Investment Suitability & Strategies

Suitability of Investments and Investment Strategies

• Registered representatives (RRs) must comprehend the products recommended to clients
• RRs must evaluate products versus related investment strategies for client suitability
• Know Your Product (KYP) is a critical concept, alongside Know Your Client (KYC)
• Suitability includes the regulatory transaction needs, recommendations, and product types
• RRs should understand various topics to properly discuss with their client
• Understanding suitability requirements is vital in sales and trading.
• Matching clients' needs to products' risk-return is essential
• Several variables must be considered

Variable Considerations

• Is the security a new issue still in primary distribution?
• How long has the product, company, or fund been in existence?
• What are the price fluctuations of the security or fund unit?
• The research department evaluation of the security, technical and fundamental.
• Has the firm approved the product for purchase?
• Are there training requirements?
• What is the company's track record like earnings and dividends?
• How reliable is corporate or market information?
• Is the product structured or synthetic?
• Is the purchase speculative?

Transaction Considerations

• Structured and synthetic products need careful examination because they are complex
• Speculative investments have little or no history of earnings and rely on unpredictable events
• The Canadian Investment Regulatory Organization (CIRO) rules apply to accounts and individual orders
• It's vital to match security attributes to client needs
• Must understand securities, to determine their suitability

Considerations when determining suitability

• Does the transaction involve a stock, bond, option, or futures contract?
• Is it a purchase or a sale?
• Is the security purchased with borrowed funds (margin or leverage)?
• What is the amount of risk?
• Is it a large order in a thinly traded issue (little liquidity)?
• Is it a short sale?
• Is the issue under investigation or review?
• Is it a hedge, or is it speculative?
• RRs must be able to defend their analysis as meeting a professional standard
• Dealer member suitability obligations extend beyond the trade recommendation date, preventing risk profile/portfolio divergence
• For unsuitable unsolicited orders, advisors must advise against and recommend suitable alternatives and document all actions
• Day trading accounts require specific checks, warnings about risks, and strict leverage limits

Example: Ben Case Study

• Ben receives a call from Sam, a 72-year-old client with a net worth of $150,000
• Income is 100% pension
• Account holds $130,000 in T-bills and long-term government bonds
• Sam wants to liquidate the T-bills and invest in a penny mining stock based on his son-in-law's tip
• Ben accepts without question
• Ben violated due care, and failed to ensure Sam knew the risks of speculative stocks
• Sam must be told this isn't in line with objectives.
• If objectives change, update the application, RR must recommend alternatives or refuse

Ensuring Compliance

• RR should ensure client transactions are suitable.
• Policies will vary based on case and some cases could require supervisor discussion
• RR must advise clients to reconsider if transactions are unsuitable.
• If client’s objectives have changed, record these new objectives. Clients should communicate with a supervisor
• Orders should be marked "unsolicited" if the client proceeds with the trade regardless
• RRs must competently perform recommendations
• Recommendations can stem from research or substantiated information
• Balanced presentations with positives and negatives are key
• RRs' responsibility to research new developments with securities
• There should be no assurance of guarantees; examples include future market price

Guidelines for the RR's recommendation

• Providing individually tailored information.
• Examining investment preferences.
• Promoting specific security or strategy
• Assesssing client with objective and financial situation
• Providing online telephonic recommendation
• Waiver is not a recommedation
• Look at commission, transaction and a relationship with the client

Institutional Clients

• Institutional clients are defined in the IDPC rules and has 5 rules that apply
• On the CIRO platform, all individuals are retail clients, despite of net worth and sophistication
• Institutional clients make independent decisions on suitability issues
• Not all institutional clients have knowledge or experience
• RR determine the level of sophistication, to assess the right amount of protection for them
• The dealer determines the indepence and decision making based on investement risk level
• Dealers do not have suitability levels for permitted clients as defined by the 31-103 rule and have protections under the rules

Product Due Dilligence

• Evaluate clients and products they recommend
• Regulators ensure process is in place to find what can be sold by the RR
• Some products like, GICs, securities and mutual funds are straightforward
• More complex products need evaluation if it should be placed on the shelf
• Firms must see what is being sold, is there training needed as well as document everything

Know your product

• Before recommending a product you should know how it is structured and how to sell it during KYP
• Explain any products non traditional, complex, explain to the client what their buying and risk, if not the client cannot tell you want to do

New Product Due Diligence

• Firms must have assessed the securities and approved of them under the NI 31-103. There has to be follow ups as well
• Follow ups for significant changes
• Establish and ensure processes and controls are in place under KYP as well as business model
• Follow up with clients, and relationships the firm has with the RR
• The notice on the 3300 and the other code guidance tells the steps needed to conduct it
• Formal standariszed doc is need so the staff know the change
• Assess with staff of a new security and reviews
• Use a trained people that oversee complex or novel process
• The security approval needs senior staff
• Post level follow up

Example: Exchange Traded Funds ETF"s

• RR needs to know ETF's since there basic but complex products
• A client sustainied 124,000 in losses nad 40,000 was fined and suspended due to no experince in GIC's , money market and the like

Leveraged and inverse exchange-Traded Funds

• Investment dealers must follow sales practices obligations
• Those types of funds have daily stated objectives, that are complex.
• the performance over time can be significant different and unsuitable for retailers
• Policy is followed for the recommadations, the community and supervision for the ETF products
• The memebers need to have access to ensure clients are good to make orders
• Must review accoutns for triggereing events
• With leveraged investments RR needs to have product benefits and features
• RR must understand with leverage market will hit a client

