IFC Regulation and Ethical Responsibilities 2 — Questions and Answers
Question 1: Under Canadian securities law, which regulatory body oversees mutual fund dealers at the national level?
- IIROC
- MFDA (Correct answer)
- OSC
- FSRA
Correct answer: MFDA
The Mutual Fund Dealers Association (MFDA) is the self-regulatory organization that oversees the distribution side of the mutual fund industry in Canada (outside Quebec).
Question 2: A registrant discovers a client has provided false information on their Know Your Client (KYC) form. The most appropriate first step is to:
- Immediately terminate the client relationship
- Update the KYC form with correct information and reassess suitability (Correct answer)
- Proceed with the original investment plan
- Report the client to FINTRAC
Correct answer: Update the KYC form with correct information and reassess suitability
The registrant must update the KYC information and re-evaluate whether existing and proposed investments remain suitable for the client.
Question 3: Which document must a fund company deliver to an investor before or at the time of purchase under Canadian mutual fund regulations?
- Annual Report
- Fund Facts document (Correct answer)
- Statement of Additional Information
- Portfolio Manager's Letter
Correct answer: Fund Facts document
Fund Facts is a plain-language, two-page document that must be delivered to investors before or at point of sale under NI 81-101.
Question 4: The ethical principle requiring investment professionals to act in the client's best interest rather than their own is known as:
- Suitability standard
- Fiduciary duty (Correct answer)
- Prudent investor rule
- Best execution obligation
Correct answer: Fiduciary duty
Fiduciary duty is the highest standard of care, requiring the advisor to prioritize the client's interests above their own or the firm's.
Question 5: Under NI 31-103, registrants must update a client's KYC information:
- Only when the client initiates a new purchase
- At least every five years regardless of changes
- When there is a significant change in the client's circumstances (Correct answer)
- Annually without exception
Correct answer: When there is a significant change in the client's circumstances
Registrants must update KYC information whenever they become aware of a significant change in the client's financial situation, investment objectives, or risk tolerance.
Question 6: A mutual fund salesperson receives a gift from a fund company worth $300. Under MFDA rules, this situation:
- Is always acceptable as a business courtesy
- Must be disclosed to the dealer and may require approval (Correct answer)
- Is prohibited under all circumstances
- Only requires disclosure if the fund is recommended afterward
Correct answer: Must be disclosed to the dealer and may require approval
MFDA rules require disclosure of gifts and benefits that could influence recommendations, and the dealer must assess whether acceptance is appropriate.
Question 7: Which of the following best describes 'churning' in the context of mutual fund regulation?
- Switching between fund companies to get lower MERs
- Excessive trading in a client's account to generate commissions (Correct answer)
- Redeeming a fund before its deferred sales charge period ends
- Reinvesting distributions automatically
Correct answer: Excessive trading in a client's account to generate commissions
Churning occurs when a registrant excessively trades in a client's account to generate commissions rather than to benefit the client.
IFC Regulation and Ethical Responsibilities 2
Under Canadian securities law, which regulatory body oversees mutual fund dealers at the national level?