IFC Regulation and Ethical Responsibilities 5 — Questions and Answers
Question 1: Under the Client Relationship Model (CRM2) requirements, dealers must provide clients with an annual report that discloses:
- Only the fund's benchmark performance
- All charges and compensation paid by the client and portfolio performance (Correct answer)
- The registrant's personal investment holdings
- A list of all available mutual funds on the shelf
Correct answer: All charges and compensation paid by the client and portfolio performance
CRM2 requires annual reports disclosing the dollar amounts of all charges paid by the client and the performance of the client's account on a dollar-weighted basis.
Question 2: A registrant's obligation to maintain client records under NI 31-103 generally requires records to be kept for a minimum of:
- 1 year
- 3 years
- 7 years (Correct answer)
- 10 years
Correct answer: 7 years
NI 31-103 requires registrants to keep most client records for at least seven years from the date the record was created.
Question 3: The 'client-focused reforms' (CFRs) introduced by the CSA primarily strengthened which obligation?
- Tax reporting requirements for mutual funds
- Registrants' duty to prioritize client interests when making recommendations (Correct answer)
- Fund disclosure requirements under NI 81-101
- Margin lending rules for mutual fund purchases
Correct answer: Registrants' duty to prioritize client interests when making recommendations
The CSA's Client Focused Reforms explicitly require registrants to prioritize client interests over their own or their firm's when making recommendations, strengthening the existing suitability framework.
Question 4: Which of the following would constitute 'insider trading' in the context of a mutual fund company?
- A portfolio manager buying units of their own fund in their personal account
- An employee trading in a security based on material non-public information about a fund holding (Correct answer)
- A compliance officer reviewing trade confirmations for errors
- A fund manager increasing cash holdings ahead of a market downturn
Correct answer: An employee trading in a security based on material non-public information about a fund holding
Insider trading occurs when someone trades securities using material information that has not been publicly disclosed, which is illegal under Canadian securities law.
Question 5: Under Canadian regulations, a mutual fund is considered 'non-redeemable' (closed-end) if:
- It only accepts new investors at IPO and investors can only exit by selling units on a stock exchange (Correct answer)
- It charges a deferred sales charge that never falls to zero
- It restricts redemptions to once per month
- It is registered under NI 81-102
Correct answer: It only accepts new investors at IPO and investors can only exit by selling units on a stock exchange
Non-redeemable (closed-end) funds raise capital at launch and do not continuously redeem units; investors liquidate by selling units in the secondary market on a stock exchange.
Question 6: When a client complains about a registrant's conduct, the dealer firm is required under MFDA rules to:
- Refer all complaints directly to the MFDA without investigating
- Acknowledge the complaint promptly and investigate it in accordance with complaint handling procedures (Correct answer)
- Resolve the complaint only if the amount in dispute exceeds $5,000
- Forward the complaint exclusively to the client's lawyer
Correct answer: Acknowledge the complaint promptly and investigate it in accordance with complaint handling procedures
MFDA rules require dealer firms to acknowledge complaints promptly, conduct a fair investigation, and provide the client with a substantive written response within 90 days.
Question 7: A registrant who engages in 'front-running' by placing personal trades ahead of large client orders is violating which core ethical principle?
- Fair dealing and client priority (Correct answer)
- Know your product obligations
- Record-keeping requirements
- Continuing education requirements
Correct answer: Fair dealing and client priority
Front-running exploits advance knowledge of client orders for personal gain, directly violating the duty to deal fairly and to prioritize client interests over the registrant's own.
IFC Regulation and Ethical Responsibilities 5
Under the Client Relationship Model (CRM2) requirements, dealers must provide clients with an annual report that discloses: