mfda bulletin - mutual fund dealers associationetfs. in addition, there are certain topics/concepts...
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Contact: Paige Ward
General Counsel, Corporate Secretary & Vice-President, Policy
Phone: 416-943-5838
E-mail: [email protected]
BULLETIN #0653 – P
July 22, 2015
MFDA Bulletin
Policy
For Distribution to Relevant Parties within your Firm
Request for Comment – Consultation Document (Proficiency Standard for Approved Persons Selling Exchange-Traded Funds (ETFs)) and Draft MFDA Staff Notice - Outside Activity
On June 18, 2015, the British Columbia Securities Commission (“BCSC”) published for public
comment Proposed Amendments to MFDA Rule 1.2. (Individual Qualifications).
The proposed amendments are intended to conform MFDA Rules with similar requirements
under securities legislation by adopting the National Instrument 31-103 Registration
Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”), Form 33- 109F4
Registration of Individuals and Review of Permitted Individuals (“Form 33-109F4”) and
Companion Policy to NI 31-103 (“31-103CP”) changes in respect of requirements pertaining to
proficiency and outside activities.
A. Consultation Document - Proficiency Standard for Approved Persons Selling Exchange-Traded Funds (ETFs)
In conjunction with the proposed amendments to Rule 1.2, MFDA staff is issuing for comment a
consultation document that sets out details of a proposed proficiency standard that would satisfy
the requirements under MFDA Rule 1.2.3 for Approved Persons selling ETFs.
The consultation document (Proficiency Standard for Approved Persons Selling Exchange-
Traded Funds (ETFs)) is attached to this Bulletin as Schedule “A”.
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B. MSN-0040 Outside Activity
In conjunction with the proposed amendments to Rule 1.2, MFDA staff is also proposing
revisions for comment to MFDA Staff Notice MSN-0040 Outside Activity. The revised MFDA
Staff Notice is attached to this Bulletin as Schedule “B”.
C. Comment on MFDA Staff Notices
Members and other interested parties are requested to provide comment on the consultation
document (Proficiency Standard for Approved Persons Selling Exchange-Traded Funds (ETFs))
and on the proposed revised MSN-0040 Outside Activity.
Comments on the consultation document and MFDA Staff Notice should be delivered by
September 16, 2015 to:
Paige Ward,
General Counsel, Corporate Secretary and Vice-President, Policy,
Mutual Fund Dealers Association of Canada,
121 King St. West, Suite 1000,
Toronto, Ontario, M5H 3T9
or emailed to [email protected].
DOCs# 433967v3
MFDA Consultation Document
PROFICIENCY STANDARD FOR APPROVED PERSONS SELLING EXCHANGE TRADED FUNDS (ETFs)
On June 25, 2015, the British Columbia Securities Commission (“BCSC”) published for public
comment proposed amendments to MFDA Rule 1.2 (Individual Qualifications). Proposed Rule
1.2.3 sets out a general proficiency principle that would apply in situations where additional
education, training and proficiency may be appropriate (e.g. where Members and Approved
Persons trade in investment products that have unique features such as ETFs). The purpose of
this consultation document is to solicit comment on details of a proficiency standard for
Approved Persons selling ETFs that would satisfy proposed MFDA Rule 1.2.3.
Background
Subject to appropriate registration and proficiency, MFDA Members and their Approved Persons
may sell ETFs that meet the definition of a mutual fund. However, there are important
differences between ETFs and conventional mutual funds, including how they are transacted,
that Approved Persons must know and understand to meet the general proficiency principle
under proposed Rule 1.2.3 and NI 31-103. Existing courses and examinations used by Approved
Persons to satisfy proficiency requirements under NI 31-103 to sell conventional mutual funds
do not adequately address the sale of ETFs.
