General Counsel, Corporate Secretary and Vice President, Policy
MSN - 0031
Oct 29, 2004(Updated Jan 19, 2017)
Control or Authority over the Financial Affairs of a Client – Rule 2.3.1
MFDA Staff Notices are intended to assist Members and their Approved Persons in the interpretation, application of and compliance with requirements under MFDA By-laws and Rules. Notices make reference to these requirements and set out MFDA staff's interpretation of how to comply with these requirements. Notices may also include best practices or guidance.
1. Full or Partial Control or Authority over the Financial Affairs of a Client
Members and their Approved Persons are prohibited under MFDA Rule 2.3.1(a) (Control or Authority) from having full or partial control or authority over the financial affairs of a client. As noted in the Rule, this includes: (i) accepting or acting upon a power of attorney from a client; (ii) accepting an appointment to act as a trustee or executor of a client; or (iii) acting as a trustee or executor in respect of the estate of a client.
The requirements of the Rule would also apply to situations where an Approved Person has such control or authority while acting as an administrator or in a similar role in respect of the affairs of a client’s estate. In addition, an Approved Person would be considered to have full or partial control or authority over the financial affairs of a client where the Approved Person has a joint account with the client, acts as a joint trustee with the client, is a co-executor of a client’s estate, or has trading authorization in respect of the client’s account.
Requirements under Rule 2.3.1 deal with authorizations that are broad in scope and do not apply to limited trading authorizations, as addressed under MFDA Rule 2.3.2 (Limited Trading Authorization).
Under Rule 2.3.1(c), an Approved Person may have full or partial control or authority over the financial affairs of a client provided that: the client is a Related Person, as defined by the Income Tax Act (Canada)1, the Approved Person notifies the Member of the appointment, and obtains written Member approval prior to accepting or acting upon the control or authority.
3. Notice and Approval
The purpose of the notice and approval requirement under Rule 2.3.1(c) is to ensure that the Member has sufficient time to appropriately assess any actual or potential risks/conflicts of interest that might be associated with the assumption of such control or authority by the Approved Person in the particular circumstances. To meet the regulatory objectives of the Rule, an Approved Person must notify the Member:
- Upon becoming aware: as soon as the Approved Person becomes aware of the appointment. In certain situations, the Approved Person may only become aware of the appointment after the incapacity or death of the individual who appointed them;
- Upon accepting: when the Approved Person accepts the appointment, if there was a significant period of time between the Approved Person becoming aware of the appointment and accepting it; and
- Upon acting: when the Approved Person acts upon the control or authority, if there was a significant period of time between the Approved Person accepting the appointment and acting upon it (i.e. when the individual who appointed the Approved Person loses capacity or dies).
In certain circumstances, an Approved Person might become aware of and accept an appointment at the same time.
4. Appointment by Non-Related Person
In certain situations, an Approved Person may be appointed by an individual who is not a Related Person of the Approved Person, and may only become aware of the appointment after the incapacity or death of the Non-Related Person who appointed them. In such circumstances, the Approved Person is unable to act on the appointment. Guidance in respect of this matter is set out under section 5, below.
5. Policies and Procedures / Member Supervision
The Member’s policies and procedures respecting requirements under Rule 2.3.1 should, at a minimum, address the following:
- Application of exception: the limited circumstances under which the Rule 2.3.1(c) exception applies (i.e. that it only applies to a client who is a Related Person, as defined by the Income Tax Act (Canada), of the Approved Person);
- Member notification: when the Approved Person is required to notify the Member, (i.e. as set out under section 3, above);
- Approval requirements: that the Approved Person is required to obtain written Member approval prior to accepting or acting upon the control or authority. The Member’s policies and procedures should clearly set out the process to be followed by Approved Persons in respect of notification and Member approval pursuant to the requirements of Rule 2.3.1(c);
- Appointment by Non-Related Person: where, as described under section 4 above, an Approved Person was appointed by a Non-Related Person, Member policies and procedures should provide that the Approved Person either: (i) decline the appointment and, if appropriate, take reasonable steps to find another individual to assume the control or authority or, if the Approved Person is unable to do this, (ii) accept the appointment and arrange to have the client’s account/estate account transferred to another registrant under securities legislation so as to avoid the conflict of interest. Member policies and procedures should also address the fact that, where the Approved Person renounces the control or authority in the circumstances noted above, they must do so in accordance with the procedures set out in the applicable legislation of the jurisdiction;
- Related requirements under MFDA Policy No. 2 Minimum Standards for Account Supervision: Member policies and procedures should address related supervisory requirements (i.e. those related to account/trade identification, and trade review), as set out under Policy No. 2; and
- Standard of Conduct/Conflicts of Interest: the Member’s policies and procedures should also remind Approved Persons that the exercise of control or authority, as permitted under Rule 2.3.1(c), is subject to MFDA requirements respecting general standards of conduct, and conflicts of interest, as set out under Rules 2.1.1 (Standard of Conduct) and 2.1.4 (Conflicts of Interest).