BULLETIN #0210-P

View and Download English PDF

Mutual Fund Dealers Association of Canada
Association canadienne des courtiers de fonds mutuels
121 King Street West, Suite 1000, Toronto, Ontario, M5H 3T9
TEL: 416-361-6332 FAX: 416-943-1218 WEBSITE: www.mfda.ca

Contact: Paige
L.
Ward
BULLETIN #0210 – P
Director of Policy and Regulatory Affairs
July 24, 2006
Phone: 416-943-5838
E-mail: pward@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

MFDA Policy 5 – Branch Review Requirements

The MFDA Board of Directors and the recognizing securities commissions have approved
MFDA Policy 5 (Branch Review Requirements). The new Policy, attached, is effective
immediately.

The new Policy establishes minimum standards for the development and implementation of
branch and sub-branch review procedures. The objective is for Members to develop branch
review programs that maximize their ability to detect potential compliance issues, so that
corrective action may be promptly taken before serious problems occur.

Summary of Proposed Requirements

Branch Review Policies and Procedures

Each Member must implement a branch review program that allows the Member to assess the
supervisory procedures and practices in place at its branches and sub-branches, as well as the
quality of execution of those procedures. The review process must include interviews with
supervisors and Approved Persons as well as substantive testing, including a review of client
files and trade blotters, sales communications, advertising, client communications and client
complaints.

Branch Review Cycle

Members are generally expected to perform an on-site review of their branches no less than once
every three years. However, Members must review certain branches more frequently than once
every three years if justified based on risk. Where, under unusual circumstances, a Member
Page 1 of 8
exceeds a three year branch review cycle, the Member must be able to justify the longer review
cycle by demonstrating that the branches that have not been subject to an on-site review are low
risk and have been subject to alternative compliance review procedures performed by head
office, such as an off-site desk review. Under no circumstances however, should a Member
never perform an on-site review of a branch.

Qualifications of Reviewers

The individuals responsible for completing the branch reviews must have the training, skills and
proficiency necessary to accomplish the objectives of the review program. Individuals that have
successfully completed the courses required for designation as a branch manager as set out under
MFDA Rule 1.2.2(a) or that have equivalent experience, training or education would generally
be considered sufficiently qualified to perform branch reviews.

Follow Up and Reporting

The Member must have, as part of the branch review program, a consistent means of tracking results;
a means of reporting the results back to the branch in a timely fashion; a means of tracking responses;
and a means of ensuring that the branch implements any required changes in a reasonable amount of
time.
Branch Review Files

Branch review files, including working papers and other documentation, must be maintained in
accordance with Rule 5 and must be made available to MFDA staff upon request.

Doc #84300
Page 2 of 8
Mutual Fund Dealers Association of Canada
Association canadienne des courtiers de fonds mutuels
121 King Street West, Suite 1000, Toronto, Ontario, M5H 3T9
TEL: 416-361-6332 FAX: 416-943-1218 WEBSITE: www.mfda.ca

July 24, 2006

MFDA POLICY NO. 5

BRANCH REVIEW REQUIREMENTS

Introduction

This Policy establishes minimum standards for the development and implementation of branch
and sub-branch review procedures. All references to “branch” in this Policy include sub-
branches as defined in MFDA By-law No.1.

Members are responsible for establishing, implementing and maintaining policies and procedures
to ensure that business is conducted and managed in accordance with MFDA By-laws, Rules and
Policies and with applicable securities legislation. Under MFDA Policy 2, the Member is
required to conduct an on-going review of sales compliance procedures and practices at both
head office and at branch offices to confirm that these procedures are adequately fulfilling the
purposes for which they have been designed. The requirement to complete regular branch
reviews is consistent with these obligations and will serve to enhance the Member’s ability to
meet the fundamental supervision requirements under MFDA By-laws, Rules and Policies.

The intent of this Policy is to establish minimum standards for internal branch review programs
(“Branch Review Program”), while allowing Members sufficient flexibility to develop
procedures that are appropriate to the Member’s size and business model. Accordingly, strict
adherence to the minimum standards as set out in this Policy will not necessarily ensure that a
Member’s Branch Review Program is effective to ensure proper supervision and compliance
with MFDA Rules. The objective is for Members to create and effectively implement processes
that maximize their ability to detect potential compliance issues, so that corrective action may be
taken before serious problems occur. MFDA staff will assess the effectiveness of the Member’s
Branch Review Program in the course of conducting compliance examinations and may impose
additional requirements to ensure compliance with MFDA By-laws, Rules and Policies.

