Client Discovery and Account Opening

Introduction to Client Discovery and Account Opening

• Opening a new account is a crucial first step in the advisor-client relationship.
• It allows the advisor and client to review the client's situation to make suitable investment recommendations.
• Client discovery involves the advisor and client asking questions to get to know each other.
• Additional accounts opened by existing clients offer an opportunity to update documentation.
• Registered Representatives must evaluate and document a client's background thoroughly.
• Initial information gathered forms the basis of future recommendations.
• Interactions with clients provide opportunities to understand their objectives and constraints.

Opening Accounts and RR Responsibilities

• Registered Representatives (RRs) have responsibilities to both clients and dealer members, requiring high integrity.
• Standards of conduct provide a framework for responsible client dealings when placing orders.

The Cardinal Rule: Know Your Client (KYC)

• Clients' interests are paramount and client information must be updated to ensure appropriate recommendations.
• Under the Know Your Client (KYC) rule, cautionary advice is required for seemingly unsuitable orders.
• The recorded objectives and risk factors should be suitable for the client.
• Significant changes in a client's circumstances require updating information.
• The KYC rule is the cornerstone of client dealings beginning with client intake.
• Dealer members must take reasonable steps to remain informed of facts about an order, account, and client.
• Compliance with KYC ensures collection of information regarding a client’s financial situation, knowledge, needs and objectives, risk profile, and time horizon.
• Information is required to make a suitability determination.
• Suitability must consider the concentration and liquidity of securities, costs to retail client returns, and alternative actions.
• Variables to consider include age, marital status, occupation, income, net worth, dependents and risk profile, investment goals, investment experience, and time horizon.
• A client's age and life stage are key components of their Know Your Client profile.
• One effective way to ensure Know Your Client compliance involves hiring skilled advisors who use a robust Know Your Client process with regular client revisits.
• Follow-ups are key for senior investors.

Obtaining Information at the Account Opening Stage

• Registered Representatives are required to obtain sufficient customer information.
• Collected information allows recommendations to be appropriate and investment objectives to be met.
• Lifestyle questions help broaden investor conversation during the account opening process.
• Examples: when the client plans to retire, how much money the client needs, and other financial considerations.
• In-person meetings help ensure the accuracy of investor information.
• Trusted family member or friend at meetings is encouraged.
• Frequent updates of new account information, such as annual updates, is essential.
• Verifying investments meet expectations is important at the account opening stage.

Client Identification and Anti-Money Laundering

• Registered Representatives help combat and detect money laundering and terrorist financing activities.
• Requirements extend to employees with client contact and those who monitor/supervise activities.
• Failure to fulfill reporting responsibilities under PCMLTFA may lead to a five-year prison term and/or fines of up to $2,000,000.
• Anti-money laundering and anti-terrorist financing (AML/ATF) procedures are part of existing KYC obligations.
• The Canadian Investment Regulatory Organization (CIRO) has rules for account opening procedures.
• Dealer members must obtain and maintain client information and request essential facts for each customer.
• Procedures provide information for a reasonable risk-based assessment that includes the client's income and the expected account activity.
• Extra customer information may be needed for certain clients.
• Offshore accounts may necessitate additional monitoring and due diligence.
• During client discovery and throughout the relationship, registered staff must observe and evaluate client behavior.
• Monitoring behavior can uncover red flags that may indicate money laundering or terrorist financing activities.
• Red flags are warning signals of possible improper activities that, after being reported, can provide a basis for action.
• The client discovery process and ongoing client interactions are critical to KYC and preventing illegal activities.
• Client identification and verification is insufficient on its own and professional judgment and help is needed in opening and continuing accounts.

Account Opening Red Flags

• Red flags should raise suspicions that a transaction relates to a money laundering offense or terrorist financing activity.
• Examples of red flags:
  • Reluctance to provide information or documentation
  • Altered or counterfeit documentation, or all documents with recent issue dates
  • Documents that are photocopies, faxes, or electronic reproductions certified by an attorney
  • Attempts to open accounts in others' names.
  • Vague or potentially untrue information
  • Out-of-area address
  • Post office box, general delivery, or other type of mail drop address
  • Unreachable phone number
  • Inquiries that avoid reporting
  • Reluctance to complete or supply required documentation
  • Inquisitiveness about compliance and anti-money laundering procedures
  • Attempts to use aliases or open accounts in different names.

