Investment Products and Strategies

Investment and Strategies Suitability

• RRs must understand the products being recommended or sold and evaluate products and investment strategies for client suitability
• Know Your Product (KYP) has emerged alongside Know Your Client (KYC) as critical concept for Registered Representatives (RRs)
• RRs must understand securities issuances through prospectus, prospectus exemptions, and rules for issuers purchasing securities of others or buying back their own shares

Suitability Requirements

• Match a client’s needs to the risk-return attributes of investments like stocks, bonds, and mutual funds
• Consider if a security is a new issue still in primary distribution
• Determine how long the product, company, or fund has been in existence
• Find out what the normal price fluctuations of the security or fund unit are
• Consider your research department's technical/fundamental evaluation of the security
• Confirm the firm has approved the product for purchase
• Identify additional training requirements for selling the product
• Analyze the company’s track record factors like previous earnings and dividend payments
• Verify the currency, availability, and reliability of corporate or market information
• Determine if the product is a structured or synthetic product and if the purchase is speculative

Transaction Considerations

• Suitability standards require matching a security's attributes and a client's needs to variables of the trade
• CIRO rules apply to both accounts and individual orders, necessitating an understanding of the security by the RR
• Determine if the proposed transaction involves a stock, bond, option, or futures contract, and if it is a purchase or sale
• Find out if the security is being purchased with borrowed funds (margin or leverage)
• Ascertain the amount of risk associated with the transaction
• Determine if the order is large in a thinly traded issue (low liquidity) and if it is a short sale
• Find out if the issue is under investigation or review and if it’s a hedge or speculative

RR standards of professionalism

• RRs must analyze each factor professionally and competently
• If necessary, defend the analysis as meeting an acceptable professional standard
• Dealer member suitability obligations extend beyond the time of a trade recommendation
• Advisors must advise against unsuitable unsolicited orders and recommend suitable alternatives with documentation

Day Trading Accounts

• Establish whether a day trading account is appropriate for clients intending to day trade
• Warn clients of the risks associated with day trading
• Implement strict leverage limits via margin requirements

RR Responsibilities in the Retail Sector

• Provide each client with a copy of their KYC information when opening the account
• Consider the client’s time horizon, current investment portfolio composition, and risk profile to assess suitability
• Reassess suitability at prescribed triggering events and update client’s KYC profile when there are significant changes

Case Study: Ben

• Ben violated due care by accepting Sam's order without question, lacking assurance Sam knew the risks with speculative penny mining stocks
• Ben needed to inform Sam the trade does not conform to Sam's investment objectives, with possible alternatives, or refusing order

Conduct to Ensure Compliance

• Ensure every transaction is suitable for the particular client
• Advise clients against unsuitable transactions and get confirmation in writing that a client's investment objectives have changed
• Mark "unsolicited" orders and document the trade context and circumstances in the client's file

Rules for recommendations

• RRs must ensure recommendations are made competently, generated by research or based on substantiated information
• Disclose all relevant positive and negative information about securities under discussion
• RRs must be aware of new developments affecting client investments in a professional capacity

Restrictions on Recommendations

• RRs should not guarantee the future market price of a security, future payments of dividends or interest, and a client's ability to sell a security at a stated price
• The listing of a security on an exchange at a future date should not be guaranteed

Recommendations

• Providing individually tailored information
• Examining client data and using it to target investment-related information
• Promoting a specific security/trading strategy
• Being a dealer member taking into account the client’s financial situation

Factors not determining Recommendations

• Supplying a waiver or disclaimer
• Charging a lower commission
• Classifying a transaction as buy or sell
• Absence of previous relationship

Institutional Accounts

• CIRO's IDPC rules set minimum standards for institutional account opening, operation, and supervision
• The approach will depend on the nature of the dealer member, the procedures, and the customers

