The Mutual Fund Dealers Association has uncovered weaknesses in record-keeping procedures at fund dealers.

The MFDA says the problems were revealed during its compliance examinations and that it has issued a notice to fund dealers and reps to remind them of the requirement to record and maintain evidence of client instructions for all trades.

The MFDA has found that many members and their reps are not recording and maintaining adequate records of client trade instructions. In many cases, firms cannot produce evidence of client authorization or client instructions for trades, the MFDA says. In reviewing client files during compliance examinations, MFDA staff has also found pre-signed trade order forms, forged client signatures and photocopied client signatures.

MFDA rules and securities legislation prohibit mutual fund dealers and their salespersons from having discretionary trading authority over a client account, the notice says. Also, its rules require MFDA members to keep an adequate record of each order, and any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted.

“Maintaining a detailed and accurate record of client instructions is an important internal control, which provides an audit trail for members to confirm transactions and assists in verifying trade details in the event of a dispute,” the MFDA says.

With that in mind, the notice also recommends that records include: a summary of the discussions between the client and the rep including any recommendations made by the rep (regardless of whether or not the client acted on the recommendation) and a summary of the various alternatives discussed with the client; and, confirmation as to the discussion regarding fees or charges to be paid on the transaction or fees or charges that may apply (e.g. deferred sales charges).

As for trades made without written client authorization (under a limited trading authorization or for a nominee name account), the MFDA notes that an LTA does not relieve firms and reps from the requirement to record and maintain evidence of client trade instructions. Indeed, it says that it is particularly important to record trade instructions received from clients where trades are placed pursuant to a LTA or for a nominee name account as there is no written authorization from the client in such cases to verify the trade.

Members should also have policies and procedures in place to document trade instructions, the MFDA says.