Client Discovery and Account Opening

• This chapter discusses client discovery and all aspects of the account opening process, including the ongoing procedures for maintaining accurate records.

Opening Accounts

• An RR is responsible to both the client and the dealer member they are employed by and must display high standards of integrity.
• The cardinal rule for RRs is to ensure client's interests are paramount.
• RRs must constantly update all client information to ensure recommendations are appropriate.
• The Know Your Client (KYC) rule requires that every dealer member takes reasonable steps to learn and remain informed of essential facts relative to every order, every account, and every client.
• Suitability must be considered in light of concentration and liquidity of securities within the account, the potential and actual impact of costs on the retail client's return, and a reasonable range of alternative actions.

Obtaining Key Information

• Consider the client's age, marital status, occupation, income, net worth, number of dependents, and risk profile in determining suitable trades.
• A robust initial KYC process followed by regular client revisits to update information and review advice and strategies are important to compliance.
• Documentation of client lifestyle responses is important, and can be achieved by documenting discussions regarding retirement and financial responsibilities surrounding support of family members.
• In person meetings ensure all investor information on the account application is up to date.
• Frequent updates of new account information should be required on an at least annual basis.

Client Identification Requirements: Anti-Money Laundering

• As an RR, an important role includes combating and detecting money laundering and terrorist financing activities.
• Any employee not fulfilling reporting responsibilities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) can face a prison term up to five years and a fine up to $2,000,000.
• Anti-money laundering (AML) and anti-terrorist financing (ATF) procedures are incorporated into existing KYC obligations.
• The Canadian Investment Regulatory Organization (CIRO) sets the rules for account opening procedures, requiring certain customer information to be obtained and maintained.
• Account opening procedures should enable a reasonable, risk-based assessment of clients, their income source, and account activity in order to assess extra need of client information or additional monitoring and due diligence.

Assessing and Monitoring for Money Laundering Risks

• RRs must observe and evaluate client behavior for potential money laundering during the client discovery process and client relationship.
• There is required professional judgement and the seeking of help where necessary, both to open accounts and in subsequent dealings with clients. Simply following regulations is not enough if there are red flags to possible involvement in illegal activities.

Account Opening Red Flags

• Red flags during account opening include reluctance to provide information, documentation that appears altered or counterfeit, and attempts to open accounts in other people's names.
• Other flags include providing a phone number where the client cannot be reached, inquiries that suggest a desire to avoid reporting, and attempts to use aliases or open accounts in different names.

General Anti-Money Laundering Due Diligence

• Firms must use extra due diligence with client from bank secrecy jurisdictions or countries with high levels of corruption.
• Extra information or documentation should be provided about corporations and trusts, particularly private offshore entities.
• Pay particular attention to clients in cash based businesses, close associates in positions of public trust, and those who have had suspicious transactions filled in their accounts.
• Certain clients in a prominent position of public trust, their immediate family, and their associates are referred to as politically exposed persons (PEPs).
• Foreign PEP accounts are generally a bigger concern than domestic PEP.
• Any person holding a position in/on behalf of a foreign state, or that person’s family members (spouse, child, or parent) are considered foreign PEPs.
• The definition of a foreign PEP covers only those holding positions at a national level.
• Senior management must approve accounts for a foreign PEP within 30 days of opening, and they are subject to enhanced ongoing monitoring.
• Accounts for domestic PEPs must also be assessed for money laundering risk, using the same controls as foreign PEP accounts.
• Anti-money laundering regulations require verification of the identity/DOB for any person opening a securities account.

Account Updates and Reviews

• Dealer members must have procedures for the review of high risk accounts for money laundering based on review of changes to client profiles or changes to ownership documents.
• All accounts should be categorized by risk, with supervisory systems in place tailored to the categorical risk level.

Anti-Money Laundering Procedures for Corporate Accounts

• Under PCMLTFA, firms must gather specific information about both the entity and beneficial owners when opening accounts for private corporations, trusts, or similar entities.
• Record information obtained and why certain information was not obtained, and restrict the account to liquidating trades and transferring assets if information is not obtained within 30 days.