Institutional Clients

• Institutional clients on the CIRO platform are retail clients regardless of net worth, securities under management, and sophistication
• RRs must establish an institutional client’s level of sophistication, which determines the degree of a suitability assessment

Suitability Obligation

• Dealer members have no suitability obligations to institutional clients who are also permitted clients, and who have waived their written rights

Product Due Diligence is Required

• Firms must evaluate which products are sold and on what basis in a process for determining suitability
• Factors include training, documentation, and supervision regarding product sales

Know Your Product Obligations

• This refers to the KYP obligation
• RRs must explain non-traditional, complex, or structured products, assess suitability, explain features and risks, and enable clients to properly instruct them

New Product Due Diligence

• Registered firms cannot offer securities unless they take reasonable steps to assess relevant aspects and approve them for use
• Firms must establish, maintain, and apply KYP policies, procedures, and controls considering the business model types of securities, proficiency of individuals, and the nature of client relationships
• Documented approval processes, a senior staff's formal decision on the security, and post-approval follow-up are included

Due Diligence Post Approval

• Monitoring of client complaints, reassessment of training, compliance monitoring, and periodic reassessment of the security's appropriateness are required

Exchange Traded Funds

• ETFs provide a good example to illustrate the importance of dealer members and RRs knowing their new products
• Some ETFs are complex structured products that use leverage and other sophisticated investment strategies
• All RRs must be aware of new ETF features before making a recommendation

Leveraged and Inverse Exchange Traded Funds

• FINRA reminds dealer members of following sales practices for leveraged/inverse ETFs
• Leveraged/inverse ETFs are unsuitable for retail investors wanting a holding longer than one trading session, particularly in volatile markets

Assessing Suitability of Leveraged and Inverse ETFs

• Registered Representatives must practice diligence, use the accounts suitability factors and understand market volatility effects on the ETF performance and leverage

Unsuitable Investments and the Public

• Before accepting orders for leveraged/inverse ETFs, it must be ensured that the order is suitable for that client
• If receiving an unsuitable order, advise the client against proceeding with it
• Sales materials and presentations for leveraged/inverse ETFs must present a fair and balanced picture
• Communications must not omit material facts/qualifications or that are misleading

RR Supervision in Regard to Recommendations

• Appropriate product suitability and client-specific analysis must be completed, sales materials must be accurate and balanced, and CIRO rules must be followed

Principal Protected Notes

• CIRO requires that sales of PPNs must only be performed at registered dealers

RRs and Dually Employed PPNs

• PPN features are essentially the same, so CIRO requires RR sales of PPNs from the dealer member for the sake of policies and procedures in place

Non-Arm's Length Investment Products

• Concerns include issuer scrutiny, conduct-related matters, suitability, disclosure, conflicts of interest, and protection fund coverage

Steps for Ciro Expectations in Regard to Non-Arms Length Investment Products

• Perform the due diligence, identify conflicts and assess resolution, as well as suitability of client orders for RR recommendations

IIROC Exam Deficiencies regarding New Product Due Diligence

• Absence of clear definition of "new product"
• Absence of appropriate internal review with subject experts
• Absence of consideration of proficiency, training, and marketing issues

Lack of Formal Process

• A lack of formal processes to monitor customers complaints involving new products, thus allowing the firm to ignore systemic issues

Stanley Case Study

• Stanley didn't learn essential details, negligently failing to act in the client's best interests
• To ensure compliance, RRs must apply due diligence and use the firm's research department and available training

New Issues and Propectus Exemptions

• RRs must understand client situations and explain products, understand transaction conditions, and know about new security issues through a prospectus

Prospectus

• When a company raises equity capital, it issues securities that are sold to the public and it is received by company
• An IPO requires filing a prospectus that outlines the facts for buyers to base decisions on

Reporting Issuer

• This describes a company issuing additional securities and requires a prospectus unless an exemption is available

Dealer Members

• They provide advice to the issuer on which type of securities to issue, pricing the securities, and also helping to sell them and distributing to individuals or institutions

Bought Deals

• This describes when a dealer purchases the whole block of new securities and sells it to a group.

