BULLETIN #0524-P

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Paige Ward

General Counsel, Corporate Secretary and Vice President, Policy

(416) 943-5838

pward@mfda.ca

BULLETIN #0524-P

April 16, 2012

Amendments to MFDA Rule 3.3.2 (Segregation of Client Property – Cash) and Policy No. 4 Internal Control Policy Statements

Amendments to MFDA Rule 3.3.2 and Policy No. 4 have received all requisite approvals and will come into effect on April 30, 2012.

Amendments to Rule 3.3.2 will permit Members discretion as to whether they will pay interest on client cash held in trust, subject to a requirement for Members to disclose to clients whether interest will be paid on client cash and, if so, at what rate.  The amendments also include a requirement that any changes in the interest rate may only be made on at least 60 days’ written notice to the client.

In the case of Level 3 and 4 dealers, Members will have one year from the effective date of the Rule, ending on April 30, 2013, 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.

Member Regulation Notice MR-0080Payment of Interest on Client Cash Held in Trust has also been issued in order to provide further guidance on compliance with the amended Rule.  The amended Rule and Policy are attached as Schedule “A”.


Schedule “A”

3.3.2 Cash

  1. Trust Account. All cash held by a Member on behalf of clients shall be held separate and apart from the property of the Member in a designated trust account with a financial institution (which is an acceptable institution for the purposes of Form 1).
  2. Determination. Each Member shall determine on a daily basis the amount of cash it holds for clients and that is required to be held in segregation pursuant to this Rule 3.3.
  3. Deficiency. In the event of a deficiency in the amount of cash required to be held in trust for a client, the Member shall immediately provide from its own funds an amount necessary to correct the deficiency and any unsatisfied obligation to do so shall be immediately charged to the capital of the Member.
  4. Notice to Institution. The Member must advise the financial institution in writing that:
    1. the account is established for the purpose of holding client funds in trust and the account shall be designated as a “trust account”;
    2. money may not be withdrawn, including by way of electronic transfer, by any person other than authorized employees of the Member; and
    3. the money held in trust may not be used to cover shortfalls in any other accounts of the Member.
  5. Commingling. The Member shall not commingle money for mutual fund transactions with money held in trust for the purchase or sale of other securities or financial products (such as deposit instruments or segregated funds). The Member must maintain separate accounts, which may be designated as trust accounts, for the purchase and sale of such other securities or financial products.
  6. Interest Bearing. The trust account bears interest at rates equivalent to comparable accounts of the financial institution.
  7. Use of Funds. The Member shall not use any money received for the investment of mutual funds or other securities to finance its own operations.
  8. Distributions. The Member must have a system in place to properly distribute on a cash basis interest earned in the mutual fund trust account to either the mutual fund companies for reinvestment or to clients directly.
  9. Payment of Interest. The Member must disclose to clients whether interest will be paid on client cash held in trust and the rate. Notwithstanding this requirement, the Member may retain the interest earned in excess of the amount of interest payable to the client. The Member may only revise the rate of interest upon the delivery of at least 60 days written notice to the client.

Internal Control Policy Statement 4 – Cash and Securities

Trust Accounts For Client Funds

  1. All client cheques are recorded upon receipt by the Member and deposited to the trust account on the day of receipt. If a cheque is received after normal business hours, the cheque is deposited the following business day.
  1. Deposits to the trust account are balanced daily against deposit records, receivable records, and mutual fund settlement records.
  1. Trust accounts are established to bear interest at rates equivalent to comparable accounts of the financial institution.
  1. Money received from clients for investment in mutual funds is not used to finance the Member’s operations. This would include offsetting bank charges with interest earned on monies held in trust.
  1. The Member distributes interest earned on the mutual fund trust account on a cash basis to either the mutual fund companies or mutual fund investors.
  1. Members must segregate interest received that is payable to clients in respect of monies held in trust for clients in accordance with Rules3.1 and 3.3.2.
  1. Members that pay interest to clients in accordance with MFDA Rule 3.3.2(e) must maintain adequate records of amounts owing and paid to each individual client.

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