(Updated January 26, 2017)
I. Identifying and Preventing Signature Falsification
MFDA staff continues to encounter situations where Approved Persons (“APs”) have created, possessed or used documents such as Know-Your-Client (“KYC”) forms, trade forms and cheques which have been pre-signed or on which client signatures have been falsified through other means. Members and APs may only use forms that are executed by the client after information on the form has been properly completed. Under MFDA Rule 2.1.1 (Standard of Conduct), Members and APs are obligated to deal fairly, honestly and in good faith with their clients and observe high standards of ethics and conduct in the transaction of business.
This MFDA Staff Notice reviews background information on signature falsification, and outlines actions that should be taken by APs and Members to prevent it.
II. Background Information on Signature Falsification
Hearing Panels of the MFDA Regional Councils have consistently ruled that signature falsification is not permissible under MFDA Rule 2.1.1.
Examples of signature falsification identified in Hearing Panel decisions include, but are not limited to:
- having a client sign a form which is blank or only partially completed (a “Pre-Signed Form”);
- having a client sign multiple forms for use in future trading;
- signing a client’s name to a document;
- cutting and pasting, photocopying or using liquid paper on a document to “re-use” a previous signature;
- altering or correcting any information on a signed document, without the client initialling the document to show the change was approved;
- reproducing client initials beside changes made to a document where the client forgot to initial;
- using liquid paper to white out old instructions and write in new instructions on a signed client form;
- receiving client instructions over the phone or by e-mail and signing the client’s signature on an account form to carry out the instructions; and
- photocopying a previously-submitted account form and altering the trade details in order to process a new trade.
Signature falsification can violate Rule 2.1.1 whether or not:
- it is done for the purposes of client convenience;
- the client instructs or otherwise consents to the AP falsifying the document;
- the client complains or there is financial harm to the client;it is the AP’s intention to deceive a client or another person; or
- the document is used to commit a further breach of requirements under MFDA By-laws, Rules and Policies and applicable securities regulation.
Signature falsification can:
- adversely affect the integrity and reliability of documents;
- destroy the audit trail;
- impact the ability of APs to produce valid documentation to support transactions that come into question;
- prejudice a client by making it appear that they executed a particular document when they did not;
- mislead Member supervisory personnel;
- negatively affect the credibility of the AP;
- negatively affect Member complaint handling; and
- facilitate other misconduct such as unauthorized trading, fraud and misappropriation of funds.
III. AP Actions to Detect and Address Signature Falsification
1. Compliance with Member Policies
Under MFDA Rule 2.10 (Policies and Procedures Manual), every Member shall establish and maintain written policies and procedures (that have been approved by senior management of the Member) for dealing with clients and ensuring compliance with the Rules, By-laws and Policies of the MFDA and applicable securities legislation. MFDA Hearing Panels have found that under Rule 2.1.1, APs must follow Member policies and procedures designed to detect and prevent signature falsification and APs must respond truthfully to Member inquiries about signature falsification.
2. Limited Trading Authorizations
The purpose of a Limited Trading Authorization (“LTA”) under MFDA Rule 2.3.2 (Limited Trading Authorization) is to facilitate a trade where the assets are held at the mutual fund company in the name of the client. When clients sign an LTA, they authorize the Member to execute a trade without the need to provide signed written instructions. Use of an LTA can assist APs in minimizing the number of trading-related forms where a client signature is required. Proper use of an LTA eliminates the “convenience to the client” rationale many APs use to justify their inappropriate use of trading forms.
APs should record and maintain evidence of client instructions for all trades in accordance with MFDA Rule 5.1(b) (Requirement for Records). Where trades are placed pursuant to an LTA, records of client trade instructions should include notes as to how the instructions were given, for instance by telephone, in person or by facsimile. When using an LTA, it is not appropriate to sign a client’s signature on a trading form.
3. Signature Falsification by Other Persons
APs must not instruct or permit others to engage in signature falsification. APs should in their supervision of support persons, pro-actively address the issue of signature falsification and take steps to ensure it does not occur.
IV. Member Actions to Detect and Address Signature Falsification
1. Supervision
Pursuant to MFDA Policy No. 2 Minimum Standards for Account Supervision, supervisory staff has a duty to ensure compliance with Member policies and procedures and MFDA regulatory requirements. Member supervisory staff, compliance officers and staff who process documents should be alert to signature falsification occurring when reviewing documentation that is required to be signed or authorized by a client. This type of documentation may include trade orders, KYC forms and New Account Application Forms. Supervisory staff, compliance officers and staff who process documents should receive training in how to detect signature falsification. Branch managers can play a particularly important role in the detection of signature falsification during the course of their tier one reviews.
Copies of Documents
Client documents used in tier one or tier two reviews or other supervisory activity should be originals, colour copies or colour scans, to ensure that a reasonable supervisory review for possible signature falsification can take place.
