unit 9: responsibilities

Canadian Investment Funds Course

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Unit 9: Responsibilities Welcome to Responsibilities. In this unit, you will learn about your obligations and fiduciary duties as required by securities regulations, including maintaining your registration in good standing. You will also learn about the rules regarding the prospectus, the exempt market, and sales communications. Being a good mutual fund salesperson is more than just understanding financial products. You must always act ethically and in your client's best interest. Otherwise, you may be subject to disciplinary action. This unit takes approximately 1 hour and 30 minutes to complete. You will learn about the following topics:

• Prospectus • The Exempt Market • Sales Communication • Your Registration • Your Duties and Obligations

To start with the first lesson, click Prospectus on the table of contents.

Lesson 1: Prospectus

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Lesson 1: Prospectus Welcome to the Prospectus lesson. In this lesson, you will learn about the information provided in a prospectus. You can use this information to help assess mutual funds, in order to make investment recommendations to your clients. The lesson takes 20 minutes to complete. At the end of this lesson, you will be able to do the following:

• explain the importance of a prospectus • describe and explain the contents of a simplified prospectus • describe and explain the contents of an annual information form • describe and explain the contents of financial statements


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The Prospectus Before a security may be offered for sale, a prospectus must be filed and approved by the provincial or territorial securities regulators of those jurisdictions where the securities are to be sold. The prospectus is an extremely important document because it provides full disclosure of the material facts relating to a new issue of a stock, bond, mutual fund, or other type of security. Material facts are those that have, or may have in the future, a significant impact on the market value of the securities in question. However, acceptance or clearance of the prospectus by security regulators does not guarantee that the investment is sound. It only means that investors are given the material facts upon which to base an investment decision. What does a prospectus provide? Among other things, a prospectus provides information about the following:

• the company or other legal entity issuing the security • the names of its directors • how the proceeds from the sale of the security are to be used • the issuer's audited financial statements • the details of the sale price of the security • the risk factors involved in the purchase of the security

The mutual fund prospectus must include a statement about the investor's statutory rights, which informs the investor of his or her rights to some or all of the following:

• receive an accurate and current prospectus • cancel his or her order, for any reason, within two business days of having

received the prospectus or within 48 hours of having received purchase confirmation from the mutual fund

• seek damages if he or she made a decision to purchase shares in the mutual fund and subsequently lost money, if he or she can demonstrate that he or she was misled by a false statement in the prospectus

The Mutual Fund Prospectus System Most mutual funds, except those that invest in real property, use a prospectus system that is different from the system used for bond and stock issues. Under the mutual fund simplified prospectus system, the traditional prospectus (also known as the long form prospectus) is separated into three documents:

• simplified prospectus • annual information form • current annual audited and interim unaudited financial statements


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The Simplified Prospectus Depending on the jurisdiction, you are required to provide a simplified prospectus to a client either at the time of purchase or no later than two business days afterwards. The purchase is not binding on the purchaser until two days after they have received the simplified prospectus. National Instrument 81-101 (in Form 81-101 F1) outlines the content required in a mutual fund prospectus, which includes the following:

Part A: General disclosure Part B: Fund-specific information front cover disclosure general table of contents introductory introductory disclosure organization and management details general investment risks fund details organization and management details for a multiple simplified prospectus

fundamental investment objectives

purchases, switches and redemptions investment strategies optional services provided by the mutual fund organization

top ten holdings

fees and expenses risk factors dealer compensation suitability income tax considerations for investors past performance statement of rights distribution policy additional information financial highlights part B introduction additional information back cover

The Annual Information Form An investor can request a copy of the annual information form if they want further details about the fund. National Instrument 81-101 (in Form 81-101 F2) outlines the content required in the annual information form, which includes the following: • front cover disclosure • table of contents • name, formation, and history of the

mutual fund • investment restrictions • description of securities offered by the

mutual fund • valuation of portfolio securities • calculation of net asset value • purchases, switches, and redemptions of

securities • responsibility for mutual fund operations • conflicts of interest • fund governance

• fees and expenses • income tax considerations • remuneration of directors, officers, and

trustees • material contracts • legal and administrative proceedings • other material information • certificate of the mutual fund • certificate of the manager of the mutual

fund • certificate of each promoter of the

mutual fund • certificate of the principal distributor of

the mutual fund • exemptions and approvals • back cover


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Copies of the annual information form are generally not delivered to investors, but must be made available upon request. Amendments to a simplified prospectus and annual information form If there is a material change in a fund, such as a new commission fee structure, the fund prospectus and/or annual information form must be amended and the amended prospectus should be provided to investors prior to the purchase of fund units. Financial Statements If requested by an investor, you must provide a fund's financial statements. They include the following: Statement of operations: This statement shows the fund's income (interest income, dividends, and capital gains) and expenses over a one-year period. Statement of net assets: This statement shows a fund's assets and liabilities at a point in time. The fund's net assets (assets less liabilities) are divided by the number of units outstanding to come up with the NAVPS. Statement of changes in net assets: This statement shows a fund's net assets at the beginning and end of the year as well as the reasons for any changes. Reasons include sales, redemptions, and realized and unrealized gains or losses. Statement of investment portfolio: This statement shows the fund's holdings at the end of the year, as well as the original costs for those securities. The information that appears on these statements will depend on the type of securities held. For equities, the number of shares, the average, and the market value are generally listed. For interest-bearing instruments, nominal interest rate, the par value, the maturity date, cost to the fund, and market value are listed. Fund performance figures: Although not required by securities regulators, most mutual fund companies will publish their funds' average annual compound rates of return for one, three, five, and ten year periods (where applicable) as well as year-by-year performance numbers for the past five years. Notes to financial statements: Notes to financial statements contain both voluntary and mandatory information that is deemed important in assessing the operations of a mutual fund. Some examples of mandatory information:

