Investment Suitability & Transaction Considerations

Suitably Requirements Associated with Sales and Trading

• Know Your Product (KYP) along with Know Your Client (KYC) has emerged as a critical concept in registered representative's (RRs) daily work
• RRs have a duty to match a client's needs to the risk-return attributes of investments being considered
• Suitability standards require a security’s attributes and the client’s needs be matched to variables in the trade nature

Transaction Considerations

• Canadian Investment Regulatory Organization (CIRO) rules pertain to both individual orders and accounts
• In determining suitability, understand the security and consider whether the transaction involves stocks, bonds, options or futures contracts
• Determine the purchase or sale involved
• Consider borrowed funds used
• Note the amount of risk associated with the transaction
• Determine if it is a hedge to protect an existing position, or speculative

Retail RRs

• They must provide each client a copy of their KYC information at the time of account opening
• Must access suitability based on client elements like; time horizon, risk profile, current investment portfolio composition
• Must reassess suitability at the time of prescribed triggering events
• Must update the client’s KYC profile when there are significant changes

Recommendations

• RRs must provide a balanced presentation to the client, disclosing all relevant information, both positive and negative, about the securities under discussion
• RRs must be aware of new developments that may affect a client's investments, even if their research department doesn't follow a security

Institutional Accounts

• Most institutional clients make their own investment decisions, including evaluating product suitability
• When dealing with institutional clients of your firm, their relevant sophistication level must be established
• The level of suitability assessment owed to them is determined by this

Institutional Client Defined

• Acceptable counterparties.
• Acceptable institutions.
• Regulated entities.
• Registrants (other than an individual registrant) under securities law.
• A non-individual with total securities under administration or management exceeding $10 million

Product Due Diligence

• Regulators want firms to have processes to evaluate products permitted for sale and on what basis
• Firms conduct an evaluation to determine whether complex products should be on their product shelf
• Training requirements, documentation and supervision are also considered

New Product Due Diligence

• A registered firm must not make securities available to clients unless they have taken reasonable steps to evaluate relevant aspects, and approve them for use
• Firms must monitor securities for significant changes
• Firms must establish, maintain, and apply policies, procedures and controls relating to the KYP process
• The firm's business model, securities offered, the proficiency of RRs, and nature of the RR-client relationship are also determining factors

ETF example

• It illustrates the importance of members and RRs knowing new products
• At their simplest, these products are similar to mutual funds, however, some are complex structured products that use leverage and sophisticated investment strategies
• All RRs must be keenly aware of the features before recommending

Leveraged and Inverse ETFs

• Guidance Note 20-0086 reminds investment dealer members of their sales practice obligations
• Such funds are highly complex financial instruments designed to achieve their stated objectives on a daily basis
• In volatile markets, leveraged and inverse ETFs are generally considered unsuitable for retail investors desiring to hold them for longer than one trading session

Assessing Suitability

• Dealer members determine transaction suitability before recommending or accepting client orders to purchase or sell
• Likewise, Representatives must use diligence to ensure accounts get reviewed

Unsuitable Investments

• Due diligence is required before accepting any client order for leveraged or inverse ETFs to ensure order is suitable
• A client must be advised against proceeding with an unsuitable order

Communication

• Sales materials and oral presentations for leveraged and inverse ETFs must present a balanced picture of benefits and risks, without any misleading omissions

Supervision

• Must have appropriate product suitability, client-specific suitability analysis, that sales materials are balanced, and follow all applicable CIRO rules and securities laws

Principal Protected Notes

• CIRO’s expectations cover PPN sales by registered investment dealers in Guidance Note 2500-21-003
• IIROC dealer members; acknowledges that regulators permit particular PPNs to be sold with no KYC or suitability obligation by banks and other deposit-taking institutions

Arms length products

• Dealer members must be aware of regulatory concerns when distributing these
• Concerns include conduct-related matters, issuer scrutiny/product review, conflicts of interest, suitability, disclosure, and protection fund coverage
• CIRO's expectations are summarized in a three-step approach

New issues

• Capital Raising
• Company issues securities from its own treasury, and then sells these securities to the public
• If the securities are issued for the first time, it's an initial public offering (IPO)

Prospectus

• It outlines facts on which potential purchasers base their buy decisions; filed with regulators; investment contract between company/purchaser

Issuing Additional Securities

• It is into the marketplace, the company is called a reporting issuer
• Unless an exemption is available a prospectus is normally required
• The prospectus of a reporting issuer may be less detailed because there is already public information

Dealer Members

• They may be involved in the offering process by: providing advice to the issuer on the securities to issue, pricing, & helping to sell the new securities
• It is known as Underwriting

Distribution

• The dealer may purchase the whole or partial block of new securities, called a bought deal and distribute it to institutional or individual investors
• Best efforts deal - The dealer may act as an agent to sell securities with sales or price guarantee

Most provinces

• Require preliminary and final prospectuses be filed
• The preliminary prospectus or red herring prospectus must have a statement in red ink on the front cover
• It states it's subject to completion or amendment, and the securites may not be sold, or offers to buy them accepted until a receipt for the final prospectus has been obtained

