17.8.1 Relationship Disclosure

Relationship Disclosure

For each new client account opened, securities regulation requires that the mutual fund dealer provides written relationship disclosure information to the client. This information can either be presented as a stand-alone document or included within the account opening documentation. The documentation should encompass any information that a reasonable client would consider important about the relationship between the client, the mutual fund dealer, and its sales representative.

Regardless of how the relationship disclosure information is provided, it must include several key details outlined below.

Detailed Content Required in Relationship Disclosure

The Nature of the Relationship

This section includes a statement confirming that the client is ultimately responsible for investment decisions made in the account. However, it also notes that the client may rely on the investment advice provided by the representative.

The Products and Services Offered

This section enumerates relevant products and services. For example, it may state whether only proprietary (in-house) mutual funds are available or whether third-party mutual funds may also be held in the client account.

The Procedures for Handling Cash and Cheques

This section details how cash and cheques will be managed. For instance, it may confirm that email transfers are an acceptable form of payment for services.

The Dealer’s Obligation to the Client

This section explains that the dealer is obliged to ensure that each order accepted or any recommendation made to the client is suitable. It also advises that the representative remains responsible for ensuring suitability, even if the client provides investment direction.

Circumstances Necessitating a Suitability Review

Circumstances stated may include a client’s transfer of assets to the dealer, a material change in the Know Your Client (KYC) information previously provided, or a change in the representative responsible for the client account.

Terms Regarding KYC Information

This section delineates how the information collected by the dealer will be used in assessing investments in the client account.

Terms of Account Reporting

This section specifies the content and frequency of client reporting for the account.

Nature of Compensation Paid to the Dealer

This section outlines how compensation is paid to the dealer. It may also refer to more specific fee information that can be found in the client account documentation or a similar type of agreement.

Implementation and Compliance

Standardized Documentation Approval

Relationship disclosure provided in a standardized document should be approved by the head or branch office (or both). Mutual fund dealers must also maintain evidence that relationship disclosure has been provided to the client. The disclosure information can be signed by the client and incorporated into account documentation, in which case a copy of the signed account documentation is deemed sufficient evidence.

Evidence of Disclosure

If the dealer chooses to provide relationship disclosure as a stand-alone document, it may ask the client for signed acknowledgment of receipt as evidence that it was delivered. Copies of the disclosure documents may be maintained in the client’s file.

Key Takeaways for Representatives

As a representative, it is crucial to maintain detailed notes of client meetings and discussions as evidence that the relationship disclosure information was provided, even if you do not have a client-signed copy. Additionally, whenever a significant change occurs in the relationship disclosure information, the dealer must take reasonable steps to notify the client of the change as soon as possible.

Frequently Asked Questions (FAQs)

1. What is relationship disclosure?

• Relationship disclosure is the provision of written information to clients detailing the nature of the relationship between them, the mutual fund dealer, and its representatives.

2. Why is relationship disclosure important?

• It ensures that clients have a clear understanding of their responsibilities, the services offered, the handling of their assets, and the compensation structure, enhancing transparency and fostering trust.

3. When must relationship disclosure be provided?

• It must be provided when a new client account is opened and whenever there are significant changes to previously disclosed information.

4. What should be included in relationship disclosure?

• It should include details about the relationship’s nature, the products and services offered, cash-handling procedures, the dealer’s obligations, circumstances necessitating suitability reviews, terms regarding KYC information, account reporting terms, and the nature of compensation paid to the dealer.

Glossary

• KYC (Know Your Client): A standard in the investment industry that ensures investment advisors know details about their clients’ risk tolerance, investment knowledge, and financial position.
• Proprietary Funds: These are funds created and managed by the mutual fund dealer itself.
• Third-Party Funds: These are funds managed by another mutual fund dealer or management company.

Key Takeaways

• Relationship disclosure is a regulatory requirement and crucial in establishing clear communication with clients.
• Documentation can be provided either as a standalone document or part of the account opening process.
• Important sections include information about the type of relationship, products and services, obligations, reporting terms, and compensation structure.
• Mutual fund dealers must maintain evidence of provided disclosures, either through client acknowledgment or detailed records.
• Representatives should detail interactions with clients meticulously to ensure regulatory compliance.

For a visual summary, refer to the diagram below:

    flowchart TD
	    A[Relationship Disclosure] --> B[Nature of Relationship]
	    A --> C[Products and Services]
	    A --> D[Cash and Cheques Handling]
	    A --> E[Dealer's Obligations]
	    A --> F[Circumstances for Suitability Review]
	    A --> G[Terms Regarding KYC]
	    A --> H[Account Reporting]
	    A --> I[Compensation Structure]