Proposal would allow fund dealers to engage in some discretionary trading

Securities regulators are proposing rule changes that would allow mutual fund dealers to directly rebalance clients’ model portfolios without seeking client approval for every trade.

The reforms proposed by the Mutual Fund Dealers Association of Canada (MFDA) would provide fund dealers with the flexibility to engage in a limited form of discretionary trading.

According to a notice setting out the proposed change, fund dealers have been seeking the ability to rebalance clients’ model portfolios on a discretionary basis as a way of improving client service and increasing efficiency.

The notice says dealers have argued that this change would “allow them to provide more efficient service to clients and a better model portfolio solution, as dealers would be able to respond, in a more timely manner, to such things as underperforming funds or rapidly changing market conditions.”

Additionally, it notes that if dealers are able to directly make fund substitutions, “they would be free to choose from a wider variety of products from different fund companies.”

The MFDA indicated it believes the dealers have a valid argument, and that their “requests for regulatory flexibility… can be accommodated while preserving investor protection, enhancing service to clients, and reducing regulatory burden.”

In fact, the regulator suggests investor protection could be enhanced because, under the revised rules, all of the regulatory obligations to clients would be on the dealer, instead of shared between a dealer and an external portfolio manager.

“This approach would allow for the avoidance of potential disputes between different parties as to who is responsible and liable to the client in any particular situation,” it says.

The proposals are out for comment until August 2.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.