Maintaining Evidence of Disclosure

(Updated March 4, 2013)

This Notice is intended to clarify the obligations of Members and Approved Persons with respect to maintaining evidence that required disclosures have been provided to clients pursuant to MFDA Rules.

Background

Through compliance examinations performed to date, MFDA staff has noted that some Members and Approved Persons are not maintaining evidence that required disclosures have been provided to clients. In these cases, Members and Approved Persons do not have an adequate audit trail evidencing compliance with MFDA Rules.

Applicable MFDA Requirements

A Member’s obligations to disclose certain information to clients are a fundamental part of several MFDA requirements, including:

• Conflicts of interest – MFDA 2.1.4(c) requires that any conflict or potential conflict of interest that arises between the interests of the Member or Approved Person and the interests of the client shall be disclosed to the client;
• Relationship disclosure – MFDA Rule 2.2.5 requires that, for each new account opened, the client be provided with written disclosure about the nature of the relationship between the Member and the client;
• Referral arrangements – section 13.10 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations requires that written disclosure of referral arrangements must be made to the client before the party receiving the referral either opens an account for the client or provides services to the client;
• Transaction fees and charges – MFDA Rule 2.4.4 requires that Members, prior to the acceptance of any order in respect of a transaction in a client account, inform the client of any sales charge, service charge or any other fees or charges to be deducted in respect of the transaction;
• Outside Activity – MFDA Rule 1.3.2(e) requires that, where the outside activity could be confused with Member business, clear written disclosure be provided to clients that any activities related to the outside activity are not the business of the Member and are not the responsibility of the Member;
• Client complaint information – MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline requires that the MFDA’s Client Complaint Information Form (which is attached as Appendix I to MFDA Staff Notice MSN-0073 Complaint Handling – MFDA Policy No. 3) be provided to new clients and to clients who submit a complaint;
• Leveraging risk disclosure document – MFDA Rule 2.6 requires that Members provide a risk disclosure document containing the prescribed information when a new account is opened and when the Approved Person makes a recommendation for purchasing securities with borrowed monies; and
• Other disclosure requirements contained in provincial securities legislation, including the obligation to deliver a prospectus.

Member and Approved Person Obligations

Maintaining evidence that required disclosures have been provided to clients, including evidence of delivery by mail, is an important internal control which provides an audit trail for Members to assess compliance on an ongoing basis and in the event of a complaint or dispute. Accordingly, required disclosures should be provided to clients in writing and Members and Approved Persons should maintain sufficient documentation, which may include:

• Signed client acknowledgements evidencing receipt of required disclosures; or
• Copies of disclosure documents in client files along with detailed notes of client meetings and discussions evidencing that the disclosure has been provided.

In order to ensure that all clients receive required disclosures, Members may also elect to incorporate certain required disclosures into their new account application form.

MFDA staff also reminds Members and Approved Persons that they are expected to maintain evidence of these required disclosures for a period of 7 years from the date the record is created, as is required for all books and records pursuant to MFDA Rule 5.6 (Record Retention).