NI 31-103 establishes a general proficiency principle for registrants. As set out under Part 3.4(1)
of NI 31-103: “An individual must not perform an activity that requires registration unless the
individual has the education, training and experience that a reasonable person would consider
necessary to perform the activity competently.” Members must ensure that each Approved
Person offering ETFs has adequate proficiency.
Proposed Rule 1.2.3 states: “An Approved Person must not perform an activity that requires
securities registration unless the Approved Person has the education, training and experience that a
reasonable person would consider necessary to perform the activity competently, including
understanding the structure, features and risks of each security that the individual recommends.”
ETF Proficiency
In order to satisfy the proficiency principle under proposed Rule 1.2.3, Approved Persons would
need to receive training on information about characteristics and features of ETFs, as well as,
training on how ETFs will be offered through the Member.
Training on Member Policies and Procedures
SCHEDULE A
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Member specific training would focus on the information that Approved Persons would need to
know about the Member’s policies and procedures for transacting in ETFs. Training would
include, but not be limited to, the following:
Detailed product information for the ETFs approved for sale by the Member;
How market quotes will be obtained;
The types of trades accepted and the information required for each trade accepted;
The disclosure information required for each transaction;
How evidence of trade instructions and disclosures will be maintained; and
How trade orders will be processed.
ETF Information
Training should focus on new information that an Approved Person would need to know about
ETFs. In addition, there are certain topics/concepts that are applicable to both ETFs and
conventional mutual funds. ETF training should highlight the key differences between ETFs and
conventional mutual funds.
Legend:
New Information Content should be explained in detail.
Generally a higher level of detail is expected.
Should include comparison of ETFs and conventional mutual funds.
Existing Topics and
Concepts
Existing topics and concepts should be explained in the context of ETFs.
Should include comparison of ETFs and conventional mutual funds.
General Topic Sub-Topics Comment Percentage
Allocation
Introduction to
ETFs
Definition of an Exchange-Traded Fund Provide an ETF definition.
Explain how they have
attributes of both conventional
mutual funds and stocks.
15
Registration/licensing requirements and limitations Review the registration
requirements to sell mutual
funds and the limitations of
registration for Dealing
Representatives.
Review what products Dealing
Representatives can and cannot
sell.
Description of ETFs that can be sold by Approved
Persons:
o Index Tracking
o Actively Managed
o Quasi-Active/Quasi-Passive
Describe in detail the types of
ETFs that can be sold by
Dealing Representatives.
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General Topic Sub-Topics Comment Percentage
Allocation
Description of ETFs that cannot be sold by
Approved Persons:
o Leverage and Inverse
o Commodity
Describe in general the types of
ETFs that cannot be sold by
Dealing Representatives.
Regulation of
ETFs
Offering Documents
o (National Instrument 41-101 – General
Prospectus Requirements)
Disclosure Requirements
o Delivery of Summary Document (Note:
New legislation has been proposed to
replace the Summary Document with an
ETF Facts document and delivery
requirements)
o Continuous Disclosure
Investment Restrictions
o Investment restrictions applicable to ETFs
Independent Review Committee
o Role and responsibility
Generally describe the
regulation of ETFs including
the offering documents,
disclosure requirements,
investment restrictions and the
role of the Independent Review
Committee.
May include a summary of how
the regulation of ETFs is
similar/different than
conventional mutual funds.
10
Characteristics
of ETFs
Description of investment management styles:
o Active vs. Passive
o Quasi-Active/Quasi-Passive
o Indexing
o What are indices?*
o Tracking an Index
Physical vs. Synthetic
Full Replication vs.
Sampling
Tracking Error
Describe Passive vs. Active
investment management styles.
Describe Quasi Passive/Active
investment management styles.
Provide examples of each style.
Define what is an Index and
describe in detail the different
methods for tracking an Index.
Explain and give examples of a
tracking error.
20
Creation and Redemption of Units
o Designated Brokers/Dealers/Market Makers
o New ETFs
o In-kind creation
o In-cash creation
o Existing ETFs
o Additional unit creation
o Redemption of units
o When number of units may change
Describe generally the various
roles and responsibilities of:
Designated Brokers; Dealers;
Market Makers.
