Client Discovery and Account Opening

Client Discovery and Account Opening

• Client discovery and all aspects of the account opening process are discussed, including ongoing procedures for maintaining accurate records.

Key Terms

• Beneficial owner, margin account, cash account, politically exposed person, client discovery, power of attorney, delivery against payment, The Proceeds of Crime (Money Laundering) and Terrorist Financing Act, discretionary account, red flag, insider, managed account, and registered account are key terms.

Opening Accounts

• Opening a new account allows the Registered Representative (RR) and client to review the client's situation to make suitable investment recommendations; this is client discovery.
• Opening an additional account for an existing client gives an opportunity to review their situation and update documentation.
• RRs are responsible to both the client and the dealer member; they must display integrity and follow standards of conduct.
• The Know Your Client (KYC) rule is paramount, requiring constant updating of client information for appropriate recommendations.
• Cautionary advice must be given if an order seems unsuitable based on the client account documentation.
• The KYC rule ensures sufficient information is collected about the client's personal and financial circumstances, investment needs, knowledge, risk profile, and time horizon.
• Suitability includes considering security concentration/liquidity, costs, and available alternatives.
• Variables like age, marital status, occupation, income, net worth, number of dependents, and risk profile should be considered.
• Investment objectives, investment knowledge and experience, investment time horizon, and current portfolio information are important.
• A client's age and life stage are critical to their KYC profile.
• Compliance with KYC is improved by hiring skilled advisors and conducting regular client reviews.
• Regular follow-ups are important, especially for senior investors.

Obtaining Information

• RRs must obtain enough client data to ensure investment recommendations are appropriate.
• Some RRs broaden conversations via the account opening process by asking lifestyle questions, like retirement plans and financial dependencies.
• In-person meetings help ensure application accuracy.
• Clients should be encouraged to bring a trusted person to meetings.
• Regular updates of account information are needed.

Client Identification

• RRs are important in combating money laundering and terrorist financing.
• All employees in direct client contact or supervision roles have this responsibility.
• Failure to comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) can result in penalties.
• Anti-money laundering/anti-terrorist financing (AML/ATF) procedures integrate into existing KYC obligations.
• The Canadian Investment Regulatory Organization (CIRO) mandates that dealer members must obtain and maintain customer information and request essential customer facts.
• Opening procedures should provide data for risk-based client assessments, including income sources and expected account activity.
• Extra information is needed for certain clients, and accounts like offshore accounts may require added due diligence.

Red Flags

• Examining the the client behaviour during the client discovery process may reveal red flags which may indicate money laundering / terrorist financing.
• Reluctance to provide information, altered documents, photocopies, opening accounts in other names, vague information, addresses outside the service area, P.O. boxes, unreachable phone numbers, avoiding reporting, reluctance to complete documentation, compliance inquisitiveness, and alias usage can raise red flags.

Due Diligence

• Extra due diligence is required for clients from bank secrecy jurisdictions or countries with high corruption.
• More information / documentation about corporations / trusts, especially private offshore entities, is needed.
• Closer attention should be paid to cash businesses, those in public trust, and clients with a history of suspicious transactions.

Politically exposed Persons (PEPs)

• Those in positions of public trust, their families and close associates are Politically Exposed Persons (PEPs)
• Foreign PEP accounts create larger money laundering concerns than domestic PEP accounts.
• The foreign PEP category includes foreign state officials/officers, their spouses/partners, children, and parents/siblings.
• An account for a foreign PEP must get senior management approval in 30 days and undergo improved monitoring.

Account Updates

• A dealer member's AML/ATF regime should involve risk-based account categorization.
• High-risk accounts get more supervision.
• Expect ongoing profile/objective updates when client situations shift; unusual activity warrants documentation updates.
• FINTRAC suggests reviews occur every two years, but more frequent updates are needed for high-risk accounts, where transaction monitoring has flagged concerns.

Record Retention

• Accounts should primarily be reviewed to determine which need updating.
• For individual accounts, applications, trade confirmations, guarantees, authorizations, joint agreements, and all other correspondence must be retained.
• A copy of each client statement must be retained.

Corporate Accounts

• Under the PCMLTFA, specific information must be collected for corporate accounts, about the entity and beneficial owners of the entity, including, in a trust, the trustees, known beneficiaries, and settlors, and, in a corporation, individuals that own control over 25% or more.
• There must be a record of the information collected and, if this is unobtainable, the reason why.
• A firm must restrict the account to only liquidating trades / transferring assets out until this information has been obtained.

Non Resident Accounts

• Requirements for them include additional identity verification from resident accounts.
• Dealer members must familiarize themselves with registration requirements pertaining to the countries in which they intend to perform business and determine the requirements before proceeding.
• Dealer members must evaluate a foreign jurisdiction to assess money laundering concerns or sanctions by the UN before offering services there and must also ensure policies allow for the identification of PEP accounts.

Offshore Accounts

• Scrutiny must be given to offshore clients who are unwilling/unable to provide accurate information concerning ownership.
• Enquire as to nature of business, relationship between resident and entity and consider that the RR may be without authorization to offer services to client.

Institutional Accounts

• Compliance measures are required by dealers that cover institutional clients; usually financially sophisticated and sell securities in high volumes.
• CIRO asks that supervisory reviews detect transactions which can raise suspicions.

Use of Technology

• Policies should be developed which govern virtual account openings.
• Under, the PCMLTFA, you must still be able to utilize original copies of identification documents when opening accounts in order to verify personal identity.

