Unit 2 Lesson 2 Flashcards
Compliance
Discuss the Compliance regime of a mutual fund dealer.
Mutual fund dealers must establish and maintain a compliance regime, which is a system of controls and supervision. This regime ensures compliance with securities legislation and manages business risks. It includes a Compliance Department, along with policies, procedures, documentation, and training. While the main aim is legislative and regulatory adherence, effective risk management is also crucial, involving the identification of potential risks and the proactive development of strategies to mitigate them.
Describe the role of the Compliance Department.
The Compliance Department is primarily responsible for ensuring compliance with regulations outlined in the firm’s Policies and Procedures Manual and/or the MFDA’s Rules and Policies. Additionally, it manages compliance risk, addressing the potential for losses resulting from the failure to manage the compliance function. The department also offers guidance, and individuals are encouraged to seek advice when confronted with unfamiliar situations.
How does the compliance department support dealing representatives.
The Compliance Department plays a crucial role by overseeing and supervising Dealing Representatives’ registerable activities, ensuring compliance with regulations and internal policies. It monitors external activities to address conflicts of interest, educates and trains representatives for compliant business growth, helps manage risks to reputation and operations, and provides guidance in situations of uncertainty regarding the right course of action to take.
Describe the role of the compliance officers.
In a mutual fund dealer firm, everyone plays a role in managing compliance, with regulatory oversight responsibility assigned to the CEO or equivalent. MFDA rules mandate the appointment of an Ultimate Designated Person (UDP), typically the CEO, who supervises compliance activities and promotes adherence to securities legislation.
Additionally, all mutual fund dealers must have a Chief Compliance Officer (CCO) who is an officer, partner, or sole proprietor of the MFD firm and registered with the securities commission, responsible for establishing and maintaining compliance policies. The CCO monitors and assesses compliance, submitting an annual report of the compliance assessment to the Board of Directors.
Explain the requirements under the CRM and CFR.
Client Relationship Model (CRM) and Client Focused Reforms (CFR) have brought key changes in financial regulations:
1) Relationship Disclosure Information (RDI):
- CRM Introduction: RDI is a requirement providing clients with essential information about their account during its opening.
- CFR Amendment: CFR further refines RDI standards, mandating specific disclosure on conflicts of interest and the obligation to prioritize the client’s interests.
2) Conflicts of Interest:
CRM Standard: Introduced higher standards for addressing conflicts transparently, fairly, and in the client’s best interest.
CFR Amendment: Requires registrants to address all material conflicts of interest in the client’s best interest and avoid them when unable to do so.
3) Enhanced Suitability Assessment:
CRM Introduction: Established new standards and triggers for assessing the suitability of investment products.
CFR Amendment: Requires putting the client’s interests first in suitability determinations and disclosing this obligation in the RDI provided to clients.
4) Reporting to Clients:
CRM Introduction: Introduced new standards for trade confirmations, account statements, reports on charges and compensation, and performance reports.
Details: Trade confirmations provide cost details, account statements are issued quarterly, and reports on charges and compensation and performance reports are provided annually.
5) Pre-Trade Cost Disclosure:
CRM Standard: Introduced a new standard for disclosing costs associated with the purchase or sale of a security before the transaction is made.
Details: Registered individuals, including Dealing Representatives, must disclose transaction costs and inform clients about potential ongoing fees related to the security.
Explain the elements the RDI contains.
The Relationship Disclosure Information (RDI) requirement aims to ensure clients understand their obligations, the mutual fund dealer’s services, and associated costs. As a Dealing Representative, you must provide written RDI (written by your MFD) when opening a new account, discussing it with clients, and addressing any queries. The RDI covers various elements such as account type, advisory relationship, products, services, risks, conflicts of interest, suitability, Know-Your-Client (KYC), client reporting, compensation, transaction charges, impact on returns, benchmarks, and complaint obligations.
When initiating a new client account, you must provide and explain the Relationship Disclosure Information (RDI). It is your responsibility to help the client comprehend the relationship dynamics among you, your firm, and the client.
Explain the requirements for RDI.
When opening a new client account, you must provide and explain Relationship Disclosure Information (RDI), ensuring the client understands the relationship among you, your firm, and them. Under RDI requirements:
1) Spend ample time explaining RDI.
2) Discuss RDI in-person or via telephone.
3) Be ready to answer questions.
4) Follow firm policies for documentation.
It’s vital to review RDI at the relationship’s start and revisit it in subsequent meetings.
1) Setting Expectations:
Encourage clients to:
a) Update Know-Your-Client (KYC) information promptly.
b) Understand and stay informed about their investments.
2) Maintaining Evidence:
Keep proof of RDI provision, such as signed client acknowledgments or detailed notes if delivered separately.
3) Disclosure and Transparency:
Ensure all disclosures are
- Accurate – the disclosure must be accurate and up-to-date.
- Complete – the disclosure must contain all material information and must not have any omissions of
material information. - Clear and understandable – the disclosure provided to a client must be clear and understandable (e.g.
plain language). - Relevant and useful to the client – the disclosure must be relevant to the client’s specific circumstances (e.g. relevant to the client’s type of account).
- Timely – the timing of the disclosure must permit the client to act upon the information where
necessary. Specifically, disclosure of conflicts of interest in respect of a particular transaction should be provided to the client before the transaction so the client can decide whether or not to proceed with the transaction.
Explain the requirements for client communications.
MFDA rules categorize client communications as any written messages from a mutual fund dealer or Dealing Representative to a client, covering trade communications and account statements, excluding ads or sales communication. These communications must adhere to guidelines:
They must not be false or misleading.
Avoid exaggerated claims or actions against the client’s interests.
Comply with all laws and regulations.
Be consistent with information from other mutual fund dealer documents.
Specific rules govern how rates of return are communicated. Any client communication mentioning rates of return must undergo approval and supervision by the mutual fund dealer.
Explain prohibited practices including pre-signed forms and excess trading.
Dealing Representatives must follow rules, including those related to:
- Avoiding the use of pre-signed forms.
- Preventing excessive trading.
1) Pre-signed forms: The use of pre-signed forms is prohibited by MFDA rules. Dealing Representatives and mutual fund dealers are not allowed to use blank forms that have been pre-signed by clients. Only forms completed and duly executed by clients after information has been filled in are permitted. The presence of pre-signed forms will be reported to the MFDA Enforcement Department.
2) Excessive Trading (Churning): Excessive trading, also known as “churning,” occurs when a Dealing Representative recommends trades that offer minimal benefit to the client, primarily aiming to generate commissions or other benefits for the representative. In mutual fund investing, which generally follows a long-term approach, frequent trading is not typical. MFDA staff views a pattern of frequent trading with suspicion, as it may indicate transactions driven solely by commission earnings rather than client benefit.