Branch Review Procedures

Each Member must establish a Branch Review Program to effectively assess and monitor
compliance with regulatory requirements at all branch locations.

a) General Requirements
• The Branch Review Program must include an assessment of the supervisory procedures
and practices in place at the branch, as well as the quality of execution of those
procedures.
Page 3 of 8
July 24, 2006
• The Branch Review Program must address all significant aspects of the Member’s
policies and procedures manual and MFDA By-laws, Rules and Policies.
• The Branch Review Program must include interviews with branch supervisors and a
selection of other Approved Persons along with substantive testing to verify the accuracy
of information that is provided in the interviews. Substantive testing should involve
reviewing client files, trade blotters, trust account records, advertising and marketing
material and other relevant records.

b) Branch Interviews
• The purpose of the interviews is to confirm that the branch manager and Approved
Persons are aware of requirements under MFDA By-laws, Rules and Policies and
applicable securities regulation. It is particularly important that the reviewer confirm that
the branch manager has a good understanding of the fundamental supervisory
requirements. The interview process also serves as a forum for the branch manager and
Approved Persons to raise and discuss issues and areas of regulatory concern.
• The interviews must also include discussion about branch policies and procedures
relating to:
− products and services offered to clients;
− complaints;
− advertising and sales communications;
− referral arrangements;
− outside business activities;
− account opening procedures; and
− other branch and sub-branch supervision issues.

c) Review of Trade Blotters and Other Supervisory Review Documentation
• Documentation must be reviewed to confirm that trade reviews have been performed
adequately and in a timely manner covering the minimum requirements of MFDA Policy
2. This includes a review to confirm that all trades in exempt securities and a sample of
initial trades, leveraged transactions, trades made under a limited trading authorization or
power of attorney, and trades in speculative funds have been reviewed. Samples of
different types of transactions, including purchases, switches and redemptions must be
reviewed. Trade blotters must be reviewed to assess:
− trading patterns;
− evidence of supervision; and
− timeliness of review.
• The suitability of individual trades must be assessed to confirm that the quality of trade
supervision is consistent with the Member’s standards and regulatory expectations.
• Trade supervision records must also be reviewed to confirm the recording of issues noted
by supervisory staff, inquiries made, responses received and resolutions achieved.
Page 4 of 8
July 24, 2006

d) Review of Client Files
• Client files must be examined to verify that there is proper account opening
documentation on file and that branch client files are appropriately safeguarded. Know-
your-client information must be reviewed to:
− assess completeness;
− confirm that back up for any changes has been maintained on file; and
− confirm that KYC information on the back office system matches with that
recorded in the files.
• The branch review process must confirm that account opening approval procedures have
been properly followed, where these are the responsibility of branch staff.
• Client files must be examined to verify that proper evidence of client instructions and any
relevant trading authorizations have been maintained on file. Files should be reviewed to
assess the adequacy of notes regarding advice or recommendations provided to the client,
as well as notes regarding discussions relating to fees and services, if any.
• Trade orders must be reviewed to:
− assess suitability;
− detect unlicensed / out-of-province trading;
− confirm proper identification of leveraged trades; and
− confirm timeliness of trade processing.

e) Review of Sales Communications, Advertising and Client Communications
• The Branch Review Program must include a review of sales communications, advertising
and client communications, including business cards, letterhead and websites to confirm
that any required approvals have been obtained.
• The branch review process must also involve, where appropriate, discussions and testing
to detect:
− misleading communications;
− trade names of Approved Persons that have not been approved by the Member;
− undisclosed outside business activities or personal financial dealings with clients;
− securities related business conducted outside of the Member; and
− undisclosed referral arrangements.
• Where the reviewer detects a potential material deficiency with respect to the conduct of
outside business or personal financial dealings under MFDA By-laws, Rules or Policies,
the Branch Review Program must provide for the review of files of Approved Persons
relating to non-Member business.

f) Complaints
• The branch review process must confirm that any complaints that may have been made
involving individuals at the branch have been recorded and handled in accordance with
Member procedures and MFDA By-laws, Rules and Policies.
Page 5 of 8
July 24, 2006
• The nature of any complaints, as well as the timeliness and fairness of resolution must be
assessed.
• The branch review process must confirm that all complaints and pending legal actions are
made known to the compliance officer at head office (or another person at head office
designated to receive such information) within two business days in accordance with
MFDA Policy No.3. (“Handling Client Complaints”).

