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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