Background
As part of the application process for membership in the MFDA, mutual fund dealers (referred to herein as “Members”) that employ Approved Persons as agents are required to provide a sample copy of their agency agreement(s). The agency agreement(s) must comply with the requirements set out in MFDA Rule 1.1.5 (Business Structures – Agents) and contain, among other things, terms which reflect the provisions of paragraphs (a) to (j), inclusive, of Rule 1.1.5. These requirements are intended to ensure, among other things, that the regulatory principles of effective supervision of the Approved Person and liability of the Member to the client that exist in the employer/employee relationship are observed in the principal/agent relationship.
MFDA staff recognizes the desire of its Members and their Approved Persons for flexibility in structuring their business relationships and have not prescribed a specific agency agreement for use by its Members. However, MFDA staff must be satisfied that Member agency agreements are in compliance with the requirements of Rule 1.1.5. Specifically, these agreements must not omit the provisions of paragraphs (a) to (j) of Rule 1.1.5 and/or contain terms that are inconsistent with or contradict MFDA Rules. The onus is on the Member to satisfy MFDA staff that the regulatory requirements of principal/agent relationships have been sufficiently addressed in these agency agreements.
Amendments to Agreements
The agency agreements of many MFDA applicants have been in use prior to their MFDA membership application. Most of these agreements will require amendments. Some Members have chosen to prepare new agreements that are intended to comply with MFDA Rules. Other Members may wish to amend their agency agreements for that purpose.
In order to assist Members in that regard, MFDA staff has prepared an “Override Acknowledgement for Agent's Agreement“ (the “Override Acknowledgement”), attached as Schedule A, for use by Members and each Approved Person with whom an agency agreement exists: (i) confirming that the agency agreement(s) comply with the requirements of the By-laws and Rules of the MFDA; and (ii) amending the agency agreement(s) as necessary to ensure compliance.
Evidence of Compliance for Agency Agreements
As a minimum, all Members must provide a certificate signed by an officer or director of the Member certifying that its agency agreements are in compliance with Rule 1.1.5. The form of certificate should be substantially in the form of Schedule B hereto. Where, upon review of the agency agreement, MFDA staff is not satisfied that the agreement complies with the provisions of Rule 1.1.5, or that the agency agreement is relatively complicated, MFDA staff will require the Member to:
- amend the agency agreement to comply with MFDA Rules (which may include the use of an Override Acknowledgement in the form provided); and/or
- rovide MFDA staff with a legal opinion in the form prescribed (attached as Schedule C hereto).
The purpose of the legal opinion is to ensure that careful consideration has been given to the requirements of the MFDA Rules and, where amendments are being made to existing agreements, that such amendments are effective and consistent to ensure that the amended agreements comply with MFDA Rules.
This Notice is intended to describe the expected requirements for most agency agreements. However, MFDA staff retains the discretion to determine what evidence will be required from the Member in order to satisfy MFDA staff that such agency agreements are in compliance with MFDA Rules.
With respect to future agency agreements, MFDA staff strongly encourages Members to include language addressing the specific matters set out in paragraphs (a) to (j), inclusive, of MFDA Rule 1.1.5.
Schedule A - Override Acknowledgement for Agent's Agreement
Schedule B - Certificate Regarding Agent's Agreement between Members and Approved Persons
Schedule C - Counsel's Opinion Regarding Agent's Agreement between Members and Approved Persons