Registered Representative (RR) Responsibilities

Registered Representative (RR) Responsibilities

• RRs need to understand product due diligence and suitability assessment
• RRs must be aware of regulatory obligations for transactions and recommendations
• Need to understand different product types to remain compliant
• Important topics for RRs include new issues, prospectus, and take-over and issuer bids

Key Terms

• Some key terms include preliminary prospectus, principal-protected notes, private placements, prospectus, red herring prospectus, etc
• Also includes items like accredited investors, best efforts deals, bought deals, crowdfunding, etc

Introduction to Regulations

• Apart from ethical and compliance standards, there are rules for buying and selling securities
• Regulations discussed go beyond Know Your Client (KYC) compliance for RRs
• RRs must evaluate products and related investment strategies to ensure the correct product for each client

The Importance of Know Your Product (KYP)

• RRs must understand the product being recommended
• The KYP concept is critical in the field as well as KYC practices
• Obligations pertain to dealer members regarding sales, training, and supervision

Topics Covered in the Chapter

• Includes issuance of securities via prospectus such as new issues
• Prospectus exemptions that may be available to specific investors
• Rules and processes for issuers purchasing securities of another issuer
• Rules and processes for issuers buying back their own shares

Suitability of Investments and Investment Strategies

• RRs need to identify suitability requirements for sales and trading
• The client discovery process involves gathering client information for KYC compliance
• Next stage involves matching client needs with risk-return attributes
• Includes stocks, bonds, mutual funds, and other products being considered

Factors to Consider

• Is the security a new issue still in primary distribution
• Length of time in existence for the product, company, and applicable fund
• Normal price fluctuations of the security or fund unit
• Research department's evaluation of the security, technically and fundamentally
• Approval status from the firm for the product
• Any specific training requirements regarding sale of product
• Company track record in previous earnings and dividend payments
• How current, reliable corporate or market information is
• Is the product in question considered structured or synthetic
• Is the purchase speculative

Structured and Synthetic Products

• Require a stronger understanding of operational methods and investment returns
• Both RRs and firms should analyze the products closely
• Speculative investments possess very little earning history
• They depend on unpredictable future events

Transaction Considerations

• Suitability standards require to match a security's attributes with the client's needs
• CIRO rules apply to accounts and individual orders
• Determine suitability by understanding the questions below

Determining Suitability Questions

• Does the proposed transaction involve a stock, bond, option, or futures contract
• Is it a purchase or a sale
• Is the security being purchased with borrowed funds by using margin or leverage
• Size of risk associated with a transaction
• Is it a thinly traded issue that involves a larger order with less liquidity
• Is it a short sale
• Is the issue under review or under investigation
• Is the investment speculative or a hedge to protect an existing position

Evaluating Factors for Suitability

• Industry experts agree all factors should be considered to properly evaluate suitability
• RR's must also be able to answer yes to the following questions
• Have you analyzed each factor professionally and competently
• The advisor must take appropriate measures to deal with unsuitable orders
• Includes advising against the order and recommending suitable alternatives

Day Trading Accounts

• Establish whether a day trading account is appropriate for the client
• Consider order execution-only accounts
• Warn clients of the risks with day trading
• Strict leverage limits must be implemented to protect against financial loss

RR Responsibilities in the Retail Sector

• Provide clients with a copy of their KYC information
• Examine client time horizon, current portfolio composition, and risk profile
• Reassess suitability at prescribed triggering events
• Update the client's KYC profile when there are significant changes

Case study | Ben

• Ben accepted an order without question
• Ben violated the requirements for due care
• Ben has a duty to confirm Sam is aware of risks with speculative stocks
• The RR also needs to state the specific trade doesn't have correlation to their investment objectives

Suggested Conduct to Ensure Compliance

• Make sure client transactions are suitable
• Firms may require RRs to refuse unsuitable orders
• It may be best to deal with orders on a case-by-case basis
• In some instances, it may be best to contact supervisors
• Advise clients against continuing with the transaction
• Client priority must be observed in private placements

Rules Regarding Recommendations

• RRs have a responsibility to ensure that the recommendations made are done competently
• Include information generated by the research department or substantiated relevant figures

Before Executing a Trade

• RRs must give the client a balanced view on the securities
• This involves all relevant information, positive and negative
• RRs are obligated to make themselves aware of developments that could influence investments

Recommendations Must Avoid Guarantees

• RRs cannot guarantee the market price of a security in the future
• RRs cannot guarantee payments of dividends and/or interest
• RRs cannot guarantee a client's ability to sell a security at a specific price
• Unless a retractable or callable security is in question
• Cannot guarantee the listing of a security on an future exchange

Determining if a Transaction is a Recommendation

• Focus on the analysis of all facts and circumstances
• Base on whether a reasonable person believes a recommendation has been made

Providing Information that can Constitute a Recommendation

• Providing information that is tailored to a specific customer
• Examining data on client investment, habits, investor preferences, and past investment decisions
• Promoting a specific security or trading strategy
• A dealer member taking into account a client's objectives with a transaction
• A client entering an order following an RR's phone recommendation

Factors with no Bearing in Determining Recommendations

• Supplying a waiver or a disclaimer to a client
• Charging a lower commission to a client
• Classifying a transaction as either a buy or a sell
• A previous client relationship between the dealer member and investor

Firm Classifications Still Providing Recommendations

• Dealer members with discount brokers or Order Execution Only
• Can still be considered as providing recommendations depending on specific facts

Suitability Considerations for Institutional Accounts

• CIRO IDPC rules hold minimum standards for institutional account opening, operation, and supervision
• Rules will depend on the nature of the dealer member and the specific procedures

Institutional Clients

• Defined in the Investment Dealer Proficiency Course (IDPC) rules which include; acceptable counterparties, acceptable institutions, regulated entities, registrants under securities law, and non-individuals

Most Institutional Clients

• Most institutional clients make their own investment decisions
• Not all institutional clients are adequately knowledgable
• Also, not all institutional clients have an independent decision-making capability
• RRs on the firm's behalf must establish a client's level of sophistication when dealing with institutional clients
• The clients sophistication decides the level of suitability assessment required

Suitability Obligations and Institutional Clients

• Dealer members have a reasonable basis to conclude that an institutional client can make independent investment decisions
• Then the investment is fulfilled by that transaction
• Ensuring that a client's categorization is important to compliance with obligations

Product Due Diligence

• RRs need to know their client but also the products being introduced
• Regulators require firm to review permitted product for sale, and why
• Some products such as GICs, individual securities, and mutual funds are relatively straight forward
• More complex products must have an evaluation to determine whether to sell, also which client to sell them too
• Things like training requirements and supervision must also be factored in

Know Your Product (KYP)

• RRs must understand construction and performance likelihood in different market conditions
• Clients are entitled to know what you are selling and what they are agreeing to purchase
• Without knowledge, the RR can't assess suitability, features, also any risks
• As KYP suggests, if the client cannot evaluate the risks then the trade is not a suitable

New Product Due Diligence

• NI 31-103 states a firm cannot suggest securities available to clients until they have taken reasonable steps to access clients
• Policies must be implemented for KYP process in accordance with the firm's business model, type of securities offered, and the nature of the relationships
• Should also approve securities that are made available to clients, monitor for significant changes

Effective Product Due Diligence

• Should have a documented approval process by a standing committee
• Should have preliminary and final assessments completed by qualified staff and expert
• New products must be formally reviewed by a senior staff committee
• Appropriate post approval level should be determined, including monitoring and compliance

Dealer Member Measures

• Members must ensure that the committee has a structured and documented process
• Has enough skill set and experience to properly review the product

Exchange-Traded Funds (ETFs)

• ETFs are like mutual funds but are more complex
• Products use leverage and other sophisticated strategies
• RRs must be aware of ETF features before selling

Leveraged and Inverse Exchange-Traded Funds

• Investment dealer sales practice obligations require leveraged and inverse ETF to be considered
• Highly complex financial instruments need to achieve their objectives on a daily basis
• Performance over longer periods may vary
• Leveraged and inverse ETFs may be unsuitable for retail investors that desire to hold for longer than one trading session

Supervisory Procedures

• Appropriate product suitability analysis must be prepared
• Client-specific suitability analysis must be examined
• Sales materials must be accurate to the general public
• All laws and regulations must be observed

Principal Protected-Notes (PPNs) by Approved Persons

• Registered dealers need to be responsible in the sale of PPNs
• Regulators allow some PPNs to be sold by banks and related institutions
• All PPNs must be sold by registered dealers

RR Duel Employment

• RR's can work at a financial institution
• This allows these individuals the capability to distribute securities, some of which may have fees
• A large risk component can be mitigated by limiting these fees to a certain amount

Non-Arm's Length Investment Products

• Dealer members should be aware of regulatory concerns
• Involves conduct related matters, conflicts of interest, issuer scrutiny, and much more
• CIRO's expectations of dealer members are summarized into three steps

CIRO Expectations of Dealer Members

• Perform product due diligence on everything to be distributed
• Identify any conflicts and if they can be addressed
• Assess the stability of client orders by RR's

IIROC

• Targeted regulatory examinations at a sampling of dealer members to determine new product processes
• Issued Notice 10-0234 that highlights recommendations and key deficiencies
• Absence of clear definition of the new product
• Absence of an appropriate level of review that includes subject matter experts

Cases

• In order to ensure a client can maintain their investment objectives the RR needs to make sure their recommendations fall in line

New Issues and Prospectus Exemptions

• Important to state, an RR's job is to acknowledge a client's position in order to determine the proper course of action
• To best sell a product, you must understand how transactions run under specific conditions
• You must understand the details of such conditions, that also include any new prospects that fall in line with the prospectus

New Issues Equity

• Issuance called an initial public offering (IPO)
• The prospectus can best be seen as an investment contract
• Outlines facts in which purchasers can begin to base their decisions

Companies Issuing Additional Securities

• They are called reporting issuers
• A prospectus might be required but may be unavailable until an exemption
• Public access means less detail prospectus

Dealer Member Involvement

• May be involved in offering process and selling of equity
• Known as underwriting or when a dealer guarantees sales as a best efforts deal
• When a dealer purchases stocks the scenario is called a bought deal

Underwriting

• The definition of this can vary
• When a underwriter or group of underwriters purchase an entire offering it becomes a bought deal
• The investment firms risks its own capital, by chance

Preliminary Prospectus

• Before the final prospective must be filed in most provinces
• Statement that shares cannot also be sold or offers sold without a reciept

Form and Content on Prospectus

• Many laws harmonize with the content of a final prospectus
• Agents who distribute stock information need detailed contact records when sending prospectus

Activities During Waiting Period

• In the waiting period may solicit potential buyers
• Must provide information on securities when asked

A Material Fact

• To be included on the final prospective, to avoid conflicts
• Any sensitive data such as the value of a security is included

Prospectus Exemptions

• Can be a tool to have participation restricted to certain areas or territories
• This can affect loss of principal if not structured properly
• Requirements may vary

Exemptions Related to Raising Capital

• Can be associated with limitations or restrictions to resale based on original exemption
• In short, the rules can easily be subject to the below statements

Rules

• Financial strength can lead to greater investment
• Rules can be applied to institutions and firms

Private Offers

• Company that may have a set number of shares in the market
• Also may not be able to provide a standard prospective

Offering Memorandum

• The issuer needs to provide some information to the purchaser.
• If can be determined if the party has some right with the information

Crowdfunding Exemptions

• Has been set to help start-ups.
• Outline the standards of traditional exemption

Investor Limits in Crowdfunding

• Cannot pass a financial threshold
• In aggregate limits, a business cannot have a large fundraising total

Hot Issues and Private Placements

• Make a real allocation with securities sales to the the public
• Follow and uphold some requirements
• Client must be allocated first unless there has been no allocation on client's preference

Erica Case Study

• When action aren't taken the RR's can be questioned on procedures internally
• The act outside of the company guidelines should be addressed and recognized clearly with the appropriate personnel
• There should be trade oversight.
• There should be action for any non-compliance

Take-Over and Issuer Bids

• Must adhere to and know the processes when buyers purchase securities
• It also gives some guidance on offering proper advise

Take-Over Bids

• The goal is to obtain equity or securities of a company
• Securities act of provinces enforces some of these protocols

Early Warning Rules

• If a person is to retain more than 10% of shares the situation needs to be released to public
• Additional shares require releases until the aggregate holdings reach 20 percent
• Early warning legislation includes amendments to NI 62-103
• Take-over needs to include the offer for 105 days
• The offer or cannot take the shares if conditions do not apply

To Take Shares Certain Requirements Need to be Met

• 105 days have passed
• All other stipulations need to be met
• Majority need to be deposited

Withdrawal Rights

• If shares are subject to take-over shareholders may want to follow withdrawal
• Can only exist if prior to expiration, which can fall between 35 and 105 days

Issuer