Questionnaires
As part of their general supervisory duties under MFDA Rule 2.5 (Minimum Standards of Supervision), Members may wish to have APs complete a questionnaire on at least an annual basis, in regard to their conduct and practices. This questionnaire should include questions to determine whether APs have engaged in signature falsification.
2. Branch Reviews
Pursuant to MFDA Policy No. 5 Branch Review Requirements, each Member must establish a Branch Review Program to assess and monitor compliance with regulatory requirements at all branch locations. MFDA staff views branch reviews as a highly useful tool that Members can use to detect and discourage signature falsification.
Reviews of Client Files
MFDA Policy No. 5 provides that during branch reviews, client files should be examined to verify that proper evidence of client instructions and any relevant trading authorizations have been maintained on file. Members should use this review in part to detect any evidence of signature falsification.
Branch Interviews
MFDA Policy No. 5 provides that the purpose of branch interviews is to confirm that branch managers and APs are aware of requirements under MFDA By-laws, Rules and Policies and applicable securities regulation. Members should use branch interviews to ask whether branch managers and APs have observed or participated in any instances of signature falsification.
3. Training
Members should address signature falsification in their training of new APs under MFDA Policy No. 1 New Registrant Training and Supervision and in training for existing APs.
4. Reporting
Pursuant to MFDA Policy No. 6 Information Reporting Requirements, Members shall report to the MFDA whenever they are aware that any current or former AP has contravened any law or regulatory requirement relating to misrepresentation. It is the view of MFDA staff that signature falsification is a form of misrepresentation which Members are required to report to the MFDA within five days of detection, pursuant to section 6.1(b) of Policy No. 6. This includes a single instance of signature falsification, such as a Pre-Signed Form in a client’s file.
5. Reasonable Supervisory Investigation
Pursuant to MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline, Members have a duty to conduct a detailed investigation in all situations where conduct of the type listed in Part I, Section 3 of that Policy may have occurred. This list of conduct includes misrepresentation. MFDA staff is of the view that signature falsification is a form of misrepresentation and therefore Members are required to conduct a detailed investigation where signature falsification may have taken place.
An investigation may be more or less comprehensive depending on the situation. When determining how comprehensive an investigation should be, Members should interview the AP involved and review the files of that AP, and then perform an assessment. The assessment should consider whether any of the following factors exist which would warrant a more comprehensive investigation:
- evidence of unauthorized or discretionary trading in the accounts of affected clients;
- falsified KYC forms;
- a high volume of forms;
- the conduct took place over an extended period of time; or
- the conduct involved other individuals at the branch.
Where a more comprehensive investigation is warranted, some or all of the following additional steps may be required:
- an interview of supervisory personnel;
- an interview of other branch staff that may be involved;
- contact with the affected client;
- interview of the affected client;
- a review at the branch level; or
- recompletion of affected forms.
In all circumstances, Members should ensure that all affected forms are removed from the AP’s files.
6. Supervision After Detection
When a Member has detected that an AP has engaged in signature falsification, the AP should be instructed to cease and desist the conduct. The Member should also consider imposition of close supervision or other supervisory measures, such as requesting document samples or performing more frequent branch reviews.
Internal Discipline
MFDA Policy No. 3 provides that each Member must establish procedures to ensure that breaches of MFDA By-laws, Rules and Policies are subjected to appropriate internal disciplinary measures. Signature falsification has been identified by securities regulatory authorities as being serious conduct. The level of internal discipline should be sufficient to address the seriousness of the conduct in the circumstances, including whether any of the following factors are present:
- client harm;
- high frequency of signature falsification;
- AP has been cautioned or disciplined about signature falsification in the past;
- AP misled the Member during its investigation;
- AP has previously been told to destroy instances of signature falsification and failed to do so;
- AP made a false representation on annual Member attestation that he or she has never engaged in signature falsification;
- conduct occurred in response to a supervisory inquiry (whether or not the AP explicitly represented to supervisory staff that the document was signed by the client in question following the inquiry); or
- conduct occurred after release of MFDA Bulletin #0661-E (Signature Falsification) on October 2, 2015.
Note that in MFDA disciplinary hearings, MFDA staff will seek enhanced penalties for conduct that occurs after the release of MFDA Bulletin #0661-E.
Conduct by Branch Manager or Other Individual Acting in a Supervisory Capacity
When a Member has determined that a branch manager or other individual acting in a supervisory capacity has engaged in signature falsification, the Member should consider whether the individual should continue acting in that capacity. The Member should also conduct a review of the APs supervised by the individual to determine if they have been involved in signature falsification.
V. Additional Resources
APs and Members should consult the following additional resources not referenced above, for information related to signature falsification:
- MSN-0042 Limited Trading Authorizations and Intermediary Accounts
- MSN-0038 Revised Limited Trading Authorization Form and Guidelines for Individual and Joint Accounts
- MSN-0035 Recording and Maintaining Evidence of Client Trade Instructions
- MSN-0016 Electronic Signatures
- MSN-0014 Supervision Requirements for Licensed Assistants at Branch Offices
- MFDA Bulletin #0661- E Signature Falsification