The Mutual Fund Dealers Association says it has uncovered arrangements where mutual fund managers and dealers are automatically converting clients’ deferred sales charge funds to 0% front-end load funds, which pay higher trailer fees, without client knowledge.

In a notice the MFDA reports its staff has become aware of arrangements between fund managers and MFDA members and their reps which involve these automatic conversions using clients’ free transfer of 10% of their units in DSC funds each year into units of the same fund carrying a 0% front-end load. Mutual fund managers often effect this conversion through a “bulk switch” of all eligible DSC units held by clients of the dealer or rep, it says.

And, a similar arrangement identified by MFDA staff involves the automatic conversion of clients’ units where the DSC has fallen to zero (matured DSC units) into units of the same mutual fund carrying a 0% front-end load.

The MFDA says it has regulatory concerns with the manner in which some of these arrangements or programs have been structured: the trades are often effected without the prior knowledge or consent of the client; disclosure of the increased trailer fee is not provided to the client; and, the trades may have tax implications if it is considered a disposition.

The regulator says its staff is of the view that the manner in which some of these automatic conversion programs are currently structured does not comply with its rules. In order to comply, dealers and their reps must ensure appropriate disclosure is provided and the consent of the client is obtained prior to engaging in an automatic conversion program.