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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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