Describe in detail how new
ETFs are created and funded.
Describe how new units are
created for existing ETFs.
Describe how existing ETF
units are redeemed.
Describe circumstances where
ETF units may be created or
redeemed.
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General Topic Sub-Topics Comment Percentage
Allocation
Operating Costs
o Management fees
o Operating expenses
o Trading expenses
o Trailing commissions
Generally describe the various
operating costs that can apply
to ETFs with a focus on
differences between ETFs and
conventional mutual funds.
Features and Benefits
o Professionally Managed
o Low cost
o Transparency
o Tax Efficiency
o Liquidity
o Diversification
Generally describe the features
and benefits of ETFs with a
focus on differences compared
to conventional mutual funds.
Explain that some features may
only apply to certain ETFs. For
example, an ETF may not be
diversified.
General Risks
o Market Risk
o Equity Risk
o Interest Rate Risk
o Currency Risk
o Credit Risk
o Foreign Investment Risk
o Style Risk
o Concentration Risk
o Counter-party Risk
o Tracking Error
Generally describe, with
examples, each risk that can
apply to ETFs.
Explain in detail the risk of
market price. Explain how
market price differs from NAV
pricing and that market price
risk applies to ETFs and not
conventional mutual funds.
o Risk that market price differs from NAV
Compare ETFs to:
o Conventional Mutual Funds
o Closed-End Funds
o Exchange -Traded Notes
Provide a summary of key
differences and similarities
between ETFs and
Conventional Mutual Funds,
Closed-End Funds and
Exchange -Traded Notes.
Exchange
Trading
Introduction to Financial Markets
o Describe Primary Market
o Describe Secondary Markets*
o Auction Markets
o Dealer (Over-The-Counter)
Markets
Define the terms Primary
Market and Secondary Market.
Describe in detail the various
Secondary Markets focusing on
the markets that ETFs will be
traded. Details should include
type of markets, market hours
and any specific trading rules
and requirements.
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Trading on an Exchange
o ETF Pricing
o Market pricing
Continuous during market
open hours
o NAV pricing
End of day calculation
Daily, Weekly, Monthly
o Risk that market price differs from
NAV
Explain that ETFs have both a
market price and a NAV
calculation.
Explain the difference between
calculating a NAV and market
price.
Explain that ETFs may not
trade at their NAV.
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General Topic Sub-Topics Comment Percentage
Allocation
o Quotes system
o What’s a Bid?
o What’s an Ask?
o Bid/Ask Spread
o Last Trade Price
o Market Open/Market Close Price
Define the terms Bid, Ask and
the Bid/Ask spread.
Explain in detail how to
properly quote an ETF.
Define the terms Last Trade
Price, Market Open and Market
Close.
o Market Depth and Liquidity
o What’s a Board Lot/Odd Lot
o Define Market Depth
o Liquidity
o Role of Market Makers
Define terms Board Lot, Odd
Lot, Market Depth.
Explain liquidity and the role of
Market Makers for exchange
traded securities.
o Distributions
o Define the terms ex-distribution
and cum-distribution
o Describe distribution re-investment
plans
Define terms ex-distribution
and cum-distribution and what
they mean for trading purposes.
Describe distribution re-
investment plans for ETFs.
o UMIR Rules
o Trading Halts
o Circuit Breakers
Provide an overview of UMIR
Rules and who has to follow
them.
Explain trading halts and circuit
breakers including their
purpose and when they are
triggered.
Order Instructions
o Types of orders (Market, Limit, Stop Limit
etc.)
o Order Documentation
o Risks and benefits of each order
type
o Best practices for order entry (e.g.
in cases of buying or selling large
number of shares)
Describe the various types of
orders including the
information required for each
order as well as the risks and
benefits.
Describe situations where
certain order types may be
better than others.
