Client Discovery & Account Opening

Client Discovery and Account Opening

• Chapter discusses client discovery and account opening, including procedures for accurate records.
• Objectives are to explain opening procedures, importance of the application, proper completion, disclosure requirements including Relationship Disclosure Document, and procedures for maintaining client records.
• Key terms include beneficial owner, cash account, margin account, client discovery, delivery against payment, politically exposed person, power of attorney, discretionary account, insider, The Proceeds of Crime (Money Laundering) and Terrorist Financing Act, managed account, red flag and registered account.

Introduction

• Opening a new account is an important step for the RR and client.
• It allows both parties to review all aspects of the client's situation.
• This period of getting to know each other is known as client discovery.
• It is an important opportunity to evaluate and document a client background.
• Information at this stage is the basis for future recommendations.

Opening Accounts

• RRs are responsible to the client and the dealer member.
• RRs must accept, understand, and display high standards of integrity.
• The standards of conduct discussed provide a framework for responsible dealings with clients.
• Begin with a brief review of duties when placing orders.
• KYC rule requires dealer member to learn and remain informed of key facts and ensure collected information covers personal circumstances, needs, investment knowledge, risk profile and time horizon.
• Variables to consider when determining suitability of a proposed trade include age, marital status, occupation, net worth, number of dependents, income and risk profile.
• Compliance with KYC ensures the firm has gathered sufficient information about the client's personal and financial circumstances, investment needs and objectives etc,.

Information at the Account opening Stage

• RRs must obtain sufficient information about clients.
• Clients' accounts are managed in a manner consistent with their objectives.
• Document the client's response to lifestyle questions, like retirement plans, expenses, dependent children/grandchildren, wills, and financial power of attorney.
• Require in-person meetings to ensure application accuracy.
• Frequent updates should be required, like on an annual basis
• These steps help ensure the firm has required information to determine appropriate investments.

Client Identification: Anti-Money Laundering

• RRs must combat and detect money laundering and terrorist financing.
• Applies to employees in direct contact with clients, plus those who monitor and supervise daily activities.
• Employees who do not fulfill reporting responsibilities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) can face up to five years in prison and/or a fine of up to $2,000,000.
• Anti-money laundering and anti-terrorist financing (AML/ATF) procedures are part of KYC obligations.
• CIRO sets out the rules for account opening procedures stating for each account opened, a dealer member must obtain and maintain certain customer information.
• Account opening procedures should provide a risk-based assessment of clients, their source of income, and expected activity in an account. Helps to determine extra information and documentation and whether additional monitoring/ due diligence is needed (offshore accounts, etc.).
• During the client discovery process, registered staff are best positioned to observe and evaluate client behavior on the money laundering perspective.
• Red flags are warning signals of possible improper activities.
• RR must exercise professional judgment and seek help where necessary, both in opening accounts and in subsequent dealings with clients.
• Simply having followed the letter of the regulations may not be enough if there are red flags suggesting that clients may be involved in money laundering or that their transactions are suspicious.

Account Opening Flags

• An effective red flag program is a tool a dealer member can implement to assist employees in performing their duties relating to AML/ATF provisions.
• A red flag should raise suspicion that there is a reasonable chance a transaction is related to a money laundering offense or terrorist financing activity.
• Activities or behaviors that may raise red flags include
  • Reluctance to provide adequate information or supporting documentation
  • Altered or counterfeit Documentation
  • Photocopies of documents, electronic reproductions
  • Attempting to open accounts in other names,
  • Supplying vague information
  • Providing an address that is out of the local service area
  • Using a PO box
  • A phone number where the client cannot be reached
  • Suggesting a desire to avoid reporting / reluctance to complete
  • Inquisitiveness about AML procedures
  • Attempts to user aliases

General anit-money Laundering Due Diligence

• Anti-money laundering procedures based on the risk that some clients may be involved. Firm policies must:
  • Use extra due diligence with clients from bank secrecy jurisdictions or countries with high levels of corruption.
  • Provide extra information and documentation about corporations and trusts, private and offshore entities.
  • Also pay particular attention to clients with cash businesses, those in prominent positions, and those who have had suspicious transactions.
• Politically Exposed Persons (PEPs) are clients with a prominent position of public trust, their immediate family/ associates.
• Anti-money laundering rules require dealer members verify the identity and date of birth of any person opening a securities account before any transactions, other than an initial deposit, are conducted.
• The client must provide a verified consent to contact a trusted person, which will let the firm call the person if you are unable to reach the client or if you suspect diminished capacity or elder abuse.
• FINTRAC has no expectation to repeat the client identity verification process, unless there is some doubt as to the client's identity or the validity of documents previously viewed.

