Client Discovery & Account Opening

Client Discovery and Account Opening

• Client discovery and account opening encompass all aspects of opening a new client account, including the maintenance of ongoing and accurate records.

Key Terms

• Beneficial owner: The person who ultimately owns or controls an account, even if the account is held in another name.
• Cash account: An account that requires full payment for purchased transactions.
• Client discovery: The process of gathering information about a client's financial situation, investment objectives, and risk tolerance.
• Delivery against payment (DAP): An arrangement where securities are purchased and payment is made on the settlement date, usually through an intermediary.
• Discretionary account: An account where the advisor has the authority to make investment decisions on behalf of the client, with certain restrictions.
• Insider: A person with access to non-public information about a company, who has a fiduciary duty not to trade on that information.
• Managed account: An account where investment decisions are made on a continuing basis by the dealer member or a third party hired by the dealer member.
• Margin account: An account that allows investors to borrow funds from the dealer member to purchase securities.
• Politically exposed person (PEP): A person who holds a prominent public office or position of public trust, their immediate family members, and their close associates.
• Power of attorney: A legal document that gives a person the authority to act on behalf of another person.
• The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA): Canadian legislation aimed at preventing money laundering and terrorist financing.
• Red flag: A warning signal of potential improper activity that may indicate money laundering or terrorist financing.
• Registered account: An investment account registered with the Canada Revenue Agency (CRA), such as an RRSP or TFSA, that offers tax advantages.

Introduction

• Opening a new account is an important first step in your relationship with clients, and allows review of all aspects of their situation.
• Client discovery is the period during which the RR and client ask questions and get to know each other.
• Opening an additional account for an existing client helps review the client's situation and amend their documentation.
• Gathering information at this stage forms the basis of future recommendations.
• Interactions help representatives understand clients and make suitable recommendations.

Opening Accounts

• Registered Representatives (RRs) are responsible to both the client and the dealer member.
• RRs must act with high standards of integrity.
• Standards of conduct provide a framework for responsible dealings with clients, beginning with duties when placing orders.

The Cardinal Rule

• RRs must prioritize clients' interests and update information to ensure recommendations are appropriate.
• The Know Your Client (KYC) rule requires cautionary advice if an order is unsuitable based on the account documentation.
• Recorded objectives and risk factors must be suitable for the client.
• Significant changes in circumstances require updated suitability information.
• The KYC rule is the foundation of client dealings, starting at client intake and continuing throughout the relationship.
• Dealer members must make reasonable steps to learn and stay informed of essential facts about each client.
• KYC compliance must collect data like personal/financial circumstances, investment needs/objectives, knowledge, risk profile, and time horizon.
• Suitability determination is vital for retail clients.
• Suitability must consider security liquidity/concentration, cost impact, and alternative actions.
• Variables to consider for trade suitability include age, marital status, occupation, income, net worth, dependents, and risk profile.
• Investment objectives, investment knowledge and experience, investment time horizon, and portfolio composition should be considered.
• Age and life stage are vital for the investor's KYC profile.
• Hiring skilled advisors is a KYC compliance method.
• A detailed initial KYC process and regular client revisits aid KYC compliance
• Follow-ups are vital for senior investors.

Obtaining Information at the Account Opening Stage

• RRs need sufficient client information for appropriate recommendations that align with investment objectives.
• Techniques to broaden investor conversations include documenting responses to lifestyle questions.
• Lifestyle questions assess retirement plans, financial needs, and dependent issues.
• It is important to determine, if the client has a will and financial power of attorney.
• In-person meetings ensure accurate and up-to-date account applications.
• Encouraging family or friends at meetings is helpful.
• Frequent updates of client’s information are needed, such as annual updates.
• These steps help reps and firms to have client information needed at account opening stage.
• Appropriate recommendations need to be made.