Best Efforts Deal

• This describes when the broker acts as an agent and is not committed to selling the entire issue
• They are merely using their best "efforts" to sell

Preliminary Prospectus

• They indicate that the prospectus has been filed, is not in final form and subject to final amendments, or securities sales cannot commence

Purpose of the Preliminary Prospectus

• The function allows the distributor of the new issue to determine extent of public interest while reviewed by the administrator and priced and distributed

Form and Content of a Preliminary Prospectus

• It must conform to securities legislation but exclude information on the price for the underwriter and the price at which the securities are offered to investors
• The auditor's report need not be included

Security to the Public

• The agent or company distributing to public must maintain records of all persons contacted

Permissable Actions

• The act of soliciting interest from potential buyers of the security is allowed
• The act of providing a copy of the preliminary prospectus is also permitted

Activities Prohibited

• Entering into an agreement with a client for purchase and sale of the new issue of

Permissable Actions

• Publishing a circular about the availability of the preliminary prospectus and who to buy the security from
• Provide no other materials beyond these to the interests of investors during the waiting period

Final Propectus

• Full disclosure of all factors the securities are to be distributed by legislation
• The following includes: The price, the issuer/holder proceeds, underwriting discount, and the information omitted in the preliminary prospectus
• The consent of experts such as appraisers, auditors, and lawyers must accompany this

Prospectus mailing

• the mailing or delivery must be made to purchasers/agents by no later than midnight on the second business day after entering into an agreement

The Exempt Market

• This is the marketplace with lower-risk standards for specific individuals and entities as opposed to the more regulated public markets

Exemptions

• The securities in the exempt market does not typically follow the security requirements
• Exemptions and limitations include resale restrictions of specific classes: accredited investors, provate issuers, friends and family, offering memorandum, minimum amount

Related Offerings

• To raise capital, regulators introduced securities crowdfunding as a means of raising capital for start-ups and early-stage issuers
• The exemption is available to all investors to invest 2,500 dollars per distribution, or 10,000 with a registered broker
• A maximum of 1,500,000 dollars can be raised

Investor Acknowledgment

• investors must sign a risk acknowledgement form confirming that they have read and understood those warnings and information

Resale and First Trade

• This generally includes the following as stated in NI 45-102

Hot Issues and Private placements

• This dictates client priority and that requirements must be adhered to as provided by CIRO

Erica Case Study

• The firm should know and give written consent to any business dealings outside of normal business
• The RR should take any business proposals to the appropriate official or department for proper evaluation

Take-Over Bids and Issuer Bids

• RRs must understand the processes companies use to purchase other companies, and know the rules for each offer

Take-Over Bids

• A formal take-over bid is an offer that requires 20% or more of the outstanding voting/equity securities of a target company

Acts safeguarding position

• These are designed to ensure opportunity and adequate information for making a sound decision

Early warning rules

• Alerts investing public to stock accumulations

Take Over Bid threshold

• That is, any company reaching over 10% or more, must instantly disclose facts

Take Over Bid Rules

• The offeror must allow securities to be deposited for at least 105 days from the date of bid per security
• A situation can be waived if more than 50% is not withdrawn

Withdrawl Rights

• A company must not accept less than 35% of minimum deposit and not withdraw securities

Issuer Bids

• Includes all the offers by securities with same rules as above
• Issuer Bids is defined to include offers by issuers to acquire their own securities, other than debt securities that are not convertible into non-debt securities

Normal Course Issuer Bids

• These include intention to the applicable exchange for approval
• A purchase maximum applies over any 12-month period and must follow set restrictions

Registered Representatives must understand investment products and strategies to ensure client suitability. This includes understanding securities issuances through prospectus, exemptions, and rules for issuers. Suitability requires matching a client's needs to the risk-return attributes of investments.