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MSN-0080

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Paige Ward

General Counsel, Corporate Secretary and Vice President, Policy

(416) 943-5838

pward@mfda.ca

MSN - 0080

Apr 16, 2012

Payment of Interest on Client Cash Held in Trust

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.


This Notice is intended to clarify the obligations of Members with respect to the requirement under MFDA Rule 3.3.2(e) for Members to disclose to clients whether interest will be paid on client cash held in trust and, if so, the rate of interest paid.

Background

MFDA Rule 3.3.2 (Segregation of Client Property – Cash) has been amended to remove the prohibition from commingling money for mutual fund transactions with money held in trust for the purchase or sale of other securities or financial products and the prohibition from earning interest on client funds held in trust. The requirements in Rule 3.3.2 respecting commingling and the allocation and payment of interest on client cash held in trust were based on the provisions of Parts 11 (Commingling of Cash) and 12 (Compliance Reports) of National Instrument 81-102 Mutual Funds (“NI 81-102”), which has recently been amended to provide an exemption from the requirements of Parts 11 and 12 of NI 81-102 to MFDA Members.

Disclosure Requirement

Under Rule 3.3.2, Members must disclose to clients in writing whether interest will be paid on client cash held in trust. This Rule does not apply to Level 2 dealers, as they are prohibited from holding client cash.

In the case of Level 3 and 4 dealers, Members will have one year from the effective date of the Rule to notify clients of their policy with respect to interest on client cash held in trust. However, a Member that chooses to change its practice and no longer pay interest earned on client cash held in trust to the fund managers or to clients directly, must provide clients with at least 60 days’ written notice in advance of implementing the change.

Where Members pay interest on client cash held in trust, Members are required to disclose the rate of interest paid. If a variable rate of interest is paid, Members may satisfy the requirement of Rule 3.3.2(e) by disclosing to the client the fact that the interest rate is a variable rate (e.g. primeplus 1%).

Notice of Changes

Rule 3.3.2(e) requires that any changes in the interest rate may only be made on at least 60 days’ written notice to the client. Members may advise the client of the change by including updated information with regular client communications such as account statements.

If the interest rate is variable, the requirement with respect to written notification of subsequent changes to the rate would not apply, unless there is a change in the basis upon which the rate is calculated.

Maintaining Evidence of Disclosure

Members must maintain evidence that the disclosure has been provided to clients. If the disclosure is incorporated into the New Account Application Form or account documentation and is signed by the client, maintaining a copy in the client file will be sufficient to evidence delivery. Members that choose to provide the disclosure as a stand-alone document may evidence delivery by signed client acknowledgements or by maintaining copies of disclosure documents in client files, along with detailed notes of client meetings and discussions evidencing that the disclosure has been provided. Members are advised to refer to MFDA Member Regulation Notice MR-0064 – Maintaining Evidence of Disclosure for more guidance with respect to maintaining evidence of required disclosures.

Internal Controls

Members are reminded of the general requirement in Rule 3.3.1 to hold cash, securities or other property of their clients separate and apart from their own property and in trust for clients. Members are prohibited from using client funds for investment in mutual funds, securities or other investment products to finance their own operations.

Members that pay interest to clients in accordance with MFDA Rule 3.3.2(e) must segregate interest received that is payable to clients in respect of monies held in trust for clients in accordance with Rule 3.3.1 and maintain adequate records of amounts owing and paid to each individual client.

DM #302587