Account Updates and Reviews

• Compliance regime should include procedures to review accounts considered higher risk for money laundering at regular intervals, in order to assess changes to a client's profile.

• Non-individual include regular reviews to detect significant changes to the ownership structure.

• All client accounts are categorized according to risk within the dealer member's AML/ATF regime program of risk rating , the firm should then evaluate/supervise the different categories, for example, giving high-risk ones a more stringent supervisory system.

• Accounts in the high-risk category can for example include;

  • offshore accounts
  • PEP accounts
  • accounts for which a suspicious transaction has been filled.

• Expectation to update each client profile and objectives whenever there is any significant client situation change. Any unusual activity/possible money laundering activity should result in an update to the client's documentation.

• FINTRAC guidelines suggest regular intervals to review as every two years. More frequent updates may be necessary on higher-risk accounts.

Anti-Money Laundering Procedures

• In general a periodic does not mean every client profile must be updated. Reviews accounts to determine those that need updates; for an individual account one retains new apps, trade confirmations powers of attorney, and all correspondence.
• When opening an account for a private corporation, trust, or similar entity you must gather certain entity/ beneficial data. You must record such data, and if you can’t , record the reason as to why. If data can’t be obtained within 30 days of opening, restrict the account to liquidating holdings.
• Non-resident individual accounts have additional identify validation than for resident individual. Must be knowledgeable of registration necessities and procedures.

Important Notes About Accounts

• The procedure for opening accounts for a personal holding/investment corp determines account is being created for the benefit of PEP. This will protect you and your dealer member, especially with dealing with embezzlement/ corruption proceeds.
• When dealing with offshore accounts, you must be wary of any offshore client who is unwilling or unable to clearly and accurately provide detailed ownership information.
• Dealer members are also required to have AML/ATF procedures in place to cover their institutional business and clients.
• Clients accounts are characterized as being opened and operated for customers who are usually financially sophisticated and often purchase and sell securities in significant volumes.

Instituional Business

• Due institutional business nature practices, dealer members may have little/no direct contact with underlying beneficiaries/institutional clients.
• CIRO rules state dealer members dealing with institutional accounts must have supervisory reviews, designed identify suspicious money laundering terror activities.
• Dealer member determines extent institution / intermediary has authority to act underlying client's behalf. Where appropriate, should determine whether the client / intermediary has policies and to know its own clients.
• Members are exempt with identify/data exceptions for types institutions/intermediaries that are subject to protocols

Personal Identity Documents

• Members develop policies regarding use internet/ account opening ( becoming more predominant use electronic signatures on applications)
• Regardless such method, identity authentication sets by PCMLTFA
• When opening an account verify by reviewing personal identification documents

Account Applications

• You and your client must complete an account application before opening a new account.

• Applications are a critically important document; beginning of client relationship.

• Must include:

  • The client's identity, including their full name, address, citizenship, and SIN
  • The client's marital status, number of dependents, employment
  • The client's income, net worth and liquidity
  • The client's investment objectives, risk profile, and level of knowledge about investing.
  • Information about the client's relationship with any publicly traded companies

• You should keep the client's notes from the discovery process and any other documentation.

Additional Application Information

• The account application will form the basis for the legal relationship between the dealer member and the client.

• In addition to completing an application, you must maintain the notes from the discovery process and any related forms.

• The form must be approved by the Designated Supervisor after completing

• In addition to forming the basis for the legal relationship between the dealer member and the client, the account application is used for four main purposes, as follows:

  • To establish the identity of the client
  • To collect sufficient information to meet suitability obligations, such as the client's investment objectives
  • To judge the client's creditworthiness
  • To determine whether the client is an insider of a reporting issuer or other publicly traded company

• Any info/applications must be made to available to supervisors for the account.

