We all know there are a lot of no-no’s in mutual fund sales practices. The primary national regulation on sales practices — National Instrument 81-105: Mutual Fund Sales Practices — covers topics such as the types of benefits that advisors can receive from mutual fund companies. Generally, the principle behind NI 81-105 is to protect investors by discouraging undue influence by mutual fund companies on advisors to push certain funds. The regulation applies to dealers, advisors and other entities, such as mutual fund managers and distributors.

“Practice management,” although not specifically defined in the regulation, is generally understood to mean an event or tool that assists advisors in effectively selling investment products or in building a book of business. This can be anything from seminars that teach advisors how to network to find potential clients to sessions assisting advisors in assessing what type of client is the right fit for their business to help with selling and communication techniques.

How is practice management relevant to sales practices regulation? Well, NI 81-105 generally permits free fund company-sponsored events if they have the “primary purpose” of educating advisors about financial planning, investing in securities, the fund company’s funds, mutual funds in general or mutual fund industry matters. Practice-management events generally are considered as not meeting this primary-purpose test.

Why? Depending on the facts, practice management could be considered subsidization of a dealer’s “overhead” expenses relating to the general development of the dealer’s business, and that doesn’t fit within the acceptable primary-purpose topics.

The regulator’s concerns can then become: why is this event being provided by the fund company, if it’s not related to marketing its funds; is the desire to attend this event unduly influencing the dealer or advisor to sell the fund company’s products? As such, it could be wrong for a mutual fund company to provide a free practice-management event to advisors, or for advisors to attend that event.

However, this outlook does not mean that practice management is a bad thing. Done right, practice management can be good for investors, advisors, regulators and the funds industry. An advisor who develops the skills to determine his client’s needs, motivations and constraints effectively can provide superior recommendations that are tailored to that particular investor. An advisor who learns to communicate more effectively with clients can better inform a client about the opportunities and risks of each investment product. The investor benefits from improved recommendations, and is better protected if he or she better understands the investment. This supports the regulators’ investor protection objectives because the advisor is better able to meet his know-your-client and know-your-product requirements.

Fit is important, too. Advisors and investors come in all shapes and sizes. An advisor may be well suited to advise one type of client but not ideal for another type of client. Learning how to customize a book of business to fit the advisor’s knowledge, skills and goals helps the advisor to build better, longer-lasting client relationships. This makes for a healthier, more stable industry and should lead to higher levels of client satisfaction. The flip side is fewer client complaints to the regulator.

If practice management can be a good thing, is there any scope for including it in fund company-sponsored events? This issue is not black-and-white, as NI 81-105 doesn’t specifically comment on it. A fund company-sponsored event that meets regulatory requirements can also include items that don’t meet the primary-purpose test. Fund company-sponsored events for advisors often include, for example, food, drinks, or entertainment. As long as these items are not so extensive or expensive as to displace the required educational topics as the event’s primary purpose, they normally are considered permissible.

If practice management results in a win/win for advisors and investors and improves investor protection, a great argument can be made for the topic’s inclusion in fund company-sponsored events, as long as this does not change the primary purpose of the event. The event should always be considered in its totality. If, as a whole, an event would probably make an independent observer question whether an attending advisor is providing unbiased, independent advice, the advisor should not attend.

All industry participants are well advised to ensure always that their compliance requirements and policies and procedures are being fully complied with whenever fund company-organized events are held, or when any advisor receives free benefits from a fund company. When it comes to ensuring that fund-company events that include practice management are within permissible guidelines, it may be prudent to look the gift horse in the mouth. IE



Hyder Masum is legal counsel at Russell Investments Canada Ltd.