Non- Suitable Investments in the clients Portfolio

• Before clients take over inverstments you have to do some diligence to ensure theyy have no unnsuitabale issues
• Inform they may need against preceeding
• Sales and orla materials for the levergae dinveresd needs to be balaned benefits and pics
• Must include fact or what it oculd be
• Supervision system must be in place for rules an law enforcment
• Suitbale approproaite anaylissed needed
• clients should be analysed
• sales materials need to be accuratr and balaned so there are all cIRO and seguirty laws folwoinng it

Example: Principal Proctected Notes by Approved Person

• Guidence code overviews selling the PPN if they have IIROC
• certain spercified notes for banks etc. with kYC with no other obligation is enffircesd
• PPNS most only be through regieatred delaers

Distribution of Non-arms Investments, long arm and distribution channel and RR"s rules

• The arms regulations are for investments and the client/member should be aware and concerns for a clients conduct funds
• There are thee way to see the CIRO

CIRO STEP 1

• Conduct some diligence on the product before disributiong or learn some aspect of the non arms
• Distributing something is an issue

CIRO STEP 2

• iidentifying confclt with the client

CIRO STEP 3

• Assess with a cleints orders
• They need to make it accsessable

Early Knowlege

• 1 IIROC now CIRO had examined them for the new product, some facts
• 1 new product definaitions are poor
• 2 the reviesws are bad and they need subject matter experts
• 3 the training is ad
• 3 there no fornaly procces for the custoemr for the clients to fix sysemtic iisues

Erica CAse STydy

• She is acocmilpished and in the smae busines withe compnay she works for but doenst inform
• Erica belives private transacitons the clients beleive she si working on their view
• There arerisk and ciivliliabilies in unkown ways
• there is a high requitreemnt for the orvsight for the dleaeres
• she the the retail but work sin ther way and createde conflict the enusre complianance in the dleaer hsve konelg eand write and business to the

the enusre complianance in the dleaer hsve konegle and write and business to the

1 RR need sto eavulater ther business proposals 2 before clients are with the security and the enusre complianance

New Issue and Prosus Exemption : Example Stanley Senerio

• Stanley is contacted to invest but he forgets to do the due diligence to give full details causing Felecia to lose because the wrong group was invested with Class B which can’t vote.
• RR’s must do some due dligence to investigate investment apportunities

1. Have to call and make anylisis based on the knowlege
2. ensure there is comepliannce enlisting the help from the the research team up do date companies info needed
3. contact supervisor

• An RR must also learn securities are issued for, how transactions work in different market conditions, details on the product exemptions available to clients

Issuing Equity : New products

• When a comapny issues an equirty it gives some for the treausry and gives it sales too the public
• if not its new
• The new security is the offering IPo initiall public is the intial and a first time registrees and prospectus

Preminiral Product

• The preminiarlry product must go through the red hering and has a statement and amendments
• must not buy the offer til it does
• not sold til its the time by admin 1 decide if they are by admin 2 one purs=pose for new issues
• must be equal
• a record of to whom the issue has gone too
• that is to show all is there and is sent when avaiable

During Wattiing Period

• The waiting period is the time before teh reicept for final product _Underwaters express intrest ot potentiall purhaser with a phto cpy and solicciitaiton

Products for Sales

• No agreements can be set with client and the ciricualted avabilty with ciriculars and advertise or preiminary prospectus and information of
• Must be in the hand and it's isued and the price
• No other are disuterped

Final Product

_The details must be in the security _they must be true clear disclosure for reg and leg

• offerce perice to the oiblic _prodcceding to issue The uwnderting contiuue _anyhtign that was oimited in the product

the following signatures provide and with

a0. expert b)apprisers c) audits d) lawyers

• Copy is mailer or offered too the ealre
• By mid night with business

Product Examptions

refers to a markewth which partictpaitaion is restricted and certian requitrements

Requirements

• 1 preparing product for regulation

2. involing with due diliigenec _3) files with reports

Exceptions For Investors

• By virtue of the needs, these issuers may prepare a prospceuts which is costly
• Securities must give the investment question

Capital Exceptions:

Accredited investor

A high financial institution like wealth an person Must Sign a risk

Prive issuer

: Must not more the 50 showholders

• Securities cant be touched and is not able to be purchuses

####Family Freinds distriduter

• Officers and conrrol of director

OM

OM and to purcuhse prior to or is to the time

• Right to recission. a risk of knoleg

Minnaimun Ount

• Not Required if to purhase or has Restrictions to non investors And is not created of for soley to for the purpohse and connot distrubued

Crowdfunding

• The prospectus exemption is to ficialte and develop for raising, is to rase for to unds froma web form

Some rules

• no has to be more itnvested
• no groups for more
• must sign

Hot Issues

1: needs full distriputions 2: ensure that there is no clients priority 3 client prritoy needs to be addressed to the privatae

TAKE over Bids

4. Descriceb and the bidder and

an offer of 20% or more the outstanidn equityies The Acs contains porisionsd taht

Early waring

Desined for investers

• 10 % shw the stock the release

Tahke over bid rules

Seucirits need to be deoisted

They get to witrhtdaw within 25 dats or 45 datys where the offferor has payed them

• the offeror must give the sharehollers that is.

issuer buds

• similar too
• the reasons to bild
• benefits of insidders
• distriuitons of secuirtties

The desccosuire _ the offer cant tak eu othe depsotiionted secuirtties 1 If it all cimeplted 1 day

normal ciruclated issuer buds

An ixxiur is exempt and ma,e by th eaccordence with the accrdnce with the

Summary

• Resigred RRs and they need t know the produrts
• they give the rrs, and the relatuionships
• The issuance