• management fees • current and previous management expense ratios • per unit information for the past five years pertaining to:

- net asset value per share at year end - net income distributed - capital gains distributed

• brokerage commissions paid • instructions on how to obtain a statement of portfolio transactions • summary of significant accounting practices


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Voluntary information includes:

• related party transactions (for example, exchange of monies for services rendered between the fund and the manager, distributor, or trustees and their respective affiliates)

• significant events (for example, conditions involving a merger between the fund and another fund that took place during the year)

Rights of Withdrawal and Rescission The prospectus outlines another extremely important piece of information: the mutual fund investor's right of withdrawal and rescission. These rights are connected to the delivery of the prospectus or trade confirmation. Therefore, it is imperative that you are familiar with the precise rules that apply to your jurisdiction of registration. The client must provide written or electronic notification to you or your company within the required time period to exercise either option. Right of Withdrawal An investor can withdraw from an order no later than the end of the second business day after receipt of the prospectus. He or she is entitled to receive the following:

• the full purchase price paid • any sales commission or fees paid in respect to the purchase

For example, if the value of the mutual fund was $10 per unit when you made the purchase, and is $9 per unit on the date you exercise your right of withdrawal, you are entitled to receive $10 per unit. Right of Rescission An investor can rescind or cancel a purchase within 48 hours upon receipt of the trade confirmation if the amount is $50,000 or less. However, if the right expires on a weekend or holiday, it extends to the next business day. The purchaser is entitled to receive the following:

• the lesser of the purchase amount or the value of the mutual funds at the time the right is exercised

• any applicable sales charges or fees paid in connection with the purchase For example, if the value of the mutual fund was $10 per unit when you made the purchase, and is $9 on the date you exercised your right of rescission, you are entitled to receive $9 per unit. But if the value is $11 on the date you exercised your right of rescission, you are entitled to receive the purchase amount of $10 per unit. The mutual fund keeps the gain. Rules may differ from province to province. Ensure that you are familiar with the legislation in your jurisdiction.


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Case Study: Sarah Jones

Case Study: Sarah Jones' Questions

Case Study: Sarah Jones (Our Answers)

Lesson 2: The Exempt Market

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Lesson 2: The Exempt Market Welcome to The Exempt Market. In this lesson, you will learn about National Exemption rule works and whom it applies to. You can use this information to help assess mutual funds, in order to make investment recommendations to your clients. This lesson takes 15 minutes to complete. At the end of this lesson, you will be able to do the following:

• describe the National Exemption rule • explain to whom the National Exemption rule applies


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What is the Rule? The National Exemption Rule, consisting of National Instrument 45-106 Prospectus and Registration Exemptions and its related forms and companion policy, significantly simplify compliance for capital market participants. The National Exemption Rule allows exempt trades to take place without a prospectus and the involvement of a registered dealer. In general, prospectus exemptions are available only where it is assumed that investors do not need the comprehensive information and protection offered in a prospectus. The main exemptions are as follows:

• accredited investor exemption • offering memorandum exemption • minimum purchase exemption • investment reinvestment exemption • additional investments exemption

Investors may be interested in the exempt market for two possible reasons:

• It offers more investment choices. • The fees and expenses charged for exempt market securities are often lower than

those that require a prospectus. Two of the most popular exempt securities are shares of private issuers and units of pooled funds. Since a prospectus is an expensive and time-consuming obligation, usually only larger, more established issuers have the means to bring their shares to the general public. This limits an investor's choice to larger, publicly-traded companies. Exemption from the prospectus obligation allows some small- and medium-sized companies to raise capital by selling securities to certain investors. Accredited Investor Exemption Accredited investors may purchase in the exempt market because due to their nature, the law assumes they can both collect and analyze for themselves sufficient information to assess the worthiness of an investment. There is also the assumption that they will be able to withstand more easily the possible loss of their entire investment. An issuer may sell securities without any further formality to an unlimited number of the following groups of accredited investors. They are organized into three groups in the table: individuals, institutions, and funds.


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Individuals Institutions Funds

Individuals with net financial assets over $1 million or with net assets of at least $5 million

Canadian financial institutions and Schedule II banks

Public and private investment funds

Individuals with a net income over $200,000 ($300,000 with a spouse) in each of the past two years

Canadian registered advisors and dealers (other than limited market dealers)

Pension funds purchasing as principals

Entities of which all direct, indirect and beneficial owners are accredited investors

Investment funds whose securities are owned entirely by accredited investors and/or persons who acquired their securities under a minimum purchase exemption, including under the rules predating the National Exemption Rule

Registered charities that have received advice regarding the trade

Corporations, limited partnerships, trusts and estates with net assets of at least $5 million

Offering Memorandum Exemption An offering memorandum outlines the objectives and risks of the investment, and includes financial statements, management biographies, and a description of the issuer's business. It contains considerably less information than a prospectus and is not approved by a securities commission. There are two versions of the offering memorandum exemption. British Columbia and most of the Atlantic provinces use a broad exemption, while Alberta, Québec, and the remaining provinces and territories use a narrower version. Neither version is available in Ontario. Both versions of the exemption require investors to receive an offering memorandum in the required form and sign a bluntly worded risk acknowledgement document. The broad version of the exemption allows all issuers to distribute securities under an offering


