The Mutual Fund Dealers Association has issued a notice clarifying the inclusion of subordinated loans in capital calculations.

The MFDA says that if subordinated debt forms part of a member firm’s total financial statement capital, the firm is required to submit a standard MFDA Subordinated Loan Agreement to the MFDA. As well, any changes to the subordinated loan must be approved by the MFDA in writing.

The MFDA says it must give written consent before part or all of the subordinated debt is repaid. This consent will only be granted if the firm’s financial condition will be sufficient after the repayment.

If the amount of indebtedness under the subordinated loan is increased, the firm must provide the MFDA with a new agreement that reflects the revised amount. As well, the amount of subordinated debt reflected in the new agreement must match the amount shown on the member’s financial statement.