narrowed considerably, as rates in Canada have decreased.

Answer 16

NOTE ONLY / Competitive Environment

Many independent dealers are successful because of long-established client relationships, top-notch advisors and broad product lines. This comes as a result of additional regulatory licenses and commercial relationships, which provide additional expertise or products.

However, many independent dealers feel that they are being squeezed between competing against the mutual fund distribution network of banks (which account for approximately 35% of mutual fund sales) and full service IIROC dealers (who provide a complete range of financial products, including mutual funds).

Another source of competition has been the tremendous popularity of Exchange Traded Funds (ETF). EFTs can only be sold by IIROC firms, because they are only traded on a stock exchange. These funds have taken a significant market share away from index mutual funds.

Increased competition in Canada, largely as a result of the banks and the growth of IIROC sold ETFs, has made it a struggle to attract new clients. The growth of ETFs, and the sheer number of mutual fund product available, has resulted in downward pressure on fees and commissions.

Traditionally, Canadian fees and commissions on mutual funds have been significantly higher than U.S. fees. In recent years, however, the gap has narrowed considerably, as rates in Canada have decreased.

Question 17

NOTE ONLY

Cost Pressures

Not only have competitive pressures increased, but costs associated with operating an independent dealer have also gone up significantly.

This has intensified pressure on operating margins. Risk management and compliance costs have increased, reflecting greater regulatory and market-based pressures.

As well, the costs of implementing and maintaining fee-based financial planning and portfolio programs have risen.

As a result of the increased time and investment required, some dealers have chosen to outsource parts of their back-office and middle-office functions.

Answer 17

NOTE ONLY

Cost Pressures

Not only have competitive pressures increased, but costs associated with operating an independent dealer have also gone up significantly.

This has intensified pressure on operating margins. Risk management and compliance costs have increased, reflecting greater regulatory and market-based pressures.

As well, the costs of implementing and maintaining fee-based financial planning and portfolio programs have risen.

As a result of the increased time and investment required, some dealers have chosen to outsource parts of their back-office and middle-office functions.

Question 18

NOTE ONLY /

Compliance

Since the new millennium, there has been an increase in market turmoil, and an increase in the complexity of investment vehicles. Together with the aging of the baby boomer generation, this has led to regulatory initiatives to help ensure the public is protected, and that the capital markets remain efficient and fair.

Examples of such regulatory initiatives include anti-money laundering, the customer relationship model, and the Know Your Product and suitability guidelines. Compliance to these initiatives is necessary, but can be costly for smaller dealers.

Answer 18

NOTE ONLY /

Compliance

Since the new millennium, there has been an increase in market turmoil, and an increase in the complexity of investment vehicles. Together with the aging of the baby boomer generation, this has led to regulatory initiatives to help ensure the public is protected, and that the capital markets remain efficient and fair.

Examples of such regulatory initiatives include anti-money laundering, the customer relationship model, and the Know Your Product and suitability guidelines. Compliance to these initiatives is necessary, but can be costly for smaller dealers.