Client Identification Requirements: Anti-Money Laundering

• RRs play roles in combating money laundering and terrorist financing.
• All employees with client contact or monitoring duties have responsibilities.
• Employees failing to report under the PCMLTFA face prison up to 5 years and fines up to $2,000,000.
• Anti-money laundering and anti-terrorist financing (AML/ATF) procedures need to be included in existing KYC obligations.
• The Canadian Investment Regulatory Organization (CIRO) has account opening procedures.
• Dealer members must get and keep customer information.
• Essential facts relating to each customer should be requested.
• Account opening procedures aid in reasonable, risk-based client assessments.
• Clients' income sources and expected account activity helps determine information needs.
• Offshore accounts may need added monitoring and due diligence.
• Client discovery helps RRs see client behavior for money laundering concerns.
• Red flags warn of improper activities which need an appropriate action taken.
• The client discovery process and ongoing interactions are critical for KYC and illegal activity prevention.
• Client identification and verification needs professional judgement and help in opening and dealings with clients.
• Simply following rules may not be enough if "red flags" indicate client involvement in money laundering or suspicious transactions.

Account Opening Red Flags

• An effective "red flag" program aids employees involved in AML/ATF provisions.
• A red flag means there is a reasonable chance a transaction is related to money laundering or terrorist financing.
• The process is the means to verify the origin of assets that may be part of money laundering.
• Red flags include reluctance to provide information, altered or counterfeit documents, recent issue dates.
• Flags include photocopies, facsimile images, or electronic copies, opening accounts in other people's names.
• Vague or potentially untrue information or providing an address outside the local service area are red flags.
• PO boxes, general delivery addresses (when street address is the norm) is a red flag.
• Phone number where the client cannot be reached is a red flag.
• Making inquiries to avoid reporting, reluctance to complete documentation is a red flag.
• Inquisitiveness about compliance, anti-money laundering procedures and an attempt to use aliases are red flags.

General Anti-Money Laundering Due Diligence

• AML procedures emphasize the risk level that certain clients may participate in money laundering.
• Extra due diligence with bank secrecy jurisdictions or countries of high corruption are needed.
• Added information and documentation is required for corporations and trusts, mostly private offshore entities.
• Close attention is necessary for clients who have cash businesses.
• Attention needed for clients/associates in public trust, and clients with accounts with previous suspicious transactions.

Did You Know?

• Those in positions of public trust, their family, and associates are designated as politically exposed persons (PEPs).
• Foreign PEP management is of deeper concern from a money laundering perspective than domestic PEP management.
• The foreign PEP category includes foreign state persons, or their close family.
• Foreign PEP definitions are for national states, not provinces or municipalities.
• Foreign PEP accounts need senior management approval in 30 days, and ongoing monitoring.
• Domestic PEP accounts need money laundering risk assessments.
• High-risk accounts need same controls as foreign PEPs.
• Anti-money laundering regulations require dealer members to verify identity and date of birth when opening an account.
• Verifying identity must occur before transactions, except an initial deposit.
• Identity must be checked by people giving instructions to an account.
• CIRO’s client identification refers to profile, including KYC and suitability, which is not specific to FINTRAC documents.
• There is no expectation to repeat the client identity process unless there is client identity/ document validity doubt.

Account Updates and Reviews

• Member compliance regime includes reviews assessing high-risk accounts for money laundering.
• Reviews ensure whether have been account changes to a client's profile in the assessment.
• Non-individual accounts include reviews detecting ownership structure changes.
• A dealer member's AML/ATF regime needs risk rating categorizing all client accounts by risk.
• Supervisory systems are put into place based on categories.
• High-risk accounts include offshore accounts, PEP accounts, accounts with suspicious transactions, etc.
• Member determines protocols ensuring accounts do not risk money laundering activity.
• Changes to client situations should be considered when updating investment objectives.
• Activity suggesting laundering requires client documentation updates.
• An increase in assets beyond client means or unusual transfer/deposit patterns are examples.
• Regarding reviews, FINTRAC says two-year intervals are regular.
• More frequent changes beyond expectations are need for riskier accounts where monitoring sparks worries.
• Routine AML/ATF compliance includes improved, ongoing monitoring of risk accounts.

