On April 10, the Mutual Fund Dealers Association (MFDA) published a report (Report) on its review of the books of business of certain approved persons (APs) in 2018.

How the MFDA Selected APs for Review: The MFDA used the data it had previously gathered for its 2017 MFDA Client Research Project to assess the investment holdings and asset allocations of MFDA members’ clients overall. Then, the MFDA selected for review APs that had atypical books of business, such as client accounts with significant concentration in high risk sector funds, client accounts concentrated in medium-high and high risk-ranked funds, and/or APs who had all or most of their clients 100% invested in equity funds with no diversification into fixed income investments.

Findings: The MFDA found that:

  • Some APs had know-your-client (KYC) information that was uniform across all (or nearly all) of their client accounts. In such situations, there was insufficient documentation to support what was recorded in the KYC forms (e.g., no risk profile questionnaires or notes of client discussions). In some cases, it appeared that the KYC information had been documented to match the AP’s investment philosophy rather than the client’s actual risk tolerance, investment objectives and time horizon.
  • Some APs were attributing the same risk tolerance and investment objectives to senior investors as their other clients without obtaining any supporting documentation.
  • Several of the APs that had uniform KYC information for their client accounts also exhibited investment patterns where all or nearly all of their client accounts were invested in equity accounts. Although some APs explained that their clients had more diverse portfolios which included assets held outside their accounts with the member firm, generally there was no documentation of external assets and overall portfolio allocation.

Based on its review, the MFDA recommends that members:

  • conduct regular reviews of their books of business, including reviewing client investment holdings and KYC information, to identify trends or patterns of concern;
  • have policies and procedures to assess concentration risk and include concentrations limits;
  • have policies that require documentation of how risk tolerance, investment objectives and time horizons are determined;
  • document external client investments, if any, including details on the external investments; and
  • re-perform the KYC collection process where deficiencies are identified, and consider including a risk-based approach to prioritize vulnerable clients.