Lesson 1: Mutual Fund Industry

Lesson 1: Mutual Fund Industry Welcome to the Mutual Fund Industry lesson. In this lesson, you will learn about the regulatory framework surrounding the mutual fund industry. As a mutual fund representative, you should be aware of the functions these organizations perform in the financial services industry. This lesson takes 15 minutes to complete. At the end of this lesson, you will be able to do the following: describe the organization(s) involved in regulating the securities industry describe each organization's area of responsibility Regulatory Framework Financial services companies and their employees must adhere to many government regulations regulations designed to protect the interests of both the investing public and industry participants. Just as the Hippocratic oath guides medical doctors and a Code of Ethics directs chartered accountants, a set of well-defined principles and regulations guide mutual fund salespeople. In Canada, there are several monitoring bodies in the securities industry. Click each of the organizations below to see a description. Provincial Securities Commission Canadian Securities Administrators (CSA) Investment Industry Regulatory Organization of Canada (IIROC) Mutual Fund Dealers Association (MFDA) Each province and territory has a regulatory body, usually referred to as a commission, which administers that jurisdiction s Securities Act or equivalent legislation. Each commission sets its own standards for registration and has the power to grant or revoke registrations. The CSA is a forum for Canada s provincial securities regulatory authorities to coordinate and harmonize regulation of the Canadian capital markets. The CSA is a policy-making body composed of members from each provincial securities commission. IIROC is the national self-regulatory organization for the securities industry. The MFDA is the self-regulatory organization for the distribution side of the mutual fund industry. Provincial Securities Commission Each province and territory has a regulatory body, usually referred to as a commission, which administers that jurisdiction's Securities Act or equivalent legislation. Each commission sets its own standards for registration and has the power to grant or revoke registrations. All trading and advisory personnel of financial services companies, such as mutual fund dealers and banks, must register with the (those) securities commission(s) in the province(s) where each one operates. 2010 IFSE Institute 1

Each commission is responsible for the following: establishing strict standards for disclosure of information before new securities can be offered to the public reviewing and approving mutual fund and new issue prospectuses before they are offered for sale in that province registering the companies and individuals who sell securities in their province registering the companies and individuals that manage mutual fund portfolios established in their province enforcing securities regulations governing the buying and selling of securities investigating investor complaints against companies and their employees disciplining companies or individuals found to contravene the regulations to reveal an exercise about Provincial Securities Commissions below. Canadian Securities Administrators (CSA) The CSA is a forum for Canada's provincial securities regulatory authorities to improve, coordinate, and harmonize regulation of the Canadian capital markets. The CSA is a policy-making body composed of members from each provincial securities commission. The CSA s mandate consists of three goals: to protect investors from unfair, improper, or fraudulent practices to foster fair and efficient capital markets to reduce risks to the market s integrity and to investor confidence in the markets It pursues these goals through a national system of harmonized securities regulation, policy, and practices. Once these are approved by the CSA, they are enforced by the provincial securities commissions. Click here to go to the CSA website. National Instruments National instruments are harmonized regulations made by the securities commissions through the CSA. The main instruments affecting mutual funds are: NI 81-101 Mutual Fund Prospectus Disclosure NI 81-102 Mutual Funds NI 81-104 Commodity Pools NI 81-105 Mutual Fund Sales Practices NI 81-106 Investment Fund Continuous Disclosure NI 81-107 Independent Review Committee for Investment Funds Click here to investigate these national instruments in more detail. Note: It is important for you to be aware of these documents and their contents; however, you will only be tested on the information mentioned in the course material that refers to these national instruments. 2 2010 IFSE Institute