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General Topic Sub-Topics Comment Percentage
Allocation
Order Entry
o Order Processing
o Best Execution
o Exchange rules for placement and
execution
o Changing Trade Instructions
o Cancelling Trade Instructions
o Trade Settlement
o Confirmations
o Transaction costs
o Trading as Principal vs. Agent
Describe how orders must be
processed on exchanges
including best execution
requirements (e.g. immediate
execution), exchange rules and
how orders are filled.
Describe how to change and
cancel open orders.
Discuss Settlement,
Confirmations and costs.
Briefly explain trading as
Principal vs. Agent.
Investing in
ETFs
Review existing obligations for:
o Know-Your-Client
o Know-Your-Product
o Suitability Obligation
Explain that existing
obligations for KYC, KYP and
Suitability apply to the sale of
ETFs.
Explain that not all ETFs
provide the same level of
information as conventional
mutual funds, such as risk
rating, and that this information
would have to be assessed by
the Member in order to satisfy
existing obligations.
15
Portfolio Management
o Alpha and Beta
o Efficient Market Hypothesis
o Describe different investment strategies for
ETFs
Briefly explain the concepts of
Alpha, Beta and Efficient
Market Hypothesis.
Describe in detail the roles an
ETF can fill when constructing
a portfolio.
Review the following and how they apply to ETFs:
o PACs, SWPs
o DRIPs
o Taxation
o Income
o Capital Gains and Losses
o Dispositions
o Custody
o Nominee name (“street form”) vs.
client name
Review these common topics
with a focus on how they are
applicable to trading in ETFs.
Describe in detail nominee
name account records including
a comparison of how this
differs from client name
account records.
*Additional resource materials providing more detail on the different trading exchanges and
common market indices may be helpful for Approved Persons.
DOCs419295v7
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DRAFT
MFDA STAFF NOTICE
OUTSIDE ACTIVITY
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 discusses the following topics:
1. Definition of ‘Outside Activity’
2. Activities of the Member
3. Activities Allowed Outside of the Member
4. Obligation to Disclose Outside Activities
5. Member Policies and Procedures
6. Member Approval of Outside Activities
7. Ongoing Member Supervisory Obligations
8. Member Response to Supervisory Issues
9. Positions of Influence
1. Definition of ‘Outside Activity’
In accordance with MFDA Rule 1.3.1 (Outside Activity - Definition), “outside activity” is
defined as any activity conducted by an Approved Person outside of the Member:
(a) for which direct or indirect payment, compensation, consideration or other benefit
is received or expected;
(b) involving any officer or director position and any other equivalent positions; or
(c) involving any position of influence.
An outside activity includes activities for which the Approved Person does not receive, or expect
to receive, payment, compensation, consideration, as set out in clauses (b) and (c) of Rule 1.3.1,
and activities for which the Approved Person receives, or is expecting to receive, payment,
compensation, consideration, as set out in clause (a) of Rule 1.3.1.
Contact: Paige Ward
General Counsel, Corporate Secretary and Vice-President, Policy
Phone: (416) 943-5838
Email: [email protected]
MSN-0040
May 20, 2005
(Updated XX, 2015)
SCHEDULE B
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In addition, an outside activity can include a single transaction or event and does not necessarily
have to occur with repetition, regularity or continuity.
The requirements of Rule 1.3 cannot be avoided by structuring transactions so that the benefit
does not flow directly to the Approved Person. For example, an activity or occupation carried on
by an Approved Person that could or does result in a benefit to the Approved Person’s spouse, or
to a corporation in which the Approved Person has an interest or exercises control, would fall
within the definition of outside activity as an indirect benefit.
Members and Approved Persons must be aware of their obligations with respect to completing
Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (“Form 33-
109F4”) which requires all registrants to disclose their current employment, other business
activities, officer positions held and directorships. The Canadian Securities Administrators has
issued guidance in this regard in Companion Policy 31-103 CP Registration Requirements,
Exemptions and Ongoing Registrant Obligations.
