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Bulletin #0562-P

Policy
Client Disclosure Sweep – Review of Member Relationship Disclosure Documents

Contact: Aamir Mirza
BULLETIN #0562 – P
Senior Legal and Policy Counsel
March 6, 2013
Phone: 416-945-5128
E-mail: amirza@mfda.ca

MFDA Bulletin

Policy

For Distribution to Relevant Parties within your Firm

Client Disclosure Sweep – Review of Member Relationship Disclosure
Documents

On July 5, 2012, MFDA staff issued Bulletin #0534-P Client Disclosure Sweep respecting the
review of Member relationship disclosure documents. Generally, the disclosure provided by
Members was adequate to meet the requirements of MFDA Rule 2.2.5 (Relationship Disclosure).
In certain cases, Members were contacted on an individual basis.

The purpose of this Bulletin is to communicate the results of the review and provide additional
guidance and information to Members in respect of requirements under Rule 2.2.5. Members
should review their relationship disclosure in conjunction with staff comments, as noted below,
and, as appropriate, make revisions to their relationship disclosure to incorporate the guidance
provided by staff.

I.
General

MFDA Rule 2.2.5 requires that, for each new account opened, the Member provide prescribed
written disclosure to the client. For new clients, Members were required to comply with
requirements under Rule 2.2.5 by September 28, 2011. With respect to existing clients,
Members must comply with the requirements under Rule 2.2.5 by December 3, 2013.

Changes to requirements under National Instrument 31-103 Registration Requirements,
Exemptions and Ongoing Registrant Obligations
(“NI 31-103”) may impact relationship
disclosure that Members are required to provide and, as a result, Members may need to make
future revisions to their relationship disclosure to comply with any such changes
.

MFDA Staff Notice MSN-0075 Relationship Disclosure (“MSN-0075”) provides guidance and
clarification to Members with respect to their obligations under Rule 2.2.5. In discussing staff
expectations regarding the content of the relationship disclosure to be provided under each of
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subsections 2.2.5(a) – (g), staff has set out sample text that Members can incorporate, with
appropriate amendments, into their own relationship disclosure documents.

MFDA staff notes that, where Members choose to incorporate the sample text set out under
MSN-0075, they should, as appropriate, be customizing this text to ensure that the disclosure
clearly describes any unique aspects of the Member’s operations, including the nature of the
advisory relationship; products and services offered; and the compensation paid to the Member.
This matter is addressed below in greater detail.

II.
Staff Comments


Nature of the Advisory Relationship (Rule 2.2.5(a))

Summary

Rule 2.2.5(a) requires that the Member provide a brief description of the nature of the advisory
relationship and how it operates.

Staff Comments

Disclosure should make it clear that the client is responsible for making investment decisions
(i.e. that the account is not a discretionary account), but can rely on the advice given by the
Approved Person, and that the Approved Person is responsible for the advice and ensuring that it
is suitable, based on the client’s investment needs and objectives.


Nature of the Products and Services Offered (Rule 2.2.5(b))

Summary

Rule 2.2.5(b) requires the Member to provide a description of the nature of the products and
services offered by the Member.

Staff Comments

In a few cases, staff has noted, with respect to proprietary products (or those of a related issuer),
that disclosure is not sufficiently clear in informing clients that: (i) only proprietary products (or
those of a related issuer) are sold; or (ii) in identifying specific products as being proprietary (or
those of a related issuer) where the Member offers such products along with those of third
parties.

Proprietary Product Disclosure:
If the Member sells only proprietary products (or those of a
related issuer), this fact should be clearly disclosed. Where a Member offers such products along
with third party products, proprietary products (or those of a related issuer) should be clearly
identified.

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Outside Business Activity: Disclosure should clearly distinguish between products or services
offered by the Member and those offered by the Approved Person as an outside business activity,
noting that such activities are not the business of the Member or the responsibility of the
Member.

Products Offered or Sold: Product disclosure under this section may be general (e.g. “We offer
or sell mutual funds, exempt products, PPNs, GICs, LSIFs”, etc.), but should identify the type or
class of all products sold.

Procedure Regarding Handling of Cash and Cheques (Rule 2.2.5(c))

Summary

Rule 2.2.5(c) requires the Member to provide disclosure to the client that describes the Member’s
procedures regarding the receipt and handling of client cash and cheques.

Staff Comments

Level 2 Dealers: Disclosure should explain that Members cannot accept or hold client cash and
that cheques are to be made payable to the issuer or carrying dealer, as applicable, but not to the
introducing dealer or Approved Person.

Level 3 and 4 Dealers: Disclosure should note that all client cheques are to be made payable to
the Member and not the Approved Person.

Where Cash Not Accepted: Where Members do not allow Approved Persons to accept cash,
this should also be disclosed.

In some cases, staff has observed that certain Member relationship disclosure documents note
detailed procedures for cheque safekeeping, processing or when cheques will be held. While
Members may wish to include such information for the purpose of informing their clients, the
provision of such information is not necessary to meet the relationship disclosure requirements
under this section.