Account Application

• Account applications are critically important documents and the beginning of a relationship with your dealer member.
• The RR executes the application on behalf of the dealer and it must include;
  • Client identity, including name, address, citizenship, and SIN
  • Personal information, such as marital status, dependents, and employment
  • Financial information, like income, net worth, and liquidity
  • Investment objectives and knowledge, and risk profile
  • Client's relationship with publicly traded companies.
• The application contains fields for notes about the client relevant to account opening.
• The designated supervisor must approve a completed, reviewed, and signed application.
• Applications establish identity, collect suitability information, judge creditworthiness, and determine insider status.

Account Application Updates

• Clients should update their account applications regularly and when there is a significant change, including name, address, marital/employment status, another person taking interest, trading authorization, financial circumstances, investment objectives, or insider status.
• Changes could affect investment objectives, creditworthiness, or risk profile.
• To update, account documentation must be changed and then re-signed. Discussions should be had routinely, and documented, to evaluate the account application. There should be a minimum of one annual discussion to re-confirm the information contained.
• Updates may also be required for retail client accounts as required through KYC to remain suitable and will require reasonable steps to be taken.

Completing the Account Application

• General information on the account application includes: client information, account information, and registrant information.
• Client information includes name, address, and marital status, as well as net worth, investment knowledge, objectives, and risk profile.

Client Name

• Accounts should be opened under the correct legal name of the client, not an abbreviated form, to provide an additonal defense against deception, such as forgery, and helps prevent false positives in an anti-money Laundering/Anti-Terrorist Financing perspective.

Confidential Accounts

• Dealer members are given the ability to utilize only a number, nominee name, or other symbol to identify the client in order to maintain confidentiality.
• Identification information must be kept at the head office in the event this information is requested.

Home Address

• Both residential and business addresses should be retained and may not be a form of a post-office box or temporary address.
• This is done to comply with securities regulations and ensure that the RR is registered within the locations where the client resides.

Mail Confirmations

• A client can ask to have their mail delivered to a different location from the home address, but it must be ensured that the home address is real and correct.

Contact Number

• Gathering as much contact information as possible is essential so that the client may be contacted for immediate communications.

Date of Birth

• The required date of birth is essential for preventing circumstances regarding errors in deregistration, which can occur in registered accounts (RRIFs and RRSPs).

Accounts in Names of Minors

• Accounts should not be opened for those who are minors because contracts made by them can be repudiated once they are the age majority.
• Those who are minors cannot exercise their right to vote under shares, make RRSP contributions to earned income, or designate beneficiaries.

Citizenship

• Only Canadian citizens residing in Canada are given the ability to purchase shares as certain percentages/numbers under certain business.
• It is essential that citizenship information be known in the event that there are any orders placed for shares of those which are given a preference by local residents.

Employment

• Collecting employment information is important for several business reasons: establishing a client's creditworthiness, considering regulatory issues, evaluating client's ability to cover losses.

Marital Status

• Requires certain information about a party's spouse or equivalent, which has a financial/legal impact on the account.

Financial Information

• Is fundamental to setting a rating on creditworthiness if client requires this. It will also assist in establishing the ratings of recommendations.

Investment Knowledge

• Discussions on investment matters are essential when you are providing information for beneficial knowledge.

Investment Objectives and Risk Profile

• Must contain what plan client has for his/her plan and contain percentage of funds.

Account Types

• Account type, beneficial ownership, currency payment and delivery procedures and special instructions make up the account information.

Cash Accounts

• In cash accounts, payment is required in full when transacting.

Margin Accounts

• Margin accounts are required only partial payments for purchases.

Delivery Against Payment Accounts

• These accounts involve a purchase of securities and payment in form.

Registered Accounts

• In this, includes RRSPs, RRIFs, Registered Education Savings Plans (RESPs), tax-free savings accounts, and locked-in accounts.

RAP Transaction

• Occurs when dealer member receives securities from client in exchange for payment.

Pro Accounts

• Are what they are called when belonging to clients, a common name.

Investment Club

• A specific document needs to be followed for both administrative and tradings instructions.

Discretionary Accounts

• Account in which has been solicited where the client and dealer make trades without being solicited.

Account Type Rules

• All discretionary orders bust be marked at entry, CIRO person has approval to effect tradin, those with securities cannot hold security.

Managed Accounts

• Requires an agreement where any investment decision has been made under the dealer member.
• They must also indicate the investment objectives of a client in an account.

Beneficial Ownership

• Obtain ownership information, often found with Offshore accounts.

Licensing

• As an RR, some clients may require that you are registered and can advise them of anything.

Source and Direct Interests

• How did you know the client.
• What financial interest/beneficial interest is within the account.

Insiders/Control

• Must determine when your client has an ownership.

Powers of Attorny

• By providing means of alternate contact information so that the future can be prepared, you become of service in helping.

Client Acknowledgement

• A form must be given for client to confirm the services.

Disclosures

• Understanding the account disclosure must be given/known.

Relationship Disclosure

• Must provide all clients a relationship form over how you provided relationship, services will be given.

Approvals

• Name that is attesting to your confirmation's.

General Docs

• Agreements need to be in place of the account.

Margin Agreement

• If the margin is opened, your client must confirm.

Trading Authorization

• Has documentation needs over account type/type when the documentation and account are open.

Client Record

• A record must be available on the account and is the core must.

Security cross-ref

• A list to confirm to clients in a quick manner.

Correspondence

• All comes property of the dealer member and the address is the client, should also contact the supervisor on records.

Records of Orders

• Should contact the process that allows you to handle and deal with those who follow with their orders.

Electronic signatures

• Electronic signatures are legally valid if the client provides written consent, the document is accessible and retainable, organized appropriately, and the signature is reliable and associated with the document.

Client Records

• Client applications must match investment objectives and risk profiles.