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memorandum. The narrower version allows only non-redeemable investment funds and publicly offered mutual funds to be distributed under an offering memorandum exemption. Under this version, investors must qualify as eligible investors if they purchase more than $10,000 worth of securities. Minimum Purchase Exemption Under the Minimum Purchase Exemption, money managers may distribute securities in amounts not less than $150,000 to or from any person purchasing as "principal" without the regular prospectus and registration requirements. The acquisition cost must be paid in cash at the time of the trade and the trade may only involve a security of a single issuer. Investment Fund Reinvestment and Additional Investments Exemption The reinvestment of distributions and dividends from investment funds do not require a prospectus and registration. The distribution of additional securities of an investment fund to purchasers who have previously purchased securities of that fund at a cost not less than $150,000 are also exempt from the prospectus and registration requirements. Exercise: The National Exemption Rule

General Risks of the Exempt Market Since securities in the exempt market are purchased without a prospectus, there is less detailed information provided about the issuer. Accredited investors are assumed to make up for this deficit themselves, but this may not always be the case. Mutual fund salespersons should pay particular attention to whether the sale of certain exempt securities is suitable for clients who are considered accredited investors, or fall within the minimum purchase requirements. These products should only be recommended in appropriate circumstances. Investors who purchase securities with a prospectus are granted recourse to legal protection if the prospectus did not contain full, true, and plain disclosure. Investments purchased in the exempt market may not have this protection. As well, investors who buy exempt securities by means of an offering memorandum may not have the same right of withdrawal or rescission that other investors have. Investors need to be made aware of the liquidity risk that can be associated with certain exempt securities. There may not be a secondary market readily available if the investor decides to sell the security at a later date.


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Finally, the securities offered by small- to medium-sized businesses that are available in the exempt market can be riskier than those issued by larger, more established companies. Case Study: David George, Part I

Case Study: David George, Part II

Case Study: David George, Part III

Case Study: David George, Part IV


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Lesson 3: Sales Communication Welcome to the Sales Communication lesson. In this lesson you will learn about what is considered sales communications and performance data. This lesson prepares you to understand the rules regarding sales communication and the use of performance information. This lesson takes 20 minutes to complete. At the end of this lesson, you will be able to do the following:

• define sales communication • describe what you can and cannot say in sales communication • explain the difference between performance data and standard performance data • explain and give examples of acceptable and unacceptable sales communication

with performance information • describe the rules regarding advertisements and written text

Lesson 3: Sales Communication

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What is Sales Communication? As a mutual fund salesperson, you may want to communicate with your clients through phone calls, letters, and other sales material. However, you should be aware that there are strict rules governing what you can say in your sales communication, including advertising and statements you may make orally or in writing. These rules are contained in Part 15 of National Instrument 81-102 (NI-81-102) and in MFDA Rule 2.7 and 2.8. Sales communications defined As outlined in Part 1.1 of NI 81-102, the definition of sales communication includes any communication relating to a mutual fund that induces the public to invest in that mutual fund. It can come from any of the following:

• fund promoter • manager • portfolio manager • principal distributor • participating dealer

Certain documents that must be delivered to investors are not considered sales communications. These include:

• the prospectus • annual information form • financial statements • trade confirmations • statements of account

An advertisement is a sales communication that is published or designed for use on or through a public medium. It includes video and audio tapes, infomercials, displays, and billboards as well as newspaper, magazine, radio, and television ads. What you can say As long as you follow the rules, you can say the following about mutual funds:

• provide information on a fund's characteristics and attributes • make certain comparisons • promote the absence of fees and charges for a fund • discuss investment performance of a fund, including ratings, rankings,

quotations, rates of return, yield, volatility, or any other measurement of performance

What you cannot do The overriding principle for a sales communication is that it cannot be misleading. As a result, you cannot do the following:

• make an untrue statement • omit any information that, if excluded, would make a sales communication

misleading


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• include a statement that conflicts with information in a fund's prospectus • present information in a way that distorts the information contained in a

prospectus • include a visual image, which gives a misleading impression • include any unjustified promises of specific results • use misleading statistics • include an opinion or forecast of future events that is not clearly labeled as such • fail to fairly present the potential risks to the client

Presentation and Content of Text For written sales communication, there are several rules regarding the content and presentation of the text. Under Part 15 of NI 81-102, performance information and text must be at least 10-point type (one point equals 1/72 of an inch in height). Sales communications must also include:

• the name of the person or entity who prepared the sales communication • the date of first publication, in cases where the sales communication is not an

advertisement • warning generally advising the reader:

• that important information about the fund is contained in its prospectus • from whom the reader can obtain a prospectus • to read the prospectus • of the fluctuating investment return and yield for money market funds or income

funds • of the fluctuating security value for other funds

You should check section 15.4 of NI 81-102 to determine the specific warning language required for a sales communication, depending on whether it is for a money market fund, non-money market fund, asset allocation service, or guaranteed or protected fund, and whether performance data is included or not. Fees, commissions and no-load funds If you promote the fact that a fund is a no-load fund, you must disclose in the sales communication or simplified prospectus any fees relating to the:

• redemption of a fund within 90 days of purchase • opening and closing of accounts

For load funds, you may want to promote the absence of certain fees and charges. If you do so, any sales communication must disclose:

• all fees and charges that apply to the fund • the name of the principal distributor or dealer from whom the fund can be

purchased • the fact that management fees and operating expenses are paid by the fund • the existence or absence of trailing commissions


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How to Use Performance Data Although performance data may be used in sales communication, the general rule is that it cannot be misleading. For example, if a graph is being used to show the effects of a fund’s past compound rate of return, the sales communication must indicate clearly that this is past performance, not the future return on an investment in the fund. When describing a fund’s characteristics and attributes, a sales communication would be misleading if it:

• describes possible benefits from services to be provided or methods of operation and does not give equal prominence to a discussion of any risks or limitations

• makes exaggerated or unsubstantiated claims about the fund’s management, the fund’s characteristics, the fund’s services, or government supervision

• makes unwarranted or incomplete comparisons to other investment vehicles or indices