General Anti-Money Laundering Due Diligence

• Anti-money laundering procedures must be established based on risk that particular client types could be involved in money laundering.
• Use extra due diligence with clients from bank secrecy jurisdictions or countries with high levels of corruption.
• Extra information and documentation is needed for corporations and trusts, especially private offshore entities.
• Pay particular attention to clients who deal with cash businesses, their close associates and those in a prominent public trust position or those with suspicious transactions.

Politically Exposed Persons (PEPs)

• Clients in positions of public trust, their families, and associates are called politically exposed persons (PEPs).
• Foreign PEP accounts are a bigger concern than domestic PEP accounts.
• The foreign PEP category covers those holding an office/position in a foreign state, their spouse/partner, child, parents, or siblings.
• The definition of a foreign PEP only covers those persons in a national state, not those in provinces or municipalities.
• A foreign PEP account requires senior management approval within 30 days of opening and enhanced monitoring.
• Domestic PEP accounts' risk for money laundering requires assessments and the same controls apply given a high-risk determination.
• Regulations necessitate that dealer members verify the identity and birth date of securities account openers before any but initial deposit transactions.
• Identity is verified for authorized persons to give instructions, for individuals, corporations, etc.
• The Canadian Investment Regulatory Organization Know Your Client requirements are not specific to Financial Transactions and Reports Analysis Centre of Canada identity documents.
• There is no need to repeat the verification process unless questions arise regarding identity or the validity of viewed documents.

Account Updates and Reviews

• Compliance regimes should review high money laundering risk accounts regularly for profile changes
• Non-individual accounts should include regular reviews to detect significant changes in ownership.
• AML/ATF regimes require a risk rating program.
• Accounts should be categorized by risk.
• Firms must evaluate and supervise based on risk categorization.
• High-risk accounts require a stricter supervisory system.
• Accounts in this class: offshore accounts, Politically Exposed Person accounts, and suspicious transaction accounts.
• Dealer member determines extra supervisory protocols to ensure these accounts' safety.
• Client profiles/investment objectives must be updated given significant change.
• Unusual activity that indicates money laundering would require updating client documentation.
• Examples of activity include increased account size beyond client means or unusual transfers or deposits.
• Financial Transactions and Reports Analysis Centre of Canada suggests periodic reviews every two years; expectations to update with significant changes.
• More frequent updates may be needed for higher risk accounts.
• Enhanced monitoring of high-risk reports is a routine part of AML/ATF compliance.

Procedures for Corporate, Non-Resident, and Institutional Accounts Regarding Anti-Money Laundering

• Periodic review does not mean all client profiles are updated, instead determining which warrant updates, profiles may remain materially unchanged and those with contact are up to date.
• For an individual account, you must retain new account applications, confirmations of purchase or sale, guarantees, trade authorizations, powers of attorney, joint account agreements, and all correspondence about the account’s operation and statements.
• Under PCMLTFA, when opening an account you must gather information on the entity and its beneficial owner behind the entity.
• Beneficial owners of a trust are trustees, known beneficiaries and settlors.
• For corporations or entities other than corporations/trusts such as partnerships, they are individuals who control or own 25% or more of the entity.
• Registered Representatives working on the dealer member's behalf must record information; if not obtained, firms must restrict the account to liquidating trades and transferring assets. Restriction needs to be maintained, up to 30 days after the account opening, until the information is obtained.
• Non-resident individual accounts have additional identity verification requirements.
• The dealer member must familiarize themselves in countries they conduct business with registration requirements.
• Requirements must be determined before beginning to solicit business in other countries.
• Foreign jurisdictions' (in other countries) money laundering concerns and UN sanctions must be evaluated.
• Issues may impact/prevent them from dealing with residents of countries.
• When dealing with an offshore client, procedures should be implemented that allow the dealer member to identify Politically Exposed Persons accounts; must determine the account when setting up a personal investment corporation or personal holding company.
• Procedures protect them from the proceeds of foreign corruption or embezzlement.
• Extra care is required when a client is unwilling or unable to produce needed information.
• You should inquire into nature, ownership, residents' business and relationship with the entity and registration might prevent providing service to clients in particular jurisdictions.
• Dealer members should implement AML/ATF procedures in their institutional practices.
• Institutional accounts are characterized as being opened and operated by customers who usually buy or sell in large and financially sophisticated volumes; publicly held.
• Dealer members may have little/no direction communication with the beneficiaries but rather communicate with intermediaries.
• Two examples are investment funds and hedge funds, some are solely for trade executions and has limited communication.
• CIRO rules state that every dealer member must have a supervisory review, conduct due diligence, learn and remain informed of the fact that a customer accepts every order, or account.