Anti-Money Laundering Procedures for Corporate Accounts

• PCMLTFA dictates corporations, trusts, and similar entities must collect owner data on the person and owners behind the subject business.
• Record data as RR working on dealer member's behalf.
• Record why if the information cannot be procured.
• Restrict liquidating trades for 30 days until information is obtained.

Anti-Money Laundering Procedures for Non-Resident Accounts

• Non-resident individual accounts have added identity verification vs. resident.
• Dealer members need to know registration rules of nations they will do business with.
• Determine needs, mostly if soliciting in a foreign country.
• Members assess foreign jurisdictions subject to laundering or UN sanctions.
• Issues may prevent firm interactions with state residents.
• Procedures identify offshore PEP accounts.
• Determine if a holding company/investment corporation is being set up by/for a PEP.
• Procedures protect from proceeds of embezzlement or foreign corruption.

Important Note

• When using offshore accounts, be cautious using offshore clients unwilling/unable to accurately share ownership information.
• A local resident using these structures is also suspect.
• Inquire regarding residency and consider if registration allows services to clients in the residing jurisdiction.

Anti-Money Laundering Procedures for Institutional Accounts

• Dealer members also need to have AML/ATF procedures for clients.
• These deals cover customers which are sophisticated and trade securities and volumes.
• Institutional clients themselves are known, regulated, and public.
• Dealer members have less contact with this segment.
• Relationships are through intermediaries.
• Investment funds and hedge funds are typical examples.
• Accounts are solely trade executions.
• A limited relationship exists between the client and the member.
• CIRO rules are that members dealing with institutional firms must have supervisory reviews detecting concerning transactions.
• Diligence is needed on all orders accepted.

Personal Identity Documents

• Members must develop policies internet and electronic signatures usage for accounts.
• Identity needs set by PCMLTFA apply when opening accounts.
• Original documents must be reviewed when verifying account ownership.
• Copies are not valid for verification.

The Account Application

• Before opening accounts, you and your client must complete an account application.
• Completion of an application represents the start to working with the dealer member.
• An account is a services contract between the member clients.
• RRs execute the account application on a dealer’s behalf.
• An account applicant needs to have the client's full name, address, citizenship, and social insurance number.
• Accounts need to include personal data, financial data investing objectives, risk profile, knoweledge and company status.
• Space is provided to specify material issues on accounts.

More than a basic account applicant includes

• Maintain notes from the discovery process to maintain.
• Have any extra completed paperwork, such as a questionnaire is important.
• You need the designated support advisor’s approval for signoff.
• It is used to form basis of service between member and customer.
• An acount application is used to establish identify the client.
• You need info to meet suitability, gauge creditworthiness, and if they are subject to insider status.
• The form must have minimum specifications, with a copy offered to involved staff.

Further Documentation

• In addition to completing a new client account application, you should update existing accounts.
• It should also involve regular client circumstances checks.
• Significant changes update client names, adresses, marital status, and a transfer in interest within the account.
• Changes to any trading authorization, financial circumstances.
• New objectives are to amend regulatory sections.
• Profile should be reviewed for circumstance, creditworthiness and risk for any impacts.
• The legal view is account amendments involve restatement.
• The minimum steps are annual reviews confirming accurate information.
• Contacting them and giving dealer member changes works.
• Lack of response has members conclude accurate data.
• Non normal updates occur with account reviews.
• For some cases, reviewing a retail client will occur after securities are used, having received notification of securities, and new information regarding a security.
• Member may also use an information review.
• Changes may not impact review.

Case Study - Jane

• An RR at ABC Financial, Jane has a moderately-stable customer named Bruno.
• Bruno has income, moderate net worth, and conservative objectives.
• Bruno told Jane he'd recently gotten a substantial inheritance, leading her to recommend speculative stock.
• Leona is concerned due to the application listing 50% stable income, 50% safety.
• Client data failed to support order acceptance and likely exceeded his ability to pay or missed a data update.
• It is unclear if she had spoken to them about changing objectives.
• Leona was concerned and needed assurance if it had affected retirement changes to attitude needs.
• An order needs support if someone claims that it should have better.
• Investors with bad advice and history cause concerns.

