MFDA issues investment loan warning

(August 19, 2005) Danger, free money. The MFDA has issued a warning to members regarding what it calls misleading communications involving investment loans.

“MFDA staff has become aware of communications sent by affiliated financial institutions of fund managers to MFDA members, which promote investment loans in a manner that is misleading and contrary to the best interests of investors,” the fund dealer association said in a bulletin issued on Thursday.

It says those notices sent by fund manager affiliates advertise investment loans, using terms such as “inheriting cash” or “finding cash.” Some even state “there is no upper limit on the amount that can be borrowed.”

Karen McGuinness, compliance director for the SRO, says she’s concerned about the way the promotions, which target MFDA’s approved persons, promote leverage without including the commensurate discussions on risks to the client. “When you get a barrage of these communications essentially saying, ‘Here’s free money’ that’s a problem,” she says. “Advisors are sitting there saying, ‘I can increase my book size by a factor of 10?'”

The cash offers are being described as “no margin loans” and are made available only if clients invest in the mutual fund of the affiliated fund manager, MFDA says. “You can’t ignore the fund manager’s role in all thus because they’re clearly benefiting,” McGuinness says. At the same time, though, the regulator continues to have serious concerns about the way the loans are marketed.

MFDA rules require members and advisors to ensure recommendations to clients with respect to leveraging are suitable, and that a risk disclosure document be provided to clients when such recommendations are made.

McGuinness added the SRO has asked provincial securities regulators to look at the fund managers’ activities regarding the communications, because they appear to conflict with the best interests of investors.

Filed by Philip Porado, Advisor’s Edgephilip.porado@advisor.rogers.com