Staff at the Mutual Fund Dealers Association (MFDA) conducted an examination sweep of deferred sales charge (DSC) trading activity. They found that many dealers lack a formal process to examine a client's age before approving a sale.
The MFDA looked at a year's worth of trading activity from a sample of members who trade in deferred sales charge and low load sales charge funds. While most fund purchases involved clients who had a medium or long-term time horizon (i.e., 5 to 10 years or over 10 years), there were some cases in which advisors sold funds to clients with a time horizon that was shorter than the DSC schedule.
The regulator found that few firms had written procedures or practices that would prohibit or query DSC purchases based on the client’s age. "We noted some Members did consider client age as a factor when also querying time horizon. However, in general Members did not issue inquiries specifically relating to the client’s age. Overall, there was a lack of consistency across Members on how to supervise transactions involving seniors who purchased DSC funds," reads the report.
In order to fulfil their supervisory obligations, the MFDA says fund dealers need to have adequate procedures in place to assess the suitability of DSC trades; they should consider both the client's age and time horizon. They also need to have procedures to disclose sales charges both at the time of purchase and redemption. "As suitability continues to be an area of focus for the MFDA, particularly as it relates to senior investors, we will continue to review these issues in future compliance examinations," concludes the MFDA.