Mutual fund dealers should think twice before putting their senior clients into deferred sales charge (DSC) mutual funds, regulators are warning.

The Mutual Fund Dealers Association of Canada (MFDA) issued a bulletin on Friday that details the results of a compliance sweep that it carried out this year. The compliance review looked at the use of DSC funds, particularly with senior clients, and dealers’ supervision, suitability assessment, and disclosure practices in this area.

The review uncovered several problematic practices, including: clients over age 70 that were sold DSC funds; clients who were sold funds with DSC redemption schedules that are longer than their investment time horizon; and evidence of poor disclosure of the redemption fees at certain firms.

The review also found room to improve supervisory practices in this area. “Overall, there was a lack of consistency across [dealers] on how to supervise transactions involving seniors who purchased DSC funds,” the MFDA bulletin notes.

The regulator followed up with all of the dealers who were part of the sweep, Karen McGuinness, MFDA senior vice president compliance, says. And the MFDA “will also be placing a greater focus on DSC testing in our exams … for those firms who were not part of the sweep,” she adds.

The MFDA bulletin makes several recommendations, and sets out best practices for dealers regarding DSC transactions. It also provides guidance to firms designed to ensure they are properly assessing the suitability of DSC sales to older clients, and making adequate disclosure about redemption fees.

For example, the bulletin calls on dealers to: have policies to assess whether a client’s time horizon is reasonable compared to their age, both initially and on an ongoing basis; have policies and systems for flagging instances where the time horizon is less than the redemption schedule; and use time horizon categories that enable an accurate assessment of the suitability of DSC transactions.

The MFDA bulletin also notes that although some firms consider clients’ age when assessing their time horizon, most do not. The bulletin recommends that firms: adopt policies that specifically consider age when assessing the suitability of DSC purchases; adopt policies for considering the suitability of DSC purchases in RRIF accounts; and have procedures for querying trades that result in significant redemption charges, which include re-examining the suitability of the initial purchase.

The MFDA review also found some poor disclosure practices among fund dealers when it comes to DSC sales, including a few instances where dealers “were not able to provide evidence that fee disclosure was provided to the client,” the MFDA bulletin says, and cases where the dealer incorrectly assumed that disclosure of a redemption charge was not required for a redemption executed by a client’s estate.

To that end, the MFDA bulletin recommends that firms have: written policies on fee disclosure; procedures to test whether disclosure was provided to clients in cases involving significant redemption charges; and proper training for both reps and supervisors on the disclosure requirements.

The majority of client assets are in funds without sales charges these days, the MFDA bulletin notes, nevertheless, it stresses that the suitability of sales charges is “a significant aspect of a registrant’s overall suitability obligation”, and calls on dealers to review its recommendations in this area.

“Members should have adequate procedures to supervise and assess the suitability of DSC trades considering both client time horizon and age and procedures to disclose sales charges both at the time of purchase and redemption. As suitability continues to be an area of focus for the MFDA, particularly as it relates to senior investors, we will continue to review these issues in future compliance examinations,” the MFDA bulletin says.

See also: NASAA launches seniors-focused website