Purpose of Preliminary Prospectus

• Allows distributors in a new issue to figure out the extent of public interest and before it is priced and distributed
• Its form and content must comply substantially with the law
• May exclude the price for the underwriter and the price at which the securities are offered
• Underwriter, agent, or company who distributes securities must maintain a record of people it was sent to

Waiting Period

• It's the period between issuing the receipt for preliminary prospectus and receipt for a final
• During this period, underwriters may solicit interest expressions from potential purchasers
• Copy of the preliminary prospectus must be provided to anyone expressing interest, whether solicited or unsolicited

Activities Prohibited During the Waiting Period

• Entering into an agreement with a client for purchase and sale of the new securities is not allowed
• Publishing a circular or advertisement alerting general public the prelim prospectus availability is permissible
• Containing the identity of the security proposed to be issued
• Containing the proposed price of the security if determined
• Containing the name and address of dealer member or RR from which to buy the security

Final Prospectus

• It must contain complete details of securities being offered for sale
• Required by legislation, it must provide full, plain, and true disclosure of all material facts

Exempt Market

• Participation is for certain entities and individuals meeting needs in securities legislation of their resident province or territory.
• Alternatively, some securities generally considered low risk terms principal loss

Exemptions Related to Raising Capital

• Trades acquired under these provisions are subject to a restricted period of resale.
• Specific exemption rules apply to these types of investors: accredited investors, private issuers, family/friends/business associates and offering memorandum, or a minimum amount

Accredited Investors

• Include; financial institutions, governments, regulated pension funds, and trust companies
• Accredited investors must sign a risk acknowledgement form
• Firms/RRs must document the facts supporting the exemption claim

Private Issuers

• It's a company with no more than 50 shareholders whose securities are subject to to transfer restrictions
• Securities of a private issuer can be purchased by eligible investors without a prospectus

Family, Friends, and Business Associates

• This exemption allows issuers other than investment funds to distribute securities to the issuers' directors, executive officers, control persons and founders

Offering Memorandum

• Issuer must have an offering memorandum prepare in the prescribed form, and deliver to purchaser before the purchase time
• This follows the prescribed form, provides right of rescission or a right of action, if these aren't available by regulation
• Purchasers must sign a risk acknowledgement form to be retained by the issuer eight years

Crowdfunding

• Canadian regulators have introduced as way of raising capital for start-ups and early stage issuers
• It also includes a standard exemption from prospectus requirement and requirements on how securities are distributed

Exemptions

• The crowdfunding prospectus exemption allows investing in Canadian companies in early development stages
• To raise funds from public online through a funding portal, registered with securities regulators
• Non-accredited investor can invest more than $2,500 per distribution - increases to $10k with advice from a registered dealer
• The issuer group doesn't raise over $1,500,000 in aggregate
• The crowdfunding document must be provided to the investors along with other materials, plus sign a risk acknowledgement form, and have a similar right of withdrawal

Resale/First Trade Exemptions

• Restricted period called seasoning period unless otherwise exempted, securities obtained under a prospectus exemption can't be sold until passed
• Found in NI 45-102 Resale of Securities

Hot Issues and Private Placements

• CIRO demands during the distribution period of securities to the public, dealer members make a bona fide offering of total participation in the issue to public investors
• That is the length of the distribution period defined by provincial securities legislation
• Non-public investors are restricted from buying ahead of clients
• Is particular relevant to hot issues, that is issues of securities in great demand
• Public investor is defined to exclude employees of the dealer member and employees of institutional investors who are regularly engaged in the purchase or sale of securities for those institutions

Take-Over Bids

• It's an offer to acquire 20+% of the outstanding voting/equity securities of a target company
• Under the provinces securities acts, the 20% threshold must include all current holdings of voting, equity, or unissued shares owned by the offeror and its joint actors

Legislation

• It is designed to ensure each shareholder in the target company has an equal opportunity and adequate information to make an informed decision

Early Warning

• Securities legislation sets an initial threshold before a take-over bid
• It alerts investors to accumulations of stock, that can lead to a take-over bid
• Over 10% of the voting/equity class of shares triggers required disclosure through a press release

Take-Over Bid Rules

• The offeror must allow securities to be deposited for at least 105 days from date, and can't take up unless elapsed, and the bid's terms were complied with, and 50+% of the outstanding securities was deposited and not withdrawn

Withdrawal Rights

• The Deposited shares in response of a take-over bid can be withdrawn: anytime before-bid expiry, after the bid expires post 45 days, after 3 days of been taken post funds have not payed

Issuer Bids

• The Acts of provinces, contains regulating provisions for issuer bids
• Issuer bids are subject to the rules for take-over bids
• A circular must be sent to the security holders receiving the bid

Issuer Bid Disclosures

• Must be disclosed in the circular such as the reasons for the bid, benefits to insiders, any distributions over the past 5 years, dividend policy

Normal Course Issuer Bids

• Acts provides an exempt if done in an accordance of rules and policies
• To be available for the exemption, The company must prep & submit a notice to the applicable exchange for approval, the release must be issued immidiately, the share holder will then recieves summary by schedule in share class

The TSX and TSX-Ventur Exchanges

• Permits the to purchase regular market purchase Up to 2% in anyway 3 day period, 1 purchases can exceed than 10% of public float, Subjected to the of class offered restriction exclude other actors on class date.