Note: See Part 13.1 of NI 81-102 Companion Policy for more examples of misleading communications. Guidelines to follow In some sales communications, comparisons can be made between one fund and another fund under common management, or with a similar fundamental investment objective, or with an index. Except in advertisements, comparisons can also be made with stocks, bonds, guaranteed investment certificates and other certificates of deposit, real estate, or any other investment, provided that the differences among these investment alternatives are sufficiently disclosed. These comparisons must do the following:

• include all material facts • present comparison data for the same period(s) • when comparing different types of investments, disclose all details to make a fair

comparison • when comparing a fund to a benchmark, select a widely recognizable benchmark

that has been in existence for the time of the comparison or a widely available reconstruction

• provide performance data for young funds (funds less than 12 months old) only against other funds under common management

• provide performance data for index funds against indices that comply with the benchmark requirements above

Performance Information There are two types of performance information:

• performance data • standard performance data


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Performance data Performance data refers to any information relating to the investment performance of a mutual fund. This includes the following:

• ratings • rankings • quotations • analysis of rates of return • yields • volatility • any other measurement of performance

Standard performance data Standard performance data enables investors to make meaningful comparisons among funds. It must be calculated following a prescribed formula and using standardized general assumptions. For money market funds, standard performance measurements are current yield and effective yield. For other funds, standard performance data refers to total return. Total return includes returns from capital gains, dividends, and distributions, and any other gains or income earned by the fund. Performance Data in Sales Communication If you want to convey any performance data in a sales communication, you must follow these rules:

• Provide standard performance data for each fund.

• You must describe the standardized general assumptions used to calculate the data and for money market funds, include specific wording concerning the meaning of annualized historical yield.

• The information used in the calculation must not be more than 45 days old. (This does not apply to reports to security holders.)

• For money market funds, standard performance is calculated for the most recent seven-day period that is practical, given publication deadlines.

• For non-money-market funds, it must be calculated for the 1, 3, 5, and 10 year periods and the period since inception if the fund is more than one and less than 10 years old, ending on the same calendar month-end.

• Standard performance data for an asset allocation service must include a

description of the service and the underlying funds. It must also describe the standard general assumptions used to calculate the data.

• Standard performance data in a report to unitholders must be calculated for the applicable period ending on the day as of which the balance sheet of the financial statements contained in the report.

• If applicable, it must be made clear how more up-to-date standard performance data can be obtained.


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• The print type for standard performance data must be equal to or larger than that used for all other performance data in the sales communication.

• You must refer to all elements of return in performance data.

• Do not use performance data for any period before the fund started distributing its securities to the public under a prospectus.

• Do not use performance data for any period before an asset allocation service was first offered to the public and described in the prospectus of the underlying fund.

• In an advertisement, performance data can be used for the purpose of comparison only among funds under common management, funds that have similar investment objectives, or a fund and an index.

• Identify periods for which performance data is calculated.

• Performance data may not be included for funds that have been in existence for less than one year, except in sales communications sent to existing investors or investors in funds under common management.

• Include a statement that all performance data represents past performance and is not necessarily indicative of future performance.

• A mutual fund performance rating or ranking may be used only if it is prepared by an independent organization (such as Morningstar Canada).

• Credit ratings of a fund’s portfolio must be prepared by an approved credit rating organization. Only the most current rating may be quoted, and the organization cannot announce that the fund or its managers know that the credit rating may be downgraded. If the mutual fund is rated by more than one organization, the lowest rating must be quoted.

• Any material changes that can affect the performance of a fund must be disclosed in the sales communication. These include changes in the fund’s management, investment objective, portfolio adviser, ownership of the fund’s manager, fees, or other factors that could have a material effect on a fund’s performance.

• If a fund offers different classes or series that refer to the same portfolio you must:

• specify clearly the class or series of security to which any performance data

contained in the sales communication relates • provide performance data for each class or series and explain clearly the

reasons for different performance data among the classes or series • provide, in cases where a new class or series is being introduced, a clear

explanation of any differences between the new class or series and those that already exist, that could affect performance

Types of Advertising Image advertising Image advertisements, used to promote a corporate identity or the expertise of a mutual fund manager, are not required to contain warning language, provided that the advertisement or other sales communication does not refer to a specific mutual fund or funds and does not promote any particular investment portfolio or strategy.


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Window-pane advertising Window-pane advertising refers to the practice used by print media of placing a number of smaller mutual fund advertisements within a specially dedicated window-pane box showing common warning language, usually at the bottom of the page. However, these ads may cause confusion since non-mutual fund products may be included in the ad. Therefore, in order to avoid confusion, warnings must be communicated in a clear and understandable manner. Online communications Establishing an online presence has become increasingly important. Often an online presence is intended to induce the purchase of mutual funds (including reports to security holders). In these cases, such services constitute a sales communication or advertisement and would have to abide by section 15 of NI 81-102. Since online communications are instantaneous, users expect the information provided to be current. It is therefore recommended that all online communications be date and time stamped, where appropriate, and that a caution be included regarding the currency of the information provided. As well, since online communications are capable of being accessed from jurisdictions where the securities of a mutual fund may not be qualified for distribution under applicable laws, it is recommended that online communications include an additional caution regarding where the securities may lawfully be offered for sale. The following is an example of such an additional caution:

The information in this communication is subject to change without notice. [insert name of mutual fund manager] will not be held liable for any inaccuracies in the information not maintained by [insert name of mutual fund manager], such as a linked site. This communication does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should consult with their financial advisor to determine if these securities may lawfully be sold in their jurisdiction.

