Staff Notice: OSC Staff Notice - 81-704 - Limited Powers of Attorney and Letters of Authorization Used in the Sale of Mutual Funds

LIMITED POWERS OF ATTORNEY AND LETTERS OF AUTHORIZATION
USED IN THE SALE OF MUTUAL FUNDS

OSC STAFF NOTICE #81-704

Introduction

The purpose of this Notice is to communicate the views of the staff of the OntarioSecurities Commission (the "staff") on the use of powers of attorney, letters ofauthorization or trading authorizations (collectively "powers of attorney") by dealers andtheir sales representatives in the purchase and redemption of mutual fund securities.

Background

A large number of mutual fund securities are registered in the security registers of mutualfunds in client name. Mutual fund companies must look to the registered unitholder (i.e.the investor) for instructions to execute a trade. Hence, where a dealer submits an orderon behalf of its client, mutual fund companies should require that dealers provideinstructions bearing the client's signature for each trade before processing a trade in clientname. At the same time, staff understand the impracticalities for dealers in obtaining aclient's signature for every trade. Mutual fund companies have informed staff that they willaccept a power of attorney signed by a client which authorizes the client's dealer torequest trades on behalf of the client.

National Instrument 81-102 - Mutual Funds prohibits a mutual fund from paying redemptionproceeds prior to the receipt by the mutual fund of a written request for redemption fromthe securityholder. A written request is not required, however, if alternative"arrangements" are made between the mutual fund and the securityholder. The mutualfund industry typically accepts powers of attorney signed by clients of dealers. Thesepowers of attorney purport to give dealers authority to purchase and redeem the clients'securities, and as such, many industry participants view them as an acceptable alternative"arrangement".

Issues of Concern

Staff have serious concerns about the scope and form of powers of attorney which dealersand their sales representatives commonly obtain from their clients. Staff complianceexaminations of the operations of both dealers and fund managers have revealed thatmany powers of attorney confer unlimited powers on dealers and their representatives thatare not permitted by their category of registration. These unlimited powers of attorney maypermit a dealer's representatives to place trades without having received specific priorinstructions from the client. Staff concerns about the ability to conduct discretionarytrading are heightened where there is little or no supervision by a dealer of itsrepresentatives. When dealers fail to supervise the use of powers of attorney carefully,there is a much greater risk that inappropriate uses of such powers of attorney will not beprevented or detected.

Staff are concerned about how these powers of attorney are presented to clients andquestion whether clients understand the contents of the documents and the inherent risksinvolved in executing unlimited powers of attorney.

Recommendations

Staff recommend that dealers and their representatives discontinue the use of powers ofattorney that confer unlimited authority and discretion over their clients' accounts.

In order to ensure appropriate use of powers of attorney, staff recommend that dealersdevelop a standard document or form of power of attorney that:

• clearly states the name of the dealer, as well as the name of the specifiedrepresentative;
• provides for the signature of a designated partner, director, officer or branch managerof the dealer whereby that designated individual indicates approval and acceptance ofthe power of attorney;
• provides for the dealer representative's signature;
• states that the power of attorney will terminate if and when the specified representativeleaves the employment of the dealer;
• clearly states that the power of attorney is limited to trading in mutual funds and thatthe dealer's representative must obtain prior specific consent from the client for eachtrade;
• clearly states that the dealer's representative is limited to providing investmentrecommendations and executing the client's trading orders, and that he or she may notmake any decision to buy or sell mutual fund securities on behalf of the client; and
• is labelled in such a way that it clearly conveys the limited scope and power given bythe client to the dealer and representative. Acceptable titles include "Limited Powerof Attorney" or "Letter of Authorization".

Staff recommend that a dealer have legal counsel review the document to ensure that itdoes not grant to the dealer and the dealer's representatives discretionary authority overa client's account.

Staff also recommend that a dealer set up control procedures to monitor the use of powersof attorney. Recommended procedures include:

• attaching a copy of the limited power of attorney to each trade order form andindicating the original copy of the power of attorney is on the dealer's file (this will helpto ensure that the branch manager, head office and the mutual fund company areaware of the authorization);
• keeping a copy of the power of attorney document on the dealer representative's fileand at head office of the dealer;
• appropriate client signature verification procedures;
• procedures to record and retain, whether electronically or manually, specific oral orwritten trade instructions received from clients and for the dealer to regularly assessthe adequacy of documented instructions;
• procedures to identify client accounts where limited powers of attorney have beengranted;
• ensuring that branch managers and head office carry out supervision on theseaccounts on a regular basis prior to executing a trade, or within a reasonable time afterexecuting a trade, to ensure that all transactions are performed according to clients'prior and specific instructions, and in accordance with clients' investment objectives;
• procedures to ensure clients receive a confirmation of every trade directly from themutual fund company or from the dealer's head office; and
• documenting in writing the control procedures in a policies and procedures manualmade available to representatives.

Please direct any questions to:

Elle S. Koor
Ontario Securities Commission
Senior Accountant, Compliance
(416) 593-8077
[email protected]

Christina Forster
Ontario Securities Commission
Senior Accountant, Compliance
(416) 593-8061
[email protected]

Felicia Tedesco
Ontario Securities Commission
Senior Accountant, Compliance
(416) 593-8273
[email protected]

Antoinette Leung
Ontario Securities Commission
Senior Accountant, Compliance
(416) 595-8901
[email protected]