Recording and Maintaining Evidence of Client Authorization and Trade Instructions

(Updated July 7, 2022)

Under Rule 2.3.1(b), subject to the limited exceptions set out under Rule 2.3.1(c), no Member or Approved Person may engage in any discretionary trading. As a result, prior client authorization, and instructions are required for all trades executed on behalf of a client. In addition, MFDA Rule 5.1(b) sets out recordkeeping requirements for each order, or any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. This Notice is being issued to remind Members and their Approved Persons of the requirement to obtain client authorization and instructions for all trades and maintain records in accordance with MFDA Rule 5.1(b) (Requirement for Records).

Requirement for Records

Rule 5.1(b) requires Members to keep an adequate record of each order, and any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. This record must include:

2. an adequate record of each order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. Such record shall show:
   1. the terms and conditions of the order or instructions and of any modification or cancellation thereof;
   2. the account for which entered or received;
   3. the time of entry or receipt, the price at which executed and, to the extent feasible, the time of execution or cancellation;
   4. evidence that the client was informed of all fees and charges in accordance with Rule 2.4.4; and
   5. evidence of client authorization.

Evidence of Client Authorization

Members must obtain client authorization for every trade and maintain records of client authorization. 

Client authorization may be evidenced by a client signature (wet or electronic signature) on a trade order or by a recorded/taped conversation with the client that confirms the client’s trade instructions. 

Where a Member wishes to act on a client’s verbal instructions without taping or recording conversations, the Member must maintain a detailed and accurate record of client instructions, including how the instructions were given (e.g. by telephone or in person), and have a process to verify the client’s identity. Members may also accept email instructions from a client and follow up with a telephone call to verify the client’s identity and confirm the authenticity of the client’s instructions. It is particularly important for Members and their Approved Persons to record trade instructions received from clients where there is no written authorization to verify the trade. Maintaining a detailed and accurate record of client instructions is an important internal control, which provides an audit trail for Members to confirm transactions and assists in verifying trade details in the event of a dispute. Members may also enter into a written agreement with the client in which the client authorizes the Member to act on the client’s verbal instructions (e.g. a Limited Trading Authorization – (LTA) for client name positions). The MFDA does not prescribe a form for this purpose.

Records of Client Discussions

In addition to the requirements set out in Rule 5.1, it is recommended that Members maintain records that summarize any discussions between the client and the Approved Person including any recommendations made by the Approved Person (regardless of whether or not the client acted on the recommendation) and various alternatives discussed with the client.

Policies and Procedures

Members should have policies and procedures in place to document trade instructions. Records of client instructions may be maintained in paper form or by means of mechanical, electrical, electronic or other devices provided the requirements of MFDA Rule 5.2 (Storage Medium) are met:

• Such method of record keeping is not prohibited under any applicable legislation;
• There are appropriate internal controls in place to guard against the risk of falsification of the information recorded;
• Such method provides a means to furnish promptly to the MFDA upon request legible, true and complete copies of those records of the Member which are required to be preserved; and
• The Member has suitable back-up and disaster recovery programs.

Records of client instructions must be retained for a period of seven years in accordance with MFDA Rule 5.6 (Record Retention).