It is also recommended that all warnings and cautions in online communications be presented in a location and manner (such as on the home page and with performance data) that ensures that they will be seen by or available to any person accessing the online communication. Exercise: Sales Communication

Lesson 4: Your Registration

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Lesson 4: Your Registration Welcome to the Your Registration lesson. This lesson describes how to register and maintain your mutual fund license. This lesson takes 15 minutes to complete. At the end of this lesson, you will be able to do the following:

• explain the requirements for registration • explain the role of the compliance officer • describe the standard rules and regulations regarding registration


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Preparing for Registration Any person selling securities to the public must be registered with the appropriate provincial securities regulatory authority. Each provincial regulator sets the standards for registration in their province and has the power to grant, deny, or revoke a person's registration to sell securities. It should be noted that the individual has the right to appeal such rulings. By taking the Canadian Investment Funds Course, you are undertaking the most important step towards registration. Once you have passed this course or another recognized proficiency course and are sponsored by a mutual fund dealer, you may then apply to the appropriate securities regulatory authority for registration as a mutual fund salesperson. Your compliance officer When you have passed the Canadian Investment Funds Course and have found employment with a mutual fund company or dealer, be sure to contact your firm's compliance officer to assist you with your application for registration. The compliance officer's role is to ensure that the firm and its employees follow all rules and regulations pertaining to the mutual fund industry. Do not hesitate to contact your compliance officer if you should have questions pertaining to securities industry regulations. National Registration Database (NRD) The National Registration Database (NRD) is an electronic, web-based system containing registration information for dealers, advisors, and individuals registered under securities legislation in the provinces and territories. NRD is also a system that allows electronic filing of applications, notices, and other regulatory information. Use of NRD is mandatory and replaces the old paper registration filings in all jurisdictions. The advantage of NRD is that an applicant needs to file only one application for registration in more than one jurisdiction. With NRD, you are required to complete an online application form. Once the application is completed, you should sign an RCMP Records Request/Reply Form, commonly known as the securities fraud information records request. This form allows the Royal Canadian Mounted Police to investigate you to determine whether you have a criminal record. In addition, make sure you obtain the following:

• some provinces (i.e. Manitoba and Newfoundland & Labrador) require two black and white passport-style photos, taken within the last six months and dated as of the date of the photograph

• proof of proficiency After completing the above requirements, forward all registration material including a cover letter with any supporting documents to your firm's Authorized Firm Representative (AFR). The AFR is a person authorized by the dealer to access registration information and make NRD submissions on behalf of the firm and individuals employed by the firm. Only AFRs will have access to a firm's NRD filings, including filings for individuals. The AFR will review an individual's application and file it on the NRD.

Lesson 4: Your Registration

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Registration Rules The following are the standard rules and regulations pertaining to registration:

• You must be registered in the province in which you wish to sell mutual funds by the appropriate provincial securities regulatory authority. Generally, registration of non-residents is left to the discretion of each jurisdiction. Some jurisdictions allow a non-resident to become registered. Each province and territory reserves the right to refuse any application for non-resident registration.

• You must complete the online application form using the NRD system. It must be

forwarded by your sponsoring firm to the appropriate securities regulatory authority for review and approval.

The securities regulatory authority will grant your registration if it is of the opinion that you have met applicable requirements, and if there are no objections to registration on other grounds. Objections may stem from unacceptable past employment history in the securities industry or from a criminal record relative to a crime dealing with integrity or conduct. When a securities regulatory authority refuses your registration or refuses to reinstate your registration following a change of employer, you must be given an opportunity to attend a hearing and argue why registration should be granted or reinstated.

• Generally, you cannot begin to sell securities until you have received formal

confirmation from the securities regulatory authority that your application for registration has been approved and registration granted. Under the NRD system, firms can view on-line the application status of all individuals from the firm. For Québec registrations, the Bureau sends a certificate of approval directly to the applicant. Check with your compliance officer.

• An approved person who is a salesperson, and who conducts any business on

behalf of an MFDA member must sign an agreement to comply with and be bound by the by-laws and rules of the MFDA.

• In Ontario, Saskatchewan, British Columbia, Alberta, Manitoba, New Brunswick,

and Nova Scotia where you will be regulated by a self-regulatory organization such as the MFDA, you shall also within 90 days of your registration, complete a training program. This will be followed by a six-month supervisory period.

• You must renew your registration each year on December 31. Firms can now use

NRD to renew registrations online. Your firm's compliance officer should make you aware of all the rules to follow during the course of your employment as a mutual fund salesperson. He or she should also inform you how the firm handles renewals.

• The securities regulatory authority must be informed within 5 – 20 business days

of any material or significant change in your personal circumstances. The deadline depends on the type of information that has changed. These changes include a name change resulting from a marriage or divorce, a declaration of personal bankruptcy, or a change in address. Changes must be submitted using NRD. If an individual was registered prior to the introduction of NRD (i.e. under the paper application process) changes to that individual's registration information are currently submitted in paper format using Form 33-109F5. Your compliance officer


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can provide you with more details.

• If you leave your employer, your registration is suspended pending notification of the appropriate securities regulatory authority. You can, however, have your registration reinstated should you join another firm. Generally, you cannot begin to sell mutual funds or provide advice until your registration has been reinstated and you receive confirmation of this from the securities regulatory authority.

You and your former employer must each promptly notify the securities regulatory authority advising of your change of employment. When you change jobs, your former employer must also indicate the reason for your departure. If the dealer fails to send notification to the securities regulatory authority within five business days of the salesperson's departure, the securities regulatory authority has the power to suspend the sponsoring dealer's registration. If you are moving immediately to another job, your new employer can transfer your registration using NRD.

Be sure to consult your firm's compliance officer when planning any changes of employment.

• A salesperson cannot advertise the fact that he or she is registered. This is to

prevent the implication that a securities regulatory authority sanctions or condones the salesperson's actions or the securities offered for sale.

