The Mutual Fund Dealers Association of Canada said in a notice to members Tuesday that referral arrangements involving specific securities may be considered “acting in furtherance of a trade”, rather than simply making a referral.

MFDA staff has become aware of certain issuers, investment counsel and portfolio managers that have been “actively promoting and marketing referral arrangements to MFDA members tied to specific securities,” the notice says. This issue has become a concern as small retail investors have increasing been directed towards complicated products such as hedge funds and structured products.

The MFDA notes that although these arrangements are conceived as referrals, “it appears that they are not operating as such in practice. MFDA staff is of the view that where a referral is tied to a specific security rather than a general service, it is more likely to lead to acts in furtherance of a trade, and may serve as a means for members to sell a specific security through another party.”

In many cases, the specific securities involved are not securities that mutual fund dealers are appropriately registered or licensed to sell directly, the MFDA says. “The concern with such arrangements is that in most cases they result in [dealers] and their [reps] giving advice and making recommendations with respect to the specific security without having the required licensing or proficiency to do so,” the regulator says. “Accordingly, MFDA staff cautions members from entering into referral arrangements tied to specific securities, as it will be difficult in such situations to monitor compliance to ensure that they and their [reps] act within the limits of their registration.”

As for securities that the dealer is licensed to sell, the MFDA says that its members should not be entering into referral arrangements with another entity for these trades. “By providing advice on a specific security, [reps] may be acting on behalf of a registrant other than their sponsoring dealer, contrary to securities legislation and MFDA rules,” it warns. MFDA rules require that all securities-related business be carried out for the account of the dealer and through the facilities of the dealer.

The MFDA says that dealers and reps may be subject to enforcement proceedings where they fail to meet its requirements.