Describing Application Completion.

• There are general catagories of info.
• Client Data
• Account Information;
• Registrant Information.
• The data catagories are detailed following.
• Full client information: includes data such as name, marital status, and any knowledge.
• A report by an owner.
• Avoid abbrievated names, check all cases.
• Use full name only and don't try abbreviations like AMF/ATM.
• Companies need correct listings, or it could impact ownership.

Types of Account

• Confidential, nominee, and numbered are some account styles available.
• It's permissible to do accounts based on the above options.
• They must have details all the time.
• You need residence and business locations.
• Do not use a PO box.
• Ensure compliance.
• Trade confirmations matter, so keep the address on file.

Mail Confirmation

• Be careful mailing confirmations to third party addresses.
• Clients need mail receipts.

Numbers

• Gather contact numbers wherever possible.
• New names mean checking the residence.
• An SIN is needed for compliance.

Citizenship

• Also check for accounts with constraints. Electronic Documentation to send client

Date of birth

• More so than just age, the exact birth data matters for compliance.
• RRSPs and RRIfs are required to maintain the data.
• There need to be details.
• Planning has become more important.
• When opening accounts, get contacts for incapacity.
• This data also needs power attorney documentation.
• Make sure to have attorney documentation.

Minors

• Avoid minor transactions given they can be repudiated.
• Furthermore, they can not vote.
• Clients also do not have data.
• Consult accounts when dealing with younger clients and parental guarantees.
• Civil Code changes in Quebec can change everything.

Citizenship

• For client purchases check citizenship by the owner.

Employment

• You need information of their line of work.
• Establish any regulation.
• To evaluate capability for clients

Marital Status

• Marital status has a financial and impact, get data from both.
• Make you evaluate data and objectives for needs.
• It helps test trading obligations.

Information

• Data like finance if credit will extend.

Networth

• It also has you establish total sum of financial data.
• Most values are available.
• It helps state amount to know what the income is from.
• Look as to what the composition of the financial situation.

Income

• Only annual income is a must.
• It can often be wiser to have source too.
• Know data about both clients income as they have to monitor it.

Investment Knowledge

• Data on this will show how much guidance is needed and how.
• To ensure consistent process
• Evaluate the level of knowledge the client has.

Investment Objectives

• Initial data review
• The goal includes what they want.
• Account needs different objectives.

Risk Profile

• You must evaluate everything within reason.
• It should always be about needs, risk and more.

Account Information

• Need account info along with the following list.
• Beneficial Data
• Trading
• There are rules on what you have to include to them.
• It's essential the amount and trading is suitable for each data.
• Data is all need, and includes cash for a person and data for the corporation.

Cash Account

• Cash needs full payment during a purchase.

Margin

• It also requires partial payment.

Delievery Against Accounts

• This includes purchases, so it must be full.
• The client or agent needs details.

Rap

• For the exact time of RAP client needs also account needs securities to fill their need.
• That includes payments.

Registered Account

• CRA needs the exact dates
• Follow the right protocol.

Pro Account

• All employee accounts need to be there before giving data to someone.

Investment club

• It must accompany the document.
• One of us must be authorized do give us details.

Discretionary Account

• An authorization is needed.

Electronic Delivery and Signatures.

• Must have electronic access.
• It's valid signaure.
• Members must be a part, it's between people and firms .

Client Records

• RRs must have current client data.
• Follow the systems of their dealers.

Application Account

• Must be available prior for a trade to work.
• Clients and members check accounts.
• See big changes in that clients circle.

Accounts Record

• Each account must show each system.
• They provide data on price.

Security reference

• See the form and client if there is concerns.

Correspondence

• It ensures the client has the account.
• It must be there from the dealer member too.
• Important - do not use business for mail to it.*

Removals

• Dealers can take steps to not offer records.

Orders

• Details all members must follow given the policies.
• More notes and important topics that would be valuable to the exam are available on the client relationships*