• A salesperson's registration can be suspended by the securities regulatory

authority for conduct it deems inappropriate. Exercise: Your Registration

Lesson 5: Your Duties and Obligations

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Lesson 5: Your Duties and Obligations Welcome to the Your Duties and Obligations lesson. In this lesson you will learn about your obligations as a salesperson as required by securities regulations as well as your fiduciary duties. This lesson prepares you for dealing with your clients in a professional and ethical manner. Most students taking this course are doing so with the intention of selling mutual funds. This means that you should have a thorough knowledge of how to fulfill your role as a mutual fund salesperson, both for your own benefit and the benefit of your clients. This lesson takes 20 minutes to complete. At the end of this lesson, you will be able to do the following:

• define what you can and cannot do • explain the purchaser's statutory rights • describe your obligations as a mutual fund salesperson • explain and demonstrate your fiduciary duties • give examples and consequences of not adhering to your duties


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What You Must Do Once you are registered to sell mutual funds with the appropriate provincial securities regulatory authority, securities legislation imposes a series of obligations that you must abide by in order to maintain your registration in good standing, and to avoid suspension or other legal sanctions. You should be aware that the onus of establishing compliance rests with you. You should be sure to retain appropriate records to establish your compliance with your obligations for the regulators, your employer, and your clients. Let's first review what you must do to keep your registration in good standing: The Prospectus You should deliver to each purchaser of mutual fund securities a copy of the prospectus by the second day following the signing of an agreement to purchase. When requested by a client, the fund manager must provide a copy of the annual information form and/or the financial statements. Annual account statements At least once a year your dealer must send to each client a statement of account showing the details of all purchases and sales, as well as the market value of all securities held by the client as of the statement date. New account application form (NAAF) A NAAF must be completed for each new account of a client. The NAAF must include Know Your Client information and must be approved in writing by a designated officer, partner, director, or branch manager. Purchase orders Your district or head office must receive an order on the same day it is placed with you by the purchaser. The head office or district office must relay this order to the principal distributor of the fund, or the fund itself on the same day that the order is received. The head office may establish its own internal cut-off times for the receipt of orders from its salesperson. Should the order be given after business hours, the same procedure applies, except that the order must arrive at the head office or district office the next business day. Orders may be transmitted by courier, priority post, or other telecommunications facilities as permitted by your dealer. It is your obligation to choose the most expedient method of transmission of the order under the circumstances. In every case, such transmission must be made without cost to the investor. Confirmation of trade You or your head office must promptly mail or deliver to the purchaser a written confirmation of each purchase or redemption of fund units. A record of all trades must be maintained. (In Ontario, fund companies can send confirmations to investors on behalf of dealers.)


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The confirmation must include:

• the number and description of the securities purchased • the gross amount paid • the trade date • the commission paid by the purchaser • the name of the MFDA member if applicable and whether or not the member is

acting as principal or agent • if acting as agent, the name of the person or company from or to or through

whom the security was bought and sold • the type of account through which the trade was effected • the salesperson's name or a code identifying the person • the price per share or unit at which the trade was carried out • the amount deducted as a sales charge, if applicable • the settlement date

What You Must Not Do Not only does securities legislation tell you what you must do when you complete a sale of securities, it also sets out certain prohibitions you must know. These include the following: No repurchase of security You cannot offer to repurchase a security from a client if circumstances change. However, the purchaser has the right of rescission or withdrawal in certain circumstances. No refund of purchase price You cannot offer to refund all or any part of the purchase price, other than on rescission or withdrawal of the order by the purchaser. In certain circumstances, securities rules permit the rebate of redemption fees when client assets are switched from one fund family to another. Consult your compliance officer before making any representations to this effect. No guarantee of future price or value You cannot make representations about or commit to a future price or value for the security you are selling. No suggestions of securities regulatory authority approval You cannot make any oral or written representation that the securities regulatory authority has in any way passed judgement upon your fitness for registration, the merits of the security being sold, or the merits of the management company behind the security. No advertising of your registration You cannot advertise your registration by a provincial securities regulatory authority in any materials that you are using in connection with a sale, or by any other means. You also cannot suggest that you are registered if your registration is not complete or in good standing.


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Stock exchange listing You cannot represent that a security will be listed on a stock exchange unless the prospectus contains a confirmation of that fact or the security is listed. Purchaser's Statutory Rights You should also be aware that the purchasers of mutual fund securities have certain automatic statutory rights, as well as certain rights granted to them if you fail to carry out the obligations imposed by the legislation. In addition to the rights of withdrawal and rescission, other rights include the following:

• If you fail to deliver a prospectus

Rules regarding failure to deliver a prospectus vary from province to province. For specific details, consult the securities act for your province. In most provinces, if you don't deliver a copy of the prospectus to the purchaser within two days of receipt of the purchase order, the purchase is not binding upon the purchaser. Where a prospectus is delivered, the purchaser has until midnight of the second day after he or she has received the prospectus to withdraw from the purchase order. This right generally lasts until 180 days from the transaction date.

• Action for damages

In addition to withdrawal and rescission rights, the possibility of legal action for damages also arises when you fail to deliver a prospectus within two days of the purchase order. This possibility remains open until the earlier of 180 days after the purchaser first had knowledge that he or she was entitled to the prospectus or three years following the transaction date. The amount of damages would be the losses incurred as a direct result of the purchase and the amount of any sales charges paid. Failure to comply with your duties and obligations in this area jeopardizes your ability to continue selling securities and to receive commissions on such sales.

What are Fiduciary Duties? At some time in your career as a mutual fund salesperson, you may decide to pursue a financial planning designation, such as the Certified Financial Planner® (CFP®). Currently, many provinces are initiating educational qualifications and proficiency requirements for registrants who hold themselves out to the public as financial planners. You should be aware that once you advertise yourself as a financial planner or as acting in the capacity of a financial planner, you are holding yourself out as being able to provide a specialized service designed for a particular client based on that client's financial circumstances and objectives. Any contract entered into between you and a client to provide services creates a legal relationship. This type of legal relationship imposes what is known as fiduciary duties upon a salesperson.


