Client vs. Nominee Investor Accounts

Client name accounts

With an account established in 'client name', the account is registered in the name of the client on the records of the fund company. Under this method of operating, the mutual fund dealer does not 'hold' mutual fund securities on behalf of the client but is entitled to convey instructions to the fund company on the client's behalf pursuant to written instructions or in a non-written form pursuant to a Limited Trading Authorization (LTA) for each subsequent transaction. Any monies remitted by the client to the fund company are done so via the dealer. 

For example:
Kasha opened an account with Polar Mutual Fund Dealers (Polar) in client name and purchased $1,000 of ABC Canadian Equity Fund and $1,000 of XYZ Canadian Dividend Fund. Kasha remitted two $1,000 cheques to the two fund companies via Polar. Kasha also had a Limited Trading Agreement with Polar and one month later, phoned Polar and requested a switch of his XYZ Dividend Fund to the XYZ Mortgage Fund.

An LTA is meant to facilitate a trade where the mutual fund company holds securities in the name of a client. Since the client is the registered owner, normally he or she would have to sign all trade instructions before a mutual fund company could complete the transaction. An LTA authorizes a mutual fund dealer to execute the trade without submitting signed written instructions to the mutual fund company.

This does not mean the dealer is permitted to make discretionary trades. Although a signature is not required for each transaction, there must be evidence of specific client instructions.

Nominee name accounts

When a mutual fund dealer establishes accounts for clients in 'nominee name', the dealer becomes the registered/legal owner of any mutual funds purchased, which they then hold in trust for their clients. The fund company makes transactions as directed by their clients but in this case it is the mutual fund dealer that is dealing with the fund company directly. The client would direct any monies to the fund dealer, which would then be deposited in the dealer's trust account before transfer to the fund company. A major advantage of the nominee name structure from the perspective of the dealer is that client orders can be 'pooled,' which requires only one transfer of funds between the dealer and a given fund company for a given fund per day.

Example:
Jessica opened an account with Arctic Mutual Fund Dealers (Arctic) in nominee name and purchased $1,000 of TLC Latin Growth Fund and $1,000 of LMN Precious Metals Fund. Jessica remitted one $2,000 cheque made payable to Arctic. If other Arctic clients were purchasing or redeeming those same funds on that day, Arctic would make one transfer of monies with the fund companies to cover all nominee account transactions in those funds.

Since the dealer, and not the client, is the registered owner of the mutual funds, the client's signature would not be required for the execution of a trade. Therefore, there is no need for an LTA to be signed. However, discretionary trading by the dealer is not permitted. There must be a record of specific client instructions for all trades.

For more information on the requirement for records, click here to see MFDA Notice MR-0035 Recording and Maintaining Evidence of Client Trade Instructions.

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The economics of generic injectable pharmacueticals

Coming down the pipe, with supposed huge implications for the biotech industry, the FDA has approved a generic version of Sanofi's blood thinner Lovenox.

The new version will be marketed by Novartis and Momenta Pharmaceuticals and will be available immediately. The fears are that Lovenox could suffer rapid sales losses in the very near term. It’s interesting to note that Momenta's stock price soared 70% on the news, while Sanofi’s shares dropped nearly 5%.

Unknown and perhaps of little interest to the people betting heavy on Momenta is that Lovenox was genericized in Canada more than 5 years ago. Canada's HPB granted a notice of compliance to NovoPharm (now TEVA) to market the copycat version.

The generic never made it to market and two years after pulling the plug on their sales and marketing efforts, Sanofi relaunched Lovenox in Canada. Today sales of brand name Lovenox have never been better. It’s unknown why Novo never did bring the drug to market, but sure to say the effort to replace Lovenox would have been an immense undertaking, even with Sanofi tucking under. 

What does this say for Momenta's version of Lovenox? If I were a betting man (thankfully I’m not), I'd be buying September put options on Momenta expecting it to fall off quite a bit from that 70% surge.

We are a quite a ways off from seeing generic versions of drugs that are made through genetic engineering. That’s why there was barely a ripple in the stock prices of Amgen, Genzyme, Ortho Biotech, and even Sanofi following the news from the FDA.

Keep your eye on the ball and look for underlying value in pipelines when it comes to investing in the biotech industry.

Cheers