Anti-Money Laundering Procedures for Non-Resident Accounts

• Non-resident individual accounts have additional identity verification requirements, and dealer members must be familiar with the regulations of countries they intend to conduct businesses in.
• You must evaluate foreign jurisdiction for money laundering concerns or US sanctions. Moreover, procedures must allow you to identify PEP accounts when dealing with offshore clients.

Account Application

• It is important to open an account in the correct legal format, not an abbreviated form.
• Dealer members may maintain a confidential, nominee, or numbered account where the client’s identification is only maintained by number, code or other symbol.
• At least one account is required that is either a residence address or a business address and cannot be a PO Box.
• Ensure the permanent address is where the RR is registered to comply with the regulations and AML/ATF.
• You can’t use your residence, post office box or another address for the mailing address, and a written consent is necessary to have communications through electronic methods.
• Each RR need to gather as much information as possible so the client can be contacted for immediate communication.
• A social insurance number is required for tax reporting and date of birth is essential for registered accounts.
• Encouraging investors to prepare by receiving a power of attorney and preparing a plan for incapacity situations.
• You should avoid opening accounts in the name of minors because contracts made can be repudiated.

Client Citizenship

• Only Canadian citizens that live in Canada can purchase certain percentages or numbers of shares of companies culturally or economically important to Canada.
• Employment information should be considered to establish the client’s creditworthiness, whether regulatory issues apply, and to evaluate their ability to withstand losses.
• Employment information should be considered to establish the client’s creditworthiness, whether regulatory issues apply, and to evaluate their ability to withstand losses.
• Total net worth can be the sum of total assets (liquid and fixed) less total liabilities (secured and unsecured).

Investment Knowledge

• Discussions with your client are important to disclose their knowledge of investment markets and helpful when determining the level of guidance.
• Initial discussion must include a review of the client’s investment objectives. To determine the client’s risk profile, one must assess both the risk tolerance and capacity.
• It is essential to determine exactly the account used that is suitable for each client; a financing agreement, or margin agreement, must be completed before the account is approved.
• There are certain regulations in registered accounts that can be included in the individual’s name with the CRA, and employees are considered to be non-clients.
• Accounts can come with discretionary authority or be able to use management, and there must be proper documentation for these account procedures.

Electronic Delivery and Signatures

• All clients must provide written consent to receive communications through electronic methods because electronic commerce legislation is valid.
• Clients must be provided a copy of their KYC information, and they must acknowledge the account application.
• If an alteration is going to be made to the account application, you must be alerted to that event and keep up with the application and record.
• The portfolio record shows each client’s current holdings and provides a quick reference when speaking to the client.
• It is strongly suggested to avoid using your business address for non-business related mail in correspondence, and any restrictions and removals should be discussed with the supervisors.

Disclosures

• Disclosure and transparency are crucial components of the account opening process in the current regulatory environment.
• Dealer members must give all retail clients a relationship disclosure document that outlines the account relationship and services planned for the client.
• For each conflict discovered, the disclosure provided to clients must be specific, prominent, and written in plain language.
• A dealer member must disclose any payment of charges, and also disclose their status when acting as a Principal.
• Insiders may not use their material non-public information for their personal gain, nor should you pass the information on to anyone else.
• They must file reports with the securities commissions detailing their trading trades within 10 days after the transaction date.
• Clients must receive a leverage risk disclosure statement at time of a new account is opened, you make a recommendation to purchase securities with borrowed funds, or when you become aware.
• Clients must also acknowledge that they receive the firm's statement.
• The agreement can be opened as joint, managed, thrust accounts but requires separate account applications and supporting documents.

This chapter explores client discovery and the account opening process. It emphasizes the RR's responsibility to uphold integrity and prioritize client interests. The Know Your Client (KYC) rule requires dealer members to stay informed of essential facts and consider suitability in investment recommendations.