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Fiduciary duties are duties of loyalty and good faith. Failure to observe your obligations as a salesperson could result in a breach of one or more of your fiduciary duties to your client. This could expose you to legal liability. How fiduciary duties arise Fiduciary duties can potentially arise in three ways:

• as a result of laws passed by provincial or federal governments that specifically impose fiduciary duties.

• through common law - (This means they result from court judgements in cases involving fiduciary relationships. These judgements may then form precedents for future cases.)

• through the terms of a contract or other arrangement where you assume fiduciary duties as part of your obligations to your client

The Most Common Fiduciary Duties Most fiduciary duties result from common law. The most common fiduciary duties include the following: Advise who performs the service Your clients expect to be dealing with you. No aspect of your work can be delegated to outside companies or specialists without the knowledge and written consent of the client (for example, hiring an accountant to prepare a tax return). This may be especially important if you are acting as a financial planner and need to rely on specialists from other fields. Follow your agreement with the client Your client should sign a contract that clearly states the services that you will provide. Any changes during the course of the relationship should also be communicated and agreed to by the client in writing. You should communicate frequently with the client so that there is a paper trail of instructions and implementation to support the actions you take on his or her behalf. In addition to the confirmations required after each security purchase and the annual client account statements, you should make and retain notes of all meetings and telephone conversations. Whenever possible, confirm all telephone instructions in writing. Many dealers also provide semi-annual or other periodic client account statements. Exercise industry standards of care and skill By calling yourself a salesperson or financial planner you are representing that you have a specialized skill and expertise, and you are held to the standards of the industry. You should provide objective, prudent, and responsible financial services that are in keeping with agreed-upon realistic goals within the financial means of the client. If there is a dispute, your actions are judged against the standards of your industry - that is, your peers. The duty to exercise care and skill also implies an obligation to take continuing education courses and otherwise keep abreast of developments and changes to standards within the financial services field.


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Act in good faith and in the best interests of the client To act in good faith and in the best interests of the client, you must recommend investments that stand on their merit alone, and not with a view to maximize your commission income or other compensation. Never place yourself in a position in which you cannot demonstrate that you have acted in complete good faith. Account fully for any profits The basic rule is that if you put yourself in a position where your self-interest and your duty to your client conflict, you become liable to account for any secret profits you receive. Of course, if the secret profit is disclosed and the client consents, it is no longer secret and you may not be held accountable. Make full disclosure of your personal interests All sources of compensation for services arising out of a client transaction must be fully and completely disclosed, along with any other material circumstances of a non-monetary nature. These can include special arrangements with product suppliers such as mutual fund or life insurance companies or other marketing arrangements. The disclosure should be in writing and acknowledged by the client. Complying with the duty to make full disclosure does not protect you from liability for breach of your other obligations to your client. Due diligence As a mutual fund representative, you have a legal duty to perform your work with due diligence, meaning that you must be able to show that you have a reasonable basis for your recommendations. You must be able to show that you did everything necessary to provide an independent and accurate analysis of any recommended investment strategy, and that it was a suitable choice considering your client's unique financial needs. For a more detailed discussion of due diligence, you should now click on the Resources button found at the top of your page. Then click on Financial Planning Principles to read the Lesson entitled Due Diligence. Conflicts of Interest According to MFDA Rule 2, any conflict or potential conflict of interest between you and a client must be immediately brought to the attention of your employer and disclosed in writing by you to the client prior to conducting business for the client. This applies to any conflict of interest, regardless of whether they relate specifically to the business of your employer. This could include conflicts of interest that arise where you are engaged in outside business activity or personal dealings with clients. There would likely be a conflict of interest where, because of the activity undertaken, there is a financial interest that could influence the type of advice and service you offer your client. You are not permitted to put your interests in front of those of your client.


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The conflict must always be resolved in the best interests of the client using responsible business judgment. How this happens depends on the nature of the conflict and the client's circumstances. Sometimes written disclosure to the client will suffice, whereas if there is a serious conflict of interest, the action that is creating that conflict may be prohibited. Personal Financial Dealings with Clients If you have personal financial dealings that are not conducted through your employer, there is a significant chance that those activities will constitute a serious conflict of interest. Borrowing from or lending to clients Generally, if you or your employer either borrows from or lends funds to your client, either directly or indirectly, there is a significant and direct conflict of interest that would be very difficult to resolve in favour of the client. Private investment schemes with clients If you engage in private investment schemes like investment clubs, pyramid-like schemes, or arrangements where client funds are put into investments that you are going to manage, there will likely arise a serious conflict of interest. The exercise of responsible business judgment prohibits these arrangements. Monetary or non-monetary benefits to or from clients Non-monetary benefits such as gifts or charitable donations are sometimes used as compensation for inappropriate activities carried on by mutual fund salespersons. Sometimes they are used as a means of private settlement where the salesperson has breached MFDA requirements, or in exchange for referrals. To ensure that any monetary or non-monetary benefit to or from a client does not represent a conflict of interest, all benefits must flow through your employer, the MFDA member. You must inform your employer of any such arrangement so that it can decide whether it is a conflict and monitor the activity. However in general, monetary or non-monetary benefits of nominal value would not normally be seen as a conflict of interest and may be provided as long as your employer has established procedures to address them. For more information on personal financial dealings with clients, click here to view MFDA Regulation Notice MR-0047 Personal Financial Dealings with Clients. Outside Business Activities Occasionally, a mutual fund salesperson will engage in outside business activities. "Outside business activities" refers to any business that you take part in other than the business associated with your employer. When you engage in outside business activities, there is the potential for conflicts of interest that could result in harm to your client.