Personal Identity Documents

• Dealer members must develop policies regarding online account openings, including the use of electronic signatures on applications, with identity verification pursuant to the PCMLTFA
• The original ID (ex. a driver's license) must be reviewed when opening an account of an account holder for verification purposes, copies are not acceptable.

The Account Application

• Before opening an account, you and the client must complete the application on paper/electronically.
• This is a critical document and contract for service that the RR in most cases executes on behalf of (and services) the dealer.
• It includes customer identity (name and etc), personal, financial, investment and insider status,
• The application includes fields for you to take notes

Notes On Account Completion

• In addition to completing the account applications, you should maintain notes from the client, the discovery process and other documentation
• To form the relationship, applications are used to identify the client, meet obligations, evaluate credit and insider status with Designated Supervisor approval upon completion and signing.
• The exhibit to demonstrate minimum new accounts and forms demonstrates the minimum requirement of that form.
• Make a copy of the information and give it to responsible parties, such as supervisors, HQ and sales manager.

Updating Account Applications

• New accounts applications do not update existing accounts regularly and instead new changes should trigger: change of name/address, status, third party interests, changes, addition of risk or investment factors. - Any change affects objectives, credit rate and risk profile.
• Updates allow legal perspectives, documenting those discussions, evaluate whether to follow a strict role-following the application amendment and resign.
• There is a minimum to be re-confirmed annually to stay accurate, with dealers providing customers change letters and making assumptions of change if they fail to contact him.
• These updates may be in between major changes where dealers review a trading account within reasonable time from event to event.
• Excellent opportunities to open discussion that support the process if you know a customer and you must be able to prove you know him.

Case Study - Jane

• Supervisor, Leona, notices RR Jane did not show enough income when her client Bruno claimed a large new inheritance, to accept his new orders
• There was neither change possible to Bruno's objectives demonstrated, and with no discussion, there was also discussion to determine changes and attitude, where purchases can't be justified either.
• Is not always enough, you need to justify actions or else regulators can reject bad advice if statements from clients state it.

Completing the Account Application

• Clients must record information on account, client and Registered Representatives.
• Information must be identifying (name and etc), and it must be full and correct, with the additional defense helping to prevent false positives; also entity or persons.

Confidential, Nominee, or Numbered Accounts and Addresses

• Accounts must be identifiable by the dealer to keep beneficiaries confidential on the principal, as should written addresses from regulations with a current, real and valid address.
• If not possible, that should be with cause that would be reviewed by sales supervisor.
• Never use a company for communication with a 3rd party under conflict.

Contacts and Tax Numbers

• Have clients give the greatest means of contact and confirm it.
• Social security is required for reporting, consult a supervisor if they have any issues.

Date of Births and Future Planning

• Date of birth must include registered account plans and calendar, with care needing to be given to elderly clients and minors.
• Account openings should emphasize and give opportunity for power of attorney or future planning steps.

Opening in the Name of Minors

• You should not allow it since contracts may be repudiated and they have limited use. Check to determine what paperwork and guidance is needed if asked.

Citizenship

• Only Canadians resident in Canada should be allowed to purchase shares for economic reasons.
• A formal statement confirms their citizenship, so determine requirements if they've placed orders.

More Details For Completing Account Applications

• Additional identity should be given by the non registered member.
• Confidental accounts should maintain record where owners must also.
• A client's citizenship and the reason why should be important too, in case there are issues.

Employment

Employment and financial help establish with regulators and clients as warranted and employed to assist in checking.

What to Know About Marital Status

• Impact and connection exists between information about spouse if there is a guarantor.
• Must understand implications over others with the proper supervisor helping determine if there are issues if needed.

Finance Information

• Finance is important in judging credit with worth and worth and income; fixed assets are liquid and non liquid too, and stating matters is being very clear with it and what kind of amount is owned.
• In the annual category, only income, employment and investment must be inquired.

Investment and Wealth Details

• Monitoring shows an awareness about any great client matters; good means meeting proper requirements and knowledge, and suitability in order to provide loss sustaining.
• Discussions and questions must also be followed, with account applications needing compliance and harmonization, and high returns needing eligibility as well.

Evaluation of Risk Profile

• Client and initial discu