NI 81-101 Mutual Fund Prospectus Disclosure NI 81-102 Mutual Funds It aims at ensuring that mutual funds disclose the information which investors should consider when deciding whether to invest, or remain invested, in a fund. To this end, it prescribes the content of two key disclosure documents, namely the simplified prospectus and the annual information form. It is the main instrument regulating mutual funds. Among other matters, it: sets out restrictions on the manner in which a mutual fund may invest its assets provides a framework for funds of funds to invest in underlying mutual funds prohibits the manager from acting as custodian of the fund and specifies that the custodian must be a bank, a trust company or a subsidiary of either specifies how performance fees should be calculated specifies procedures designed (i) to ensure that investors money is received promptly by the fund and (ii) to minimise the risk of loss of the money prior to it being invested in the fund prohibits misleading sales communications relating to a fund and provides a formula for calculating standard performance data NI 81-104 Commodity Pools NI 81-105 Mutual Fund Sales Practices NI 81-106 Investment Fund Continuous Disclosure NI 81-107 Independent Review Committee for Investment Funds It deals with commodity pools, which are a special type of mutual fund. They are subject to the same regulations as other mutual funds and to the overriding special provisions of NI 81-104. The latter provides, among other things, that commodity pools may invest in commodities. It aims at ensuring that mutual funds are sold on the basis of what is suitable for, and in the best interests of, investors rather than on the basis of incentives received by dealers and their sales representatives. It sets minimum standards of conduct to be followed by managers, principal distributors, registered dealers and the latter s sales representatives when distributing mutual funds. It prohibits the payment of any monetary or non-monetary compensation by the manager to dealers in connection with the distribution of the units or shares of a mutual fund, except for those forms of payment which it specifically allows. It prescribes a continuous disclosure regime for all investment funds which are reporting issuers. A reporting issuer is generally an entity which has issued its securities to the public and is subject to reporting requirements. NI 81-106 sets out disclosure requirements in respect of financial statements, management reports of fund performance, quarterly portfolio disclosure, proxy voting, material changes, proxy solicitation and information circulars. It provides that all investment funds which are reporting issuers should have an Independent Review Committee (IRC) to review all matters involving a conflict between the manager s own interests and its duty to manage the fund in the best interest of the fund. Certain specified transactions and certain changes to a mutual fund require the prior approval of the IRC before being implemented. In the case 2010 IFSE Institute 3

of other transactions involving a conflict of interest, the IRC must provide the manager with a recommendation, which the manager is required to consider before proceeding. Investment Industry Regulatory Organization of Canada (IIROC) IIROC is the national self-regulatory organization (SRO) for the securities industry. IIROC s principal activities include the following: protection of the investing public self-regulation liaison with provincial securities commissions public policy representation maintenance of orderly marketing and trading education publication of statistical information liaison with other financial institutions IIROC s main objective is to create a favourable environment for the investing public by encouraging high practice standards and enforcing regulatory compliance in its membership. Click here to go to the IIROC website. The Mutual Fund Dealers Association (MFDA) The MFDA is the self-regulatory organization for the distribution side of the Canadian mutual funds industry. All mutual fund dealers outside the province of Québec are required to be members of the MFDA. The MFDA regulates the operations, standards of practice and business conduct of its members with a view to enhancing investor protection and strengthening public confidence in the Canadian mutual fund industry. It also regulates mutual fund representatives by virtue of their relationship with their sponsoring mutual fund dealer. The MFDA performs its regulatory role in broadly the same way as IIROC. The MFDA is empowered by securities regulators in each of the relevant jurisdictions to: admit members perform compliance reviews enforce rules through a transparent disciplinary process that can result in fines, suspension, or termination of membership Suspension or termination of MFDA membership means the suspended or terminated dealer firm cannot engage in trading in mutual fund securities. Click here to go to the MFDA Web site. Regulation in Québec Mutual fund dealers operating in the province of Québec are required to be registered under the Autorité de marchés financiers (AMF), the provincial securities regulatory body. The AMF has further delegated the responsibility of ongoing regulatory compliance and continuing education requirements to the Chambre de la sécurité financière (CSF). 4 2010 IFSE Institute

The CSF is the recognized self-regulatory organization (SRO) for Québec representatives dealing in investment funds that are not under IIROC supervision (in Québec, IIROC is the recognized SRO for brokers). Its mission is to protect consumers by maintaining discipline and overseeing the training and ethics of its members, which include group savings plan representatives and financial planners. The CSF is empowered by the AMF in Québec to: admit members perform compliance reviews enforce rules through a disciplinary process that can result in fines, suspension or termination of membership Suspension or termination of membership implies that the former member no longer can engage in the trading of mutual fund securities. To be sure you comply, be sure to refer to Québec-specific legislation and regulations, and consult applicable CSF and AMF rules before you trade or advise clients on any type of security. Click here to go to the CSF website. Exercise: Regulatory Framework 2010 IFSE Institute 5