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							 4    OCTOBER 2005 ADVISOR’S EDGE REPORT                                                                                                                                                      www.advisor.ca




                                                                                   very red flag.                                                                       as on the fund company’s website.
The Old Switcheroo                                                                    The regulators are essentially           “If a compliance officer                 They have considered changing
                                                                                   concerned the switches amount to                                                     procedures to add a form that
Regulators have their eyes on mutual                                               a raise for the advisor that wasn’t
                                                                                                                               or branch manager sees
                                                                                                                                                                        would require the dealer to show
fund exchanges                                                                                                                 clients exiting one version
                                                                                   agreed to by the client, explains                                                    the client had been told about the
                                                                                   Susan Han, general counsel at
                                                                                                                               of a fund and entering                   implications of the switch, but so
                                          refer the client to the prospectus for   AIM Trimark in Toronto. The                 an almost mirror-like                    far that procedural change hasn’t
 COMPLIANT ADVICE                                                                                                              version of that same
                                          the new fund – because it is a new       DSC option gives a 50-basis point                                                    been made.
BY PHILIP PORADO                          fund – and outline any tax conse-        trailer, whereas the front-end load         fund, then questions                         That means AIM Trimark and
                  Pop quiz: Your          quences that could result from the       option ups that to a full 1%.               need to be asked.”                       other fund companies will contin-
                  client has shares       sale of the original shares?                “You can’t make these switches                                                    ue to assume orders coming from
                  in a mutual fund            If you picked A or B, sorry but      without consulting the client.              client-by-client basis. If a rep sees    their dealers are being delivered
                  and there’s a near-     that’s called churning. The principal    You’re not entitled to do this with-        an opportunity to switch that real-      following appropriate discussions
                  ly identical fund       will be around to deal with you          out instructions, because investors         ly is driven by the belief the client    with the client. They’re expecting
into which the shares can be auto-        shortly. And the principal will take     have the right to know how much             will have more flexibility with a        the dealers to do the due diligence.
matically converted. The only dif-        the form of the Mutual Fund              their advisors are being paid,” she         fund portfolio going forward, then       “If it comes to us as a good order
ference between the two is that one       Dealers Association or Investment        says. “The client is giving the advi-       he needs to discuss it with the          transaction, we’ll process it,” says
fund has deferred sales charge            Dealers Association, both of which       sor a raise, because he’s now getting       client. The client needs to be told      Han. “We’re not part of the rela-
(DSC) units and the other carries         recently issued notices to remind        more commission from the trail.”            that the trailer commission will         tionship between the client and the
a 0% front-end load.                      members about their expectations.           Steven Kelman, president of              double. The client needs to be told      advisor.”
    Do You:                                   For those of you who picked C,       Steven G. Kelman & Associates in            about any tax consequences of                The MFDA’s notice warns there
A. Go ahead and move the client to        good work, but be prepared to            Toronto, says it’s pretty easy to           redeeming his or her shares.             may be tax implications associated
the other fund since it’s a dollar-for-   show the regulators you have pro-        spot whether or not a rep is mak-               And the rep owes it to the client    with the switches and clients need
dollar switch and there’s no material     cedures in place to ensure fund          ing the fund switch to generate             to discuss whether or not there are      to be informed if they’ll incur cap-
difference in the products other          exchanges are being monitored and        commission: Just look at the size           other, better, options for the           ital gains. Depending on the fund,
than the sales charge? After all, these   made properly.                           of the account. Reps don’t make a           money tied up in those mutual            there may or may not be a problem.
bulk switches are done all the time.          Bruce Dickson, the IDA’s direc-      lot of money when they double               fund shares, Kelman says. “The           Many funds anticipated this prob-
B. Check with the client to see if it’s   tor of sales compliance, notes fund      the commission if it’s a small port-        fact that he’s getting an extra half-    lem and set things up so the
okay and then make the switch             sellers are obligated to monitor all     folio – it can be as little as a few        point, I don’t think the client cares,   exchange does not require an out-
when he says, “Uh, I guess so,” but       trading activity going on within         dollars – whereas they make a lot           but from a disclosure point of           right disposition of the fund shares.
make sure you don’t tell him the          their shops. So if a compliance          when a large number of shares are           view the rep would be wise to doc-       In such cases, no gains occurred
switch to a front-end load will enti-     officer or branch manager sees           swapped. “If he doesn’t do it for           ument everything – this is what          since the shares were technically
tle you to a higher trailer commis-       clients exiting one version of a         the small clients, but does it for the      we’re doing, how and why we’re           never sold. Dickson noted the IDA’s
sion?                                     fund and entering an almost mir-         big ones, then it’s a commission-           doing it, and these are what the         guidance does not apply to funds in
C. Obtain the client’s consent to the     ror-like version of that same fund,      driven decision,” Kelman says.              implications are for you.”               which there are features embedded
switch after disclosing any increase      then questions need to be asked.            So what’s the best practice?                 Han notes information about          to prevent a full redemption from
in your commission, including             And if it happens repeatedly in the      First off, says Kelman, the                 DSC to front-end-load switches           taking place when the products are
higher trailer fees. Make sure you        same client accounts, then that’s a      exchanges have to be done on a              appears on all prospectuses as well      switched.                       AER