2. Activities of the Member
MFDA Rule 1.1.1 (Members) requires that all “securities related business” must be conducted
through the Member, with exceptions for the sale of deposit instruments not on account of the
Member and the activities of bank employees conducted in accordance with the Bank Act
(Canada). “Securities related business” is defined in MFDA By-law No. 1 to mean any business
or activity which constitutes trading or advising in securities for the purposes of applicable
securities legislation in any jurisdiction in Canada. This includes securities sold pursuant to
exemptions under applicable securities legislation.
Apart from the specific exceptions noted in Rule 1.1.1, Approved Persons are prohibited from
personally engaging in the sale of any investments that would be considered securities under
applicable legislation, or selling or advising on such investments through any entity other than
their MFDA Member dealer (often referred to as “selling away” or “off book trading”).
3. Activities Allowed Outside of the Member
Pursuant to MFDA Rule 1.3.2 (Requirements for Outside Activity), an Approved Person may
have, and continue in, an outside activity provided that:
The MFDA and the securities regulatory authority in the jurisdiction in which the
Approved Person carries on, or proposes to carry on, the outside activity do not
prohibit the Approved Person from engaging in such outside activity;
The Approved Person discloses the outside activity to the Member;
The Approved Person obtains written Member approval of the outside activity
prior to engaging in such outside activity;
The outside activity of the Approved Person must not be such as to bring the
MFDA, its Members or the mutual fund industry into disrepute; and
To the extent that the outside activity could be confused with Member business,
clear written disclosure is provided to clients that any activities related to the
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outside activity are not the business of the Member and are not the responsibility
of the Member.
4. Obligation to Disclose Outside Activities
(a) Disclosure to Member
Approved Persons are required to disclose all outside activities to their Member prior to
engaging in the activities.
(b) Disclosure to Client
Pursuant to Rule 1.3.2 (e), clear written disclosure must be provided to clients that the outside
activity is not the business of the Member and not the responsibility of the Member. With respect
to new clients, Approved Persons are expected to provide such disclosure at the time the client
relationship is established. Where the Approved Person has an existing relationship with a client
and the outside activity is a new activity or there is a change to an existing outside activity,
written disclosure to the client is required at the time when the Approved Person first engages in
the outside activity with the client.
Members and their Approved Persons are required to provide written disclosure to the client in
respect of any outside activity where the outside activity could be confused with Member
business. For example, where the outside activity deals with financial services such as financial
planning, insurance, mortgages, real estate, and tax and estate planning, the outside activity must
be disclosed. Where there is uncertainty as to whether an outside activity should be disclosed to a
client, Members and their Approved Persons should provide the required disclosure.
In addition, the nature of the outside activity and the name of the legal entity through which the
activity is conducted should be disclosed to the client.
(c) Disclosure to Securities Regulatory Authority
Members and Approved Persons must comply with securities legislation, which generally
requires full disclosure to the applicable securities regulatory authority of any outside activity.
In accordance with National Instrument 33-109 Registration Requirements and specifically Form
33-109F4, Approved Persons must disclose activities engaged in outside of their sponsoring
firm, including all officer and director positions and any other equivalent positions held, as well
as positions of influence. This disclosure is required whether or not the Approved Persons
receives compensation and whether or not any such position is business related.
5. Member Policies and Procedures
Members are required to establish, maintain and implement policies and procedures designed to
approve outside activities and to ensure subsequent compliance with MFDA Rules and By-laws
as these relate to the activities. These policies and procedures should include reasonable
measures for detecting undisclosed outside activity. Members should review the MFDA Policies
and Procedures Manual and Reference Guide to assist in the development of these policies and
procedures.
