Alert:
A nationwide postal strike or lockout may occur as early as November 3, 2024. Dealer Members must take steps to ensure that document delivery requirements prescribed under CIRO Rules continue to be met.
(Updated January 26, 2017)
MFDA staff continues to encounter situations where Approved Persons (“APs”) have created, possessed or used documents such as Know-Your-Client (“KYC”) forms, trade forms and cheques which have been pre-signed or on which client signatures have been falsified through other means. Members and APs may only use forms that are executed by the client after information on the form has been properly completed. Under MFDA Rule 2.1.1 (Standard of Conduct), Members and APs are obligated to deal fairly, honestly and in good faith with their clients and observe high standards of ethics and conduct in the transaction of business.
This MFDA Staff Notice reviews background information on signature falsification, and outlines actions that should be taken by APs and Members to prevent it.
Hearing Panels of the MFDA Regional Councils have consistently ruled that signature falsification is not permissible under MFDA Rule 2.1.1.
Examples of signature falsification identified in Hearing Panel decisions include, but are not limited to:
Signature falsification can violate Rule 2.1.1 whether or not:
Signature falsification can:
Under MFDA Rule 2.10 (Policies and Procedures Manual), every Member shall establish and maintain written policies and procedures (that have been approved by senior management of the Member) for dealing with clients and ensuring compliance with the Rules, By-laws and Policies of the MFDA and applicable securities legislation. MFDA Hearing Panels have found that under Rule 2.1.1, APs must follow Member policies and procedures designed to detect and prevent signature falsification and APs must respond truthfully to Member inquiries about signature falsification.
The purpose of a Limited Trading Authorization (“LTA”) under MFDA Rule 2.3.2 (Limited Trading Authorization) is to facilitate a trade where the assets are held at the mutual fund company in the name of the client. When clients sign an LTA, they authorize the Member to execute a trade without the need to provide signed written instructions. Use of an LTA can assist APs in minimizing the number of trading-related forms where a client signature is required. Proper use of an LTA eliminates the “convenience to the client” rationale many APs use to justify their inappropriate use of trading forms.
APs should record and maintain evidence of client instructions for all trades in accordance with MFDA Rule 5.1(b) (Requirement for Records). Where trades are placed pursuant to an LTA, records of client trade instructions should include notes as to how the instructions were given, for instance by telephone, in person or by facsimile. When using an LTA, it is not appropriate to sign a client’s signature on a trading form.
APs must not instruct or permit others to engage in signature falsification. APs should in their supervision of support persons, pro-actively address the issue of signature falsification and take steps to ensure it does not occur.
Pursuant to MFDA Policy No. 2 Minimum Standards for Account Supervision, supervisory staff has a duty to ensure compliance with Member policies and procedures and MFDA regulatory requirements. Member supervisory staff, compliance officers and staff who process documents should be alert to signature falsification occurring when reviewing documentation that is required to be signed or authorized by a client. This type of documentation may include trade orders, KYC forms and New Account Application Forms. Supervisory staff, compliance officers and staff who process documents should receive training in how to detect signature falsification. Branch managers can play a particularly important role in the detection of signature falsification during the course of their tier one reviews.
Client documents used in tier one or tier two reviews or other supervisory activity should be originals, colour copies or colour scans, to ensure that a reasonable supervisory review for possible signature falsification can take place.
As part of their general supervisory duties under MFDA Rule 2.5 (Minimum Standards of Supervision), Members may wish to have APs complete a questionnaire on at least an annual basis, in regard to their conduct and practices. This questionnaire should include questions to determine whether APs have engaged in signature falsification.
Pursuant to MFDA Policy No. 5 Branch Review Requirements, each Member must establish a Branch Review Program to assess and monitor compliance with regulatory requirements at all branch locations. MFDA staff views branch reviews as a highly useful tool that Members can use to detect and discourage signature falsification.
MFDA Policy No. 5 provides that during branch reviews, client files should be examined to verify that proper evidence of client instructions and any relevant trading authorizations have been maintained on file. Members should use this review in part to detect any evidence of signature falsification.
MFDA Policy No. 5 provides that the purpose of branch interviews is to confirm that branch managers and APs are aware of requirements under MFDA By-laws, Rules and Policies and applicable securities regulation. Members should use branch interviews to ask whether branch managers and APs have observed or participated in any instances of signature falsification.
Members should address signature falsification in their training of new APs under MFDA Policy No. 1 New Registrant Training and Supervision and in training for existing APs.
Pursuant to MFDA Policy No. 6 Information Reporting Requirements, Members shall report to the MFDA whenever they are aware that any current or former AP has contravened any law or regulatory requirement relating to misrepresentation. It is the view of MFDA staff that signature falsification is a form of misrepresentation which Members are required to report to the MFDA within five days of detection, pursuant to section 6.1(b) of Policy No. 6. This includes a single instance of signature falsification, such as a Pre-Signed Form in a client’s file.
Pursuant to MFDA Policy No. 3 Complaint Handling, Supervisory Investigations and Internal Discipline, Members have a duty to conduct a detailed investigation in all situations where conduct of the type listed in Part I, Section 3 of that Policy may have occurred. This list of conduct includes misrepresentation. MFDA staff is of the view that signature falsification is a form of misrepresentation and therefore Members are required to conduct a detailed investigation where signature falsification may have taken place.
An investigation may be more or less comprehensive depending on the situation. When determining how comprehensive an investigation should be, Members should interview the AP involved and review the files of that AP, and then perform an assessment. The assessment should consider whether any of the following factors exist which would warrant a more comprehensive investigation:
Where a more comprehensive investigation is warranted, some or all of the following additional steps may be required:
In all circumstances, Members should ensure that all affected forms are removed from the AP’s files.
When a Member has detected that an AP has engaged in signature falsification, the AP should be instructed to cease and desist the conduct. The Member should also consider imposition of close supervision or other supervisory measures, such as requesting document samples or performing more frequent branch reviews.
MFDA Policy No. 3 provides that each Member must establish procedures to ensure that breaches of MFDA By-laws, Rules and Policies are subjected to appropriate internal disciplinary measures. Signature falsification has been identified by securities regulatory authorities as being serious conduct. The level of internal discipline should be sufficient to address the seriousness of the conduct in the circumstances, including whether any of the following factors are present:
Note that in MFDA disciplinary hearings, MFDA staff will seek enhanced penalties for conduct that occurs after the release of MFDA Bulletin #0661-E.
When a Member has determined that a branch manager or other individual acting in a supervisory capacity has engaged in signature falsification, the Member should consider whether the individual should continue acting in that capacity. The Member should also conduct a review of the APs supervised by the individual to determine if they have been involved in signature falsification.
APs and Members should consult the following additional resources not referenced above, for information related to signature falsification: