Client Discovery, KYC, and Opening Accounts

Client Discovery

• It is an important first step in building client relationships
• During it the client and RR review all aspects of the client’s situation
• It allows for appropriate investment recommendations
• Client discovery refers to the period where client and RR ask questions and get to know each other
• Any interaction represents an opportunity to know clients better
• Knowledge of client's situation enables recommendations that suit their objectives and constraints

Opening Accounts

• Registered Representatives(RR) are responsible to both client and dealer member
• Display high standards of integrity when dealing with clients
• Standards of conduct provides the framework for responsible client dealings

Cardinal Rule: Know Your Client (KYC)

• Client interest must always be paramount
• RRs need to constantly update all client information
• Cautionary advice is required for clients placing unsuitable orders
• Recorded objectives and risk factors must still be suitable for clients
• Update client's suitability information if there are significant changes in their circumstances
• KYC rule represents an obligation starting client intake and carrying on throughout the client relationship
• Compliance ensures the firm collects the client’s personal and financial circumstances, investment needs and objectives, risk profile, and investment time horizon
• Necessary to make a suitable determination for the retail client
• Suitability factors to consider:
  • Age, marital status, and occupation
  • Income and net worth
  • Number of dependents
  • Risk profile
  • Investment objectives
  • Investment knowledge and experience
  • Investment time horizon
  • The account’s current investment portfolio composition, duration, and risk level
• Advisors must implement KYC
• Initial KYC process must be followed by regular revisits with clients to update KYC information
• Follow-ups are important when dealing with senior investors

Obtaining Information

• Obtain enough information to ensure appropriate recommendations and consistent management with investment objectives
• Techniques RRs can use:
  • Document lifestyle questions:
    • When do you plan to retire?
    • How much money do you need to retire in the fashion you want?
    • Do you have any other issues or expenses that we should contemplate as you retire?
    • Do you have children or grandchildren who are dependent on you financially?
    • Do you have a will and a financial power of attorney?
  • Require that the client meets in person to fill out the account application
  • Encourage client to bring a trusted family member or friend to meetings
  • Require frequent updates of new account information annually

Client Identification Requirements: Anti-Money Laundering

• Combating and detecting money laundering and terrorist financing activities is crucial
• The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) can involve:
  • Prison term of up to five years
  • Fine of up to $2,000,000
• AML/ATF procedures are incorporated into the existing KYC obligations
• The Canadian Investment Regulatory Organization (CIRO) sets the rules for account opening procedures and requires the dealer member to do the following:
  • Obtain and maintain certain customer information
  • Request the essential facts relating to each customer
• Account opening procedures must assess the following:
  • Clients
  • Their source of income
  • The amount of expected activity in an account

Account Opening Red Flags

• Red flag should raise suspicion of money laundering offense or terrorist financing activity
• Activities that may raise red flags:
  • Reluctance to provide adequate information or supporting documentation
  • Documentation that appears to be altered or counterfeit, or if all of the documents have recent issue dates
  • Documents that are photocopies or electronic reproductions
  • Attempts to open accounts in other people’s names
  • Supplying vague or untrue information
  • Providing an address that is out of the local service area
  • Providing a post office box or other type of mail drop address
  • Providing a phone number where the client cannot be reached
  • Desiring to avoid reporting
  • Reluctance to complete or provide required documentation
  • Inquisitiveness about compliance and anti-money laundering procedures
  • Opening accounts with aliases or open accounts in different names

General Anti-Money Laundering Due Diligence

• Required on the basis of risk that particular types of clients may be involved in money laundering Firm policies must impose the following requirements:
  • Use extra due diligence with clients from:
  • Bank secrecy jurisdictions
  • Countries with high levels of corruption
• Extra information and documentation about:
  • Corporations
  • Trusts
• Pay attention to clients:
  • Who deal with cash businesses
  • Clients or their close associates in a prominent position of public trust
  • Who have had suspicious transactions filled in their accounts
• Politically exposed persons (PEPs):
  • Clients in a prominent position of public trust
  • Their immediate family members
  • Close associates.
• Foreign PEP accounts are generally a bigger concern than domestic PEP accounts
• Foreign PEP category consists of any person who:
  • Holds/held an office/position in/on behalf of a foreign state
  • That person’s spouse, common-law partner, child, mother, father, brother, or sister
  • The spouse’s or common-law partner’s mother or father
• Note that the definition of a foreign PEP covers those holding positions in a national state, not those holding offices in provinces or municipalities
• Account for a foreign PEP:
  • Must be approved by senior management within 30 days of opening,
  • Be subject to enhanced ongoing monitoring.
• Domestic PEPs must also be assessed for risk of money laundering
• Anti-money laundering regulations require that dealer members verify:
  • Identity of any person opening a securities account
  • Date of birth . This information must be established before transactions (other than an initial deposit) are conducted.

Account Updates and Reviews

• Compliance includes procedures ensuring that the accounts are reviewed regularly:
  • Accounts considered higher risk for money laundering
  • Non-individual accounts include regular reviews to detect changes to the ownership structure
• Dealer member’s AML/ATF regime include program of risk rating and categorizes accoutns based on risk assessment
• Update each client’s profile and investment objectives whenever:
  • There is a significant change to a client’s situation
  • Unusual activity indicates possible money laundering Examples of such activity:
  • Increase in account assets beyond the apparent means of the client
  • Unusual pattern of transfers or deposits
• FINTRAC guidelines suggest regular intervals of two years
• High-risk accounts may entail more frequent updates

Anti-Money Laundering Procedures

• Opening an account for a:

  • Corporate account:
    • Gather information on the entity and beneficial owners
    • Beneficial owners of a trust are the trustees, known beneficiaries and settlors of the trust.
    • Beneficial owners of a corporation are individuals owning/controlling 25%+ of the entity
  • Non-resident account:
    • Additional requirements for identity verification apply
    • Dealer member must be familiar with registration requirements of countries intending to conduct business
    • Member must evaluate whether the foreign jurisdiction is subjected to certain concerns or sanctions
  • Offshore account:
    • Determine whether the account is being set up by, or for the benefit of, a PEP

Important Note

• 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
• Enquire as to the ownership and nature of the entity’s business
• Also, consider that your registration may not allow you to provide services to clients living offshore

Anti-Money Laundering Procedures for Institutional Accounts

• These accounts are often opened and operated by customers who are financially sophisticated buying/selling securities
• Institutional clients themselves are usually widely known, regulated, and publicly held
• Dealer members dealing with institutional accounts require supervisory reviews to detect transactions that raise suspicion of money laundering

Personal Identity Documents

• Dealer members must have policies regarding the use of the internet for account openings
• Regardless of the method used to open the account, review original copies of personal identification documents

The Account Application

• Critically important document and represents the beginning of the client relationship with their dealer member
• It serves as the contract for services between the dealer member and the client
• Account application should include:
  • The client’s identity:
    • Full name
    • Address
    • Citizenship
    • Social insurance number
  • Personal information:
    • Marital status
    • Number of dependents
    • Employment
  • Personal financial information:
    • Income
    • Net worth
    • Liquidity
  • Investment objectives
  • Risk profile
  • Level of knowledge about investing
  • Information about the client’s relationship with any publicly traded companies

Completing The Account Application: Client Name

• Open an account in the correct legal name of the client
• Prevents false positives in data analysis from an AML/ATF perspective
• Incorrect/incomplete name can have serious legal repercussions if an account’s ownership is in question

Confidential, Nominee or Numbered Accounts

• Maintaining these accounts allows clients maintaining confidentiality
• Dealer member must keep the following at its principal office:
  • Sufficient identification in writing establishing the beneficial owner of the account

Home Address

• Obtain residence and business, 1 which must be permanent Obtained:
  • Comply with AML/ATF and securities regulations Must have on file:
  • Because dealers must mail trade confirmations and account statements to clients

Mail Confirmations

• Ensure the client's address must be be real and valid
• Mailing address must not be false

Contact Number(s)

• Gather as many numbers as possible to contact the client

Social Insurance Number

• Required for tax reporting
• If a client is reluctant to disclose, consult with branch supervisor

Date of Birth

• Required
• prevents serious consequences regarding deregistration with registered type accounts

Opening Accounts in the Name of Minors

• Contracts made by minors may be rejected within a reasonable time after majority
• Cannot exercise right to vote or can't designate beneficiaries for RRSPs
• Need special documentation like a personal guarantee or legal guardian support
• Civil Code contains a special status of emancipated minor

Citizenship

• Canadian citizens resident in Canada can purchase shares of companies that are culturally/economically important

Employee Information

Needed to: - Establish client’s creditworthiness - establish any regulatory issues for account - Ability to withstand losses

Marital Status

Needed to: - Determine creditworthiness Ensures investments and risk are determined relatively - Determine if spouse subject to any regulatory items Confirm that guarantor understands obligations.

Financial Information

- Critical to determine credit and suitability
- Includes total net worth and annual income

• Total net worth is the sum of all assets (liquid/fixed) minus total liabilities
• Liquid assets include those that can be converted into cash easily
• Stating assets-be clear what amount owned
• Know income- employment, investment etc.

Investment Knowledge

• Discussions will disclose client's knowledge to ensure consistent process
• Understand 1+ is important. Score high or low based on equities or other items

All aspects must be in harmony

• Determine clients risk by asking various questions
• Range, lowest values and feelings
• Make sure they are compatible

Account Information

• Consists of these factors
  • Account type -Ownership
  • Currency
  • Payments -special
• Type must be perfect and information in this account is of equal importance
• Know investments-can or cannot be there
• Not that broad: Cash accounts- payments deposited transactions or the sales of accounts must be paid as well. Members do not provide financing to clients who operate cash accounts:
• margin accounts Partially
• Margin accounts: accounts-members don’t permit short sales or make agreements
• DAPs- intermediary acts complete transactions through which people deliver funds but never show accounts

Registered Accounts

• Through individual's account- the scope is vast and detailed to types of security (limitations)

Pro Accounts

• Employees under the same-roof cannot belong in this account-cannot be considered as non-clients:

Investment Club Accounts:

• Document needed when setting up
• RR cannot authorize unless discretionary-supervision over this account

All Requirements

• Follow all and specific requirements for trading accounts by these

Electronic Delivery and Signatures

• All clients must provide written consent
• Certain states will approve to use signatures that are valid
• They must have it accessible, retained, and easily viewable and matched to information
• Finalise with KYC information

Client Records

• Must maintain: current, record, and active clients with computerized systems
• Application- before doing make sure trade investment objectives and risk profile

Account Application must have

• 0 - Verification that it is there
• 1 - Clients circumstances
• 2 - Portfolio: Clients holdings, quick references, average

Make sure is covered:

• Security, correspondence and to avoid use address

Review and Removal of Records:

• Dealers are restricted in this aspect and you must not remove it at all

Records of Orders:

Full details of a trade must be sent directly to the client