Suitability of Orders Accepted/Recommendations Made (Rule 2.2.5 (d))

Summary

Rule 2.2.5(d) requires a description of the Member’s suitability obligation to clients.

Staff Comments

With respect to certain Member relationship disclosures, staff has noted that one or more of the
elements of suitability disclosure to be addressed under this subsection are missing.

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Whether a Member chooses to address the disclosure requirements under this subsection by
drafting their own disclosure or by adopting the sample text provided under MSN-0075, all of
the following basic elements of disclosure, as set out in MSN-0075, should be addressed:

 The regulatory obligation of Members to ensure that each order accepted or
recommendation is suitable;

 The application of the suitability obligation to trades proposed by client, whether or not a
recommendation is made; and

 The requirement for a suitability assessment on the occurrence of any of the Rule 2.2.1(e)
triggering events.

In disclosing the requirement for a suitability assessment on the occurrence of the Rule 2.2.1(e)
triggering events, a few Member relationship disclosures refer to when the client transfers
“securities”, “mutual funds” or “funds”, instead of “assets” into an account at the Member. A
client making a transfer into an account at the Member may be transferring in securities other
than mutual funds or other investments. As a result, disclosure provided under this section
should refer generally to “assets” transferred into an account at the Member.

Defining KYC Terms (Rule 2.2.5(e))

Summary

Rule 2.2.5(e) requires the Member to define various terms with respect to the Know-Your-Client
(“KYC”) information collected by the Member and to describe how this information will be used
in assessing investments in the account.

Staff Comments

All Member KYC forms are subject to comprehensive review in the course of sales compliance
examinations. Any staff comments respecting KYC forms are addressed with Members through
the examination process.

Members contemplating changes to their KYC forms that involve the definition of KYC terms,
may contact the Sales Compliance manager assigned to them for additional guidance as to
whether such changes would be consistent with the requirements of Rule 2.2.5(e).

Content and Frequency of Reporting (Rule 2.2.5(f))

Summary

Rule 2.2.5(f) requires a description of the content and frequency of reporting for the account.

MFDA Rule 5.3.5 (Performance Reporting): As MFDA staff has previously advised
Members, the implementation of Rule 5.3.5 has been suspended, pending the adoption of
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performance reporting standards under NI 31-103 and any amendments to MFDA Rules that
may be necessary to harmonize with such requirements.

Staff Comments

Staff has observed the following with respect to the disclosure provided under this subsection:

 With respect to account statements, disclosures note frequency of delivery, but not
content;

 In certain cases, disclosure with respect to the frequency of delivery for account
statements has not been updated to reflect changes to MFDA Rules. Such disclosure
must reflect quarterly delivery, as set out under MFDA Rule 5.3.1;

 Disclosures note that trade confirmations will be sent by the fund company, but do not
provide details in respect of the content or frequency of delivery for trade confirmations;
and

 Content disclosure for account statements, trade confirmations and performance reporting
is addressed by reproducing variations of MFDA Rules 5.3.2 (Content of Account
Statement – formerly Rule 5.3.3), 5.4.3 (Trade Confirmation – Content) and 5.3.5
(Performance Reporting).

Summary Disclosure:
The intent of the disclosure requirement under this section is to provide
clients with a brief, plain language, description of the content and frequency of reporting
requirements for account statements and trade confirmations, as well as brief disclosure in
respect of performance reporting that will be provided by the Member. Staff does not expect
Members to reproduce the text of MFDA Rules under this section.

Compensation and Reference to Other Sources of Information (Rule 2.2.5(g))

Summary

Rule 2.2.5(g) requires a general description of the nature of the compensation paid to the
Member with a reference to more specific information available through other sources.

Staff Comments

In a few cases, staff has noted that disclosures generally state that there are costs associated with
investing in mutual funds. Disclosures then provide a general explanation of certain terms
relating to such fees or charges (e.g. MER, trailing commissions, sales charge options, short-term
trading fees, switch fees, etc.).

 As set out in MSN-0075, disclosure under this section must include a general description
of compensation paid to the Member with a reference to more specific information
available through other sources;
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 Instead of generally noting that there are costs associated with mutual fund investing and
providing a general explanation of terms, disclosure should identify the general types of
compensation that the Member does or may receive;

 Where funds are sold on a “no-load” basis, Member relationship disclosure documents
may explain under this section that sales charges or trailing commissions are not paid on
purchases or redemptions. However, in addition to any such explanations, disclosures
should include a general discussion of compensation that the Member does or may
receive;

 Where Members will or may enter into referral arrangements in respect of the client and
receive fees or compensation as a result of such arrangements, general disclosure of such
compensation should be provided; and

 If the Member is entitled to additional fees when the Member sells specific products (e.g.
placement fees or a percentage of performance fees in addition to sales charges or trailing
commissions), the Member should provide general disclosure in respect of this matter.

DM#307041v4
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