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Members should ensure that their policies and procedures respecting outside activities address:
The requirement for Approved Persons to disclose all outside activities, obtain pre-
approval of outside activities and the process by which Approved Persons may seek such
pre-approval;
The Member’s criteria for the approval of outside activities;
The requirement to communicate to the Branch Manager or supervisor the details of the
Member’s approval of, and any refusal to approve, the Approved Person’s outside
activities;
The requirement for the Approved Person to notify the Member in the event of any
material changes to significant aspects or termination of an outside activity; and
The requirement for records to include complete supporting evidence regarding the
Member’s handling of all outside activity approval requests, including any special
conditions, policies, procedures and controls that have been imposed and how
compliance will be monitored.
6. Member Approval of Outside Activities
Members that allow Approved Persons to engage in outside activities should perform reasonable
due diligence and have a process in place that allows for the assessment and prior approval of
any such activities. This process should ensure that Approved Persons are not involved in the
approval of their own outside activities. As a preliminary step in the approval process, the
Member must obtain from the Approved Person basic information about the activity, including
the business name, the location where the activity will take place and the nature of the activity,
the title or position of the Approved Person, the number of hours to be devoted to the activity
and a description of any potential for confusion or conflicts of interest. Members should assess if
the activity should be considered to be an outside activity based on the specific facts of the
Approved Person’s activity and circumstances.
Member approval of outside activities must take into consideration any terms and conditions that
have been imposed by the applicable securities regulatory authority on the Approved Person’s
registration related to the activity. Members should be aware of these terms and conditions and
supervise for their compliance. In any case, whether or not the securities regulatory authority has
imposed any such terms and conditions, Members may decide to impose their own terms and
conditions with respect to the approval of the outside activity. Evidence of the review and due
diligence undertaken by the Member, as well as the approval, must be maintained in accordance
with the record keeping requirements under the MFDA By-laws, Rules and Policies.
For approval of a position of influence as an outside activity, Members should review Section 9
of this Notice which discusses the specific considerations for the approval of positions of
influence.
In addition, Members must maintain records of the process under which the outside activity was
approved and specific details on the nature of the outside activity approved. The approval
process should require the Approved Person to notify the Member of a material change and
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require the Member to approve that change. A material change could include the expansion of
the activity initially approved by the Member or the offer of new services or products.
Some of the issues Members should consider before approving outside activities include:
(a) Conflicts of Interest
The Member must consider issues relating to all potential conflicts of interest that may arise
from the Approved Person’s duties as a salesperson and his or her outside activity. This would
include consideration of the compensation to be paid under the arrangement, the nature of the
relationship between the Approved Person and the outside entity, and any other potential
conflicts that are identified. If any such conflict cannot be properly managed, the outside activity
must not be permitted.
(b) Potential Client Servicing Issues
Members must ensure that the outside activity does not impair the ability of the Member or
Approved Person to provide continuous service to clients. This would include the inability to
place trades in a timely manner.
(c) Standards of Conduct
The Member must be satisfied that the outside activity will be consistent with the general
standards of conduct imposed under MFDA Rule 2.1.1 (Standard of Conduct) and will not bring
the MFDA, its members, or the mutual fund industry into disrepute. Accordingly, the
background, history and experience of the others involved with the outside activity should be
considered.
(d) Nature of the Activity and Related Proficiency
The standard of review in considering whether to approve outside activity will depend on the
nature of the activity. The review process regarding the investment of client funds or financial
services provided outside of the Member should be more stringent than that applied with respect
to outside activities that are clearly unrelated to the Member’s business. As a best practice, such
review should include consideration of educational, experience or other relevant competency
thresholds that may reasonably be expected as a prerequisite to allowing certain financial service
activities.
(e) Risk Management Issues Members should determine the extent to which there is the potential for the client to be confused
between Member business and the Approved Person’s outside activity. The Member should
recognize the potential exposure to complaints and litigation against the Member in the event
that the outside activity is permitted.
(f) Ability to Supervise The Member should evaluate its ability to satisfy supervisory requirements regarding the outside
activity and consider the effect such requirements will have on resources.