• Update accounts, any significant change that occur ( eg: marital status, new trading authorization etc.)

From a Legal Perspective

• To update is to amend then re-sign

• It is advisable to routinely have dicussions and document information with the client to evaluate applications for updates.

• If not resp onded. it continues to be accurate

• Clients can confirm letters regarding current investment for advising if changes are possible.

• Suitability can be affected by the client's KYC data. Documents needed:

  • A registered individual is designated responsible for the client's account.
  • An individual has been provided with a change, unsuitability can be noticed

Completing the Account application

• There are three general categories of information required on the account application, as follows: -Client information -Account information -Registration information
• Client information includes basic identifying information as the client's name, address, and marital status.
• It also includes basic financial information, including the client's total net worth, level of investment knowledge, investment objectives, and risk profile.
• Important to open correctly, should be correct Legal Name, helps against the issue or deception to prevent false positives from AML

Mail and contact data

• You should obtain both a residence address and a business address
• You can not use your address
• It is very important that clients receive confirmations
• You can not provide services off shore unless stated
• You must consult a branch supervisor or new accounts department if a client claims not to have a SIN
• A current passport number/govt document that allows for ID
• The employment information is for:
  • To help establish the client's creditworthiness
  • To establish whether any regulatory issues apply to this account, such the requirement to report insider status
  • To evaluate the client's ability to withstand losses, and, thus, whether specific investment objectives are warranted
• For self-employed clients you should pay particular attention to the financial information.
• Marital has both a financial and legal impact on an account. The definition of a spouse often may vary.
• Where a spouse and the client are linked to the account, an action needs to be taken, along with the client understanding the document.
• If a document has not been signed appropriately the company must contact the designated supervisor.

Financial Information

• Net worth + Annual income needs to be recorded
• Total net worth is the sum of all assets (liquid and fixed) less ll liabilities
• All information will affect the outcome of KIC risk profile.
• Discussions / recommendations should be made based on the client's knowledge of the stock market
• Investment objectives must always be reviewed and documented
• Willingness to take risk, against the ability

Account Information

• It is important that you and the client agree on what account is best.

• Accounts information consists of:

  • Account Type -Beneficial ownership -currency
  • Payment delivery / procedures. -Special Instructions

• The client needs to be aware that the value can reduce due to certain areas.

Account Types

• Cash accounts require deposit in full for each transaction
• Margin accounts require payment for partial deposits
• Delivery against payment is payment on settlement, usually intermediaries involved.
• Registered accounts exist in tax shelters / deferrals plans
• Pro accounts are employees, families under members roof

investment Club, Discretionary and managed accounts.

• Investment club account means that the RR must not be the one to offer services to the account unless managed or discretionary, duplicate statements and such must be sent to the client
• Discretionary accounts mean authority
• Managed accounts have decisions made on a continuing basis and discretionary basis has managed agreement
• Disclosure of conflicts -. all trades must comply with the client and have to to be marked

Electronic Delivery and Signatures

• Clients must provide written consent to receive communications through electronic methods.

• Legal in Canadian jurisdictions and allows signatures, similar in provincial legislation, consent is required

• This is related to PCMLTFA to meet a client agreement.

• Client Records -- 5. Identify the procedures for maintaining client records.

• All active clients must remain current records. The most crucial aspects of file keeping in this regard is to know what to keep and who should keep such

• account applications have to make sure trade lies within clients parameters.

Documenting and Retaining information

• Portfolio Records has client's current holdings and provides quick reference when discussing the matter.

• All correspondences. To avoid any confusion in this regard, it is strongly suggested that you avoid using your business address for any non-business-related mail.

• Records of details in trade must be sent in the form of confirmation. You must retain;

  • records. - customer service matters.

• Dealer members may restrict removal to any type of records, that arise from all acts governing.

• You must also be alert to significant changes in the client's circumstances that necessitate an update of the account application.

Account records summary

• Opening an account to determine the clients situation and investment objectives.
• Ensure to comply with the PCMLTFA in order for all the protection
• Update all if necessary.