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Examples of inappropriate outside business activities include:

• securities sold outside of your employer such as:

• principal protected notes deemed to be securities under provincial legislation

• limited partnerships • other securities sold under exemptions provided by securities legislation

• referral of securities related business outside of your employer

According to the MFDA, all securities related business must be conducted through the member (your employer). This means that as a registered mutual funds salesperson, you are prohibited from personally engaging in any business or activity that could be seen as trading or advising in securities, according to applicable securities legislation in any jurisdiction in Canada. You are only permitted to sell products that fall under your registration, and only through your employer. Dual Occupation Although inappropriate outside business activities are not permitted, as a registered mutual funds salesperson, you are permitted to be employed in a dual occupation under certain circumstances. Some of these include:

• The activity is not prohibited by a securities commission in the jurisdiction where you carry out the business.

• Your employer is aware and has approved of the outside activity.

• Your employer has appropriate procedures in place to ensure adequate service to your clients and to address potential conflicts of interest.

• The activity does not bring the MFDA, its members, or the mutual fund industry into disrepute.

• Clear disclosure is given to your clients that any activities related to your second occupation are not the business of the primary employer and are not the responsibility of that employer.

One example of permitted dual occupation is the selling of deposit instruments, such as Guaranteed Investment Certificates (GICs), provided that in your local securities legislation, deposit instruments do not fall within the definition of "securities". If they do, they may only be sold through your employer, who is a member of the MFDA. Another example is the provision of non-securities related financial planning services. However, those services may only be provided through another entity that is also regulated or subject to rules of a widely recognized professional association. Dual licensing of life insurance agents All provinces have regulations that allow life insurance agents to sell mutual funds if they are also registered as mutual fund salespersons. A mutual fund dealer may sponsor the insurance agents of an unlimited number of insurance companies for mutual fund salesperson registration, provided the insurance agent is not prohibited in any way by the sponsoring insurance company. The agent must satisfy


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the same proficiency requirements and pay the same fees as any other mutual fund salesperson. The sponsoring mutual fund dealer is responsible for the activities of the insurance agent only in matters pertaining to the sale of mutual funds. For more information on dual occupation, click here to view MFDA Regulation Notice MR-0009 Dual Occupations, and MR-0040 Outside Business Activities. Consequences of Breaching Your Fiduciary Duties Following are some examples of breaches of fiduciary duties and consequences. Case 1 Arthur bought, for his own account, 1,000 shares each of two mutual fund management companies because he thought the firms had excellent fund managers. For the same reason, the majority of his sales to clients were of funds offered by the two companies. Arthur never told his clients he was an investor in the fund management companies because he considered his holdings insignificant. He also did not discuss the matter with his compliance officer. Consequences: Even though Arthur is neither an insider nor an owner of a significant portion of the outstanding shares of the manager, he is required to disclose potential conflicts of interest. If he was unsure as to whether a conflict existed, he should have discussed the matter with his compliance officer. All professional associations and organizations have rules pertaining to conflict of interest. Depending on his employer and which industry codes of ethics Arthur has agreed to follow, he could face disciplinary action, which may range from a reprimand to dismissal. Case 2 Laura recommended to a number of her clients that they redeem certain equity funds and buy others with similar objectives. She provided them with little information and did not inform them about redemption or acquisition costs, or about the potential tax consequences of redemption. These clients were unsophisticated in investment matters and were dependent on Laura for advice. Consequences: Laura churned these accounts and violated her fiduciary responsibility to these clients. Her employer also failed in its fiduciary responsibilities in that her branch manager failed to properly supervise her accounts. Her employer could terminate her for cause; she could face sanctions under securities legislation, which could include suspension or termination of her registration. Laura and her employer could also face civil litigation for recovery of damages. Case 3 Alain told his salespersons, who were not licensed to sell insurance, to provide the names of their RRIF clients to an "estate planning expert" who would attempt to sell the clients term-to-100 life insurance policies. Alain said his salespeople would receive half the commission as a referral fee. Consequences: The salespersons that complied with Alain’s request failed to maintain client confidentiality. Moreover, by positioning themselves to receive a benefit, these salespersons put themselves in a position of a conflict of interest with their clients. Alain has failed to show leadership on ethical matters.


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The paying and acceptance of the commissions violates securities and insurance regulations. The actions of Alain and those of his staff who complied would be grounds for dismissal and sanctions by the securities regulators. IFIC Code of Practice The Investment Funds Institute of Canada (IFIC) members believe that the interests of the investing public are met only by strict adherence to high ethical standards of practice. To help guide its membership, IFIC has developed its own guidelines called the IFIC Code of Practice and the IFIC Code of Ethics. Click here to see the IFIC Code of Practice. Please note that it is important for you to be aware of these documents and their contents; however, you will not be tested on this material. Case Study: Bob Brown

Case Study: Ira Rosenberg


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Review Let's look at the concepts covered in this unit:

• Prospectus • The Exempt Market • Sales Communication • Your Registration • Your Duties and Obligations

You now have a good understanding of your responsibilities as a mutual fund salesperson. At this point in the course you understand the information presented in the prospectus and in sales communication. You can also describe your responsibilities and fiduciary duties as a mutual fund salesperson, and the consequences of breaching those responsibilities. You also know the steps involved in registering for your mutual fund license. Click Assessment on the table of contents to test your understanding. Assessment Now that you have completed Unit 9: Responsibilities, you are ready to assess your knowledge. You will be asked a series of 20 questions. When you have finished answering the questions, click Submit to see your score. When you are ready to start, click the Go to Assessment link.

unit 9: responsibilities

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