Mutual Liability                                                                       But in discussions with the
                                                                                   province’s finance minister and the
                                                                                                                               litigation mutual fund companies
                                                                                                                               will need to beef up their already
                                                                                                                                                                        know what material changes are
                                                                                                                                                                        taking place at the company.
Ontario gives investors right to sue                                               Ontario Securities Commission, an           elaborate compliance policies.              Perhaps most importantly,
                                                                                   IFIC working group found that               Don MacDonald, vice-president            companies need to implement an
BY KATE MCCAFFERY
                                                                                   legislation was indeed intended to          and legal counsel at Investors           awareness and training program to
                                                                                   apply to mutual funds. In oversee-          Group Financial Services, advised        help employees recognize that
Mutual funds and their managers           buy shares as part of an initial         ing cases, judges are more likely to        company executives gathered at the       potential liability arises whenever a
could face legal action under             public offering, already have a          accept a broader view of the legis-         conference to review existing poli-      document is released, like sales and
Ontario’s new civil liability regime,     statutory right to sue if the infor-     lation, rather than a strict interpre-      cies and create a disclosure policy.     marketing materials, or when a
compliance experts say.                   mation presented in a prospectus is      tation of the law. “They don’t like         He added it would also be prudent        public statement is made. Disclosure
    Bill 149, which amends the            false or misleading, or if the com-      technical defences,” warns IFIC             to establish a disclosure committee      policies, MacDonald points out,
Securities Act, comes into effect on      pany omits important informa-            legal counsel Stacey Shein.                 that includes legal representation       are not worth very much if people
Dec. 31, 2005. The legislation,           tion. More than 90% of all equity            To guard against the threat of          and employees senior enough to           don’t know about them.          AER
proclaimed in August, gives stock         trading in Canada occurs in the
market or secondary market                secondary market, however, where
investors the right to sue public         investors generally buy shares from
companies that issue misleading           other investors.                                                                           OAS UPDATE
financial reports, press releases and         The rules will apply to invest-
other disclosure documentation.           ment funds as well, even though                                            Maximum old age security benefit rates as of Oct. 1, 2005
    Companies who issue mislead-          the language used in drafting the
                                                                                        Type of old age security benefit               Maximum monthly benefit                      Previous quarter
ing or incorrect statements open          legislation is not well tailored to                                                       rates October - December 2005                July - September 2005
themselves up to lawsuits if              the products. Mutual funds are                Basic old age security pension                         $479.83                                  $476.97
investors can reasonably claim they       already sold by prospectus and by             Guranateed Income Supplement
relied on that information to make        their very nature and structure,
                                                                                          Single                                               $570.27                                  $566.87
a decision about their holdings in        they also have relatively few “mate-
                                                                                        Spouse/common-law partner of
the company. Analysts’ jobs might         rial facts” that would significantly
                                                                                          - a non-pensioner                                    $570.27                                  $566.87
also become more difficult in the         affect their market price.
                                                                                          - a pensioner                                        $371.46                                  $369.24
future since the rules not only               Lawyers       presenting      at
                                                                                          - an allowance recipient                             $371.46                                  $369.24
apply to any oral statements made         Investment Funds Institute of
by company executives and invest-         Canada’s annual conference in                 The Allowance

ment managers, but to anyone else         Toronto last month said a strict                - regular                                            $851.29                                  $846.21

with the actual, implied or appar-        interpretation of the legislation               - survivor                                           $939.84                                  $934.24
ent authority to speak on behalf of       would seem to suggest that the               Source: Social Development Canada
the fund.                                 rules would not apply to most
    Primary market investors, who         investment funds.

						
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