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7. Ongoing Member Supervisory Obligations
While Members do not have specific obligations under the Rules to supervise the approved
outside activity itself on an ongoing basis, Members must monitor the activities of their
Approved Persons in relation to compliance with MFDA Rules and applicable securities
legislation. Accordingly, Members should take reasonable measures to ensure that there is no
change in the outside activity that was approved.
Approved Person and Member obligations also include ensuring that the distinction between
Member business and outside activity is properly disclosed to clients. Such disclosure should
clarify that the outside activity is not the responsibility of the Member. In addition, Members
must monitor for conflicts of interest and must follow up on all client complaints that relate to
the outside activity.
Members are required to take measures to detect and look for evidence of undisclosed outside
activities of their Approved Persons.
Effective processes to detect undisclosed outside activity can be implemented using many of the
Member’s existing review procedures including:
Advertising, website and other social media reviews - MFDA Rule 2.7.3 (Review
Requirements)
Approval of trade names - MFDA Rule 1.1.7 (Business Names, Styles, Etc.)
Branch reviews - MFDA Policy No. 5 Branch Review Requirements
Trend analysis and trade reviews - MFDA Policy 2 Minimum Standards for
Account Supervision
Due diligence in recruitment
Complaint handling
Annual Approved Person questionnaires
8. Member Response to Supervisory Issues
Where a Member becomes aware of an Approved Person’s undisclosed outside activity, it would
generally be expected that the Member conduct a reasonable investigation to ensure that the
issues noted above have been properly addressed.
In order to meet their supervisory obligations under MFDA Rules, Members must ensure that
they have access to any files necessary to complete the investigation into the nature and extent of
any undisclosed or unauthorized outside activity. Members must be aware of potential client
privacy issues since information that clients disclose to the Approved Person as part of an
outside activity may be deemed to be confidential. For more information on the collection, use
and disclosure of personal client information, Members should review MFDA Staff Notice Joint
Regulatory Notice on Federal and Provincial Privacy Legislation, issued in December 2003.
The Member must take steps appropriate for the type of activity identified, being particularly
alert to potential client concerns. Members must take action to resolve any issues, such as by
providing disclosure to clients, consideration of discipline, or other suitable measures.
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Any information received by a Member that would suggest that the outside activities of an
Approved Person may bring the Member or the mutual fund industry into disrepute must be
followed up. Any client complaints received by the Member that relate to outside activities must
be dealt with in accordance with the provisions of MFDA Policy No. 3 Complaint Handling,
Supervisory Investigations and Internal Discipline. As required under Policy No. 3, complaints
involving allegations of theft or misappropriation of funds or securities or of forgery must be
promptly reported to the MFDA.
9. Positions of Influence
Examples of positions of influence may include, depending on the circumstances, religious
leaders, health care providers and military officers.
The processes by which positions of influence are approved and supervised as outside activities
include all the requirements and best practices discussed throughout this Notice. However, as
discussed below, there are several unique considerations with respect to approving and
supervising positions of influence.
When considering the approval of positions of influence, Members must assess the nature of the
position and the degree of influence that the Approved Person holds through that position. If the
Approved Person’s influence is deemed to be significant enough that it would be difficult to
separate the influence from the activities that the Approved Person performs as an Approved
Person, the outside activity should not be approved. It would be inappropriate in this case for the
Approved Person to hold the position of influence and also engage in financial dealing activities
as an Approved Person.
In certain cases, the Member may decide that a conflict of interest may arise from the position of
influence can be addressed through terms and conditions. For example, the Member may
consider imposing terms and conditions to prevent the Approved Person from using the position
of influence to influence an individual to become a client or to affect the ongoing relationship
between the Approved Person and the client. The Member may also decide to implement
processes that monitor how the Approved Person’s relationship with his/her clients was
established in an effort to ensure that the Approved Person is not using the position of influence
to manipulate individuals to become clients.
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