Scope of Review

Sample size and the extent of the review are matters of discretion for the Member. However, at a
minimum, the review should involve a preliminary screening of the branch that is sufficient to
provide a reasonable indication of items or issues for further investigation. Sample size and the
extent of review must be reasonable based on a number of factors such as:
• the specific activities at the branch;
• complaint history;
• number of Approved Persons at the branch;
• trade volume/commissions earned;
• results of previous reviews;
• MFDA compliance examination findings;
• daily trade supervision issues;
• experience of supervisory staff at the branch;
• supervisory tools used at the branch (manual or automated);
• the nature of dual occupations or outside business activities carried on at the branch;
• the volume of leveraged trades; and
• the date of the last review.

Branch Review Cycle and Schedule

The Member must be able to justify its branch review schedule and cycle by developing a risk-
based methodology to rank branch locations as high, medium or low risk using appropriate
criteria. Such criteria would include the factors set out above under “Scope of Review”.
Members are generally expected to perform an on-site review of their branches no less than once
every three years. However, Members must review certain branches more frequently than once
every three years if justified based on risk. Where, under unusual circumstances, a Member
exceeds a three year branch review cycle, the Member must be able to justify the longer review
cycle by demonstrating that the branches that have not been subject to an on-site review are low
risk and have been subject to alternative compliance review procedures performed by head
office, such as an off-site desk review. Under no circumstances however, should a Member
never perform an on-site review of a branch.

The branch review cycle and the status of completion of the branch review cycle against
benchmarks should be included as part of the annual compliance report to the board of directors
or partners of the Member required by MFDA Rule 2.5.2(b).
Page 6 of 8
July 24, 2006

Qualifications for Reviewers

The individuals responsible for performing the branch reviews must have the training, skills and
proficiency necessary to accomplish the objectives of the review program. The individuals must
possess sufficient knowledge not only to be able to follow prescribed procedures, but to be able
to know where follow up review should be pursued. In addition, Members should ensure that
individuals delegated the responsibility to perform branch reviews have adequate existing time or
whether workloads can be rescheduled in order to provide the time necessary for proper
performance.
Individuals that have successfully completed the courses required for designation as a branch manager
as set out under MFDA Rule 1.2.2(a) or that have equivalent experience, training or education would
generally be considered sufficiently qualified to perform branch reviews. The Member must consider
the responsibilities and functions that are performed as part of a branch review and make the
determination of what constitutes equivalent experience, training or education sufficient to qualify an
individual as a branch reviewer. The Member will be required to satisfy the MFDA that the
equivalency standard has been met.
Equivalent experience, training or education may include: audit experience, legal training in the area
of securities or mutual fund regulation, or experience in a regulatory supervisory or compliance role.
Members may also have an internal training program for branch reviewers, which may satisfy the
equivalency test.
The branch reviewer must be independent of the branch and the branch manager, so as to ensure
that the reviewer can act objectively without preconceived opinions and is not subject to
inappropriate influence when performing the review.

Reporting of Results

All serious issues detected in the branch reviews must be made known to the compliance officer
at head office (or another person at head office designated to receive such information) within a
reasonable period of time.

Each Member must also ensure that branch managers are made aware of all issues that are
identified in the branch review in a timely manner. In addition, Approved Persons at the branch
should be made aware of issues identified in the report relevant to them.

The report to the branch manager on the results of the branch review must include the following
information:
• the date of the review;
• basic branch information, including the Approved Persons and staff at the branch
location;
• details of any compliance deficiencies noted in completing the branch review
including missing documentation or any gaps in supervision;
Page 7 of 8
July 24, 2006
• the date of the report; and
• the date by which a response is required.

Follow Up of Branch Review Findings

The Member must have procedures in place to ensure that the issues identified in the course of
the branch review are followed up and resolved. Therefore, the Branch Review Program must
provide for:
• consistent and timely reporting of results;
• a means of tracking responses to the reports; and
• a means of ensuring that the branch implements all required changes in a reasonable
amount of time.

Branch Review Files

Members must maintain orderly, up-to-date files for each branch that has been reviewed. The
files must include details of the procedures performed at the branch and all working papers to
support the work done and provide evidence of any deficiencies noted. All follow-up
documentation, including the report to the branch manager, must also be included in the file.
Records must be maintained for a period of seven years and must be made available for review
by the MFDA, if requested.

Branch review records should be used to identify significant deficiencies that may disclose a
need for further education and training of branch supervisors, Approved Persons, or other staff.
When systemic issues are detected through the branch review process, a review of internal
procedures and practices may be warranted.

Page 8 of 8