The Mutual Fund Dealers Association has issued a notice that aims to clarify the obligations of dealers and reps in the marketing of investments in undivided interests in land to clients, investments that may be considered securities.

It notes that MFDA staff have become aware of investments in undivided interests in land being marketed to clients by way of referral arrangements between fund dealers and the entities managing and offering the investment opportunities. “There are a variety of structures that have been employed in the creation and marketing of these investments and many members have raised questions regarding the nature of the products and their treatment under securities legislation and MFDA rules,” it says.

In the notice, the MFDA cautions its members that, “regardless of the way in which such products are presented, investments involving undivided interests in land may be found by securities regulators to be investment contracts, and would therefore be considered securities for the purposes of securities legislation and MFDA rules.”

It notes that dealers should not be entering into a referral arrangement with respect to the distribution of investments such as this that may be considered securities, because, “By providing advice on specific securities, [reps] may be acting outside of the limits of their registration, or acting on behalf of a registrant other than their sponsoring dealer contrary to securities legislation and MFDA rules.”

“Members that are considering entering into arrangements for the distribution of such products have a responsibility to perform an adequate level of due diligence to determine whether the products would be deemed to be securities under applicable legislation,” it adds. “In addition, members must be comfortable that they have a good understanding of the risks and other characteristics of these investments and should also consider the fees and expenses associated with such investments as compared to other alternatives.”

Finally, it notes that, “Members must also establish procedures to address conflicts of interest related to the promotion or recommendation of these investments, including any conflict issues that may arise with respect to compensation.”