The Mutual Fund Dealers Association (MFDA) has updated its list of frequently asked questions dealing with Phase II of the Client Relationship Model (CRM2). Several of the changes address how dealers should handle their disclosure requirements when referring clients to portfolio managers and firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC).
If an MFDA firm refers someone to a portfolio manager but retains that person as a client, can the fund dealer rely on the portfolio manager to disclose the referral fees that have been paid? The MFDA says the fund dealer can indeed rely on the portfolio manager, provided it has satisfied itself that the disclosure made in the portfolio manager's report to the client is adequate. "At a minimum, adequate disclosure would include the name of the Member and the specific amount of the referral fee paid by the Portfolio Manager to the Member," reads the FAQ.
Referrals to IIROC firms
What about cases in which, on an unsolicited basis, a client has been referred to an IIROC firm to purchase or sell a security in which the MFDA Member is not licensed to trade? Can the fund dealer also rely on the IIROC firm to provide disclosure of fees? Yes, says the MFDA, and under the same terms as is the case with portfolio managers.
In circumstances where the MFDA firm cannot satisfy itself that the portfolio manager or IIROC firm is providing adequate disclosure of referral fees and where the client has multiple accounts with the MFDA firm, does that mean the fund dealer has to provide disclosure on each and every Report on Charges and Other Compensation it prepares for the client?
No, they do not, says the MFDA. "Where the Member prepares a Report on Charges and Other Compensation for each account of the client, referral fees may be disclosed within, or as an addendum to, any one of such Reports," reads the FAQ.