Ethical Conduct & Know Your Client Rule

• Advisors are required to learn the essential facts related to every client and every order accepted as part of the "Know Your Client" rule.
• Regulators mandate that all licensed mutual fund representatives learn essential facts relative to every client and every order accepted; this is known as the Know Your Client rule.
• Licensed mutual fund representatives must Understand all the characteristics of the funds they are recommending (Know your product rule)
• Ensure that every order accepted is in keeping with good business practice
• Confirm all recommendations align with the client's investment objectives, risk profile, and personal/financial circumstances, also known as the suitability principle.
• The first step to knowing a client involves completing the New Account Application Form (NAAF).

Ethical Conduct in the Mutual Fund Industry

• The mutual fund sector relies on trust and confidence, necessitating ethical behavior from mutual fund representatives.
• Ethical conduct entails adhering not only to the letter of the law but also to the spirit of the law.

Client Focused Reforms (CFRs)

• The Client Focused Reforms (CFRs) are regulatory changes impacting Know Your Client (KYC), Know Your Product (KYP) rules, conflict of interest protocols.
• CFRs also affect trusted contact person implementation, suitability assessments, and relationship disclosure sections of NI 31-103 and its associated policy.
• The Canadian Securities Administrators (CSA) introduced these amendments to prioritize client interests, and better align the interests of advisors, dealers, and registrants with clients.
• CFRs seek to improve outcomes for clients and also aim to help clients fully grasp the nature and terms of their relationships with registrants.

Fiduciary Duty

• Fiduciary duty's extent depends on how heavily the individual trusts and relies on the other person.
• Examples include parents to children, lawyers to clients and doctors to their patients
• If mutual funds are sold to a sophisticated, knowledgeable investor there is a lower level of fiduciary duty than if sold to an elderly person with very little investment knowledge, who places complete trust in you

The "Know Your Client" Rule (KYC)

• If a new client refuses to provide their birth date but wants a trade processed, the advisor should refuse the order.
• The "Know Your Client" Rule (KYC) mandates that advisors MUST take reasonable steps to learn essential facts relevant to every client and every order.
• Required client information includes personal circumstances, financial status, investment needs/objectives, investment knowledge, risk profile, and time horizon.
• Advisors cannot act on behalf of a client and could be held liable if any of the details of KYC are unknown

Risk Averse Investors

• Jane is risk averse, as she consistently selects the investment option with the lowest risk.
• A smart investor should pick the investment with the lowest risk if all of the investment choices have the same expected return, regardless of risk tolerance.

Fund Facts Documents

• The Fund Facts document should not exceed four pages and provides essential details about the fund
• The Fund Facts document should include performance history, investments held, and costs of investing.

Client Responsibility

• When serving a client, a representative should have professional, ethical, and legal responsibilities.
• Professional responsibility means to provide excellent service to the client
• Ethical responsibility means to prioritize the client's interests over the representative's own self-interest
• Legal responsibility means to guarantee the suitability of any client's order.

Client Focused Reforms Initiative

• The CFR initiative pertains to Conflict of Interest, Suitability, KYC, KYP rules, as well as Trusted Contact Person and Relationship Disclosure.
• These all fall under NI 31-103 and its companion policy.

Client Focused Reforms Intentions

• The client focused reforms (CFRs) intends to better align the interests of securities advisors, dealers, and registrants with the interests of their clients.
• The CFR also intends to improve outcomes for clients as well as helping clients better understand the nature and terms of the relationship between themselves and the registrant

Mutual Fund Representatives

• A mutual fund representative should refer a client to a qualified planner, if a client wants a financial plan
• Financial plans should not be created using only KYC information obtained, nor should a fact-finding interview and working on a plan

Investment Recommendations

• When a client requests a financial plan, mutual fund representatives should refer the client to a qualified planner.
• A mutual fund representative would not create a monthly budget for a client to decide how much money can be saved towards retirement.

Processing Client Orders

• If Candace, a sophisticated investor, does not want to provide the dealer with all of the required know your client information, then the deal cannot be processed.
• Collection of know your client information is required by law as it is for the client's own protection.

Mutual Funds

• If Sam is a long time client and wants to switch to the ABC Mutual Fund from his current DEF fund, Joseph should not recommend the switch.
• This is because the two funds are similar in almost every aspect, the switch will not benefit him.

The "Know Your Client" (KYC) Rule Requirements

• The "Know Your Client" (KYC) rule mandates advisors to learn essential client facts, including: personal and financial circumstances, and investment time and horizon

KYP Rule

• The KYP rule includes a good understanding of the funds structure, features, risks, and costs.

Recommending Mutual Funds

• An equity mutual fund with superior historical returns and extreme volatility should not be recommended to Gary, age 60, who just retired with $100,000 net worth.

Investment Recommendations and Suitability

• A fundamental obligation is to ensure each investment recommendation is suitable for the client.
• Considerations for this include understanding their personal/financial situation, the investment product, and the client's unique situation and investment objectives.

Registrant Expectations

• Acting in the best interest of their registrant and his or her employer is NOT one of the three pillars of registrant expectations,
• The three pillars of registrant expectations are Know Your Client, Suitability, Know Your Product.

Steps to Investment Suitability

• Determining investment suitability involves assessing the client's risk profile, investment horizon, and investment knowledge.

Fund Facts Document

• The Fund Facts document provides information on investment holdings and costs, fund details, and historical performance.

Determining Appropriate Asset Mixes

• The most appropriate asset mix for a client who is 30 years old, planning to retire at 55, has not begun saving, wants to save a substantial amount each year and is totally comfortable with risk is: 5% cash and equivalents, 25% fixed income, 70% equities.

Fiduciary Responsibility

• The responsibility to always put the client's interests first is involved in a fiduciary responsibility to your clients as a mutual fund sales representative

Client Service

• Providing the best client service possible falls under Professional responsibility.

Investment Products

• Mutual fund representatives should understand the structure, features, risks, initial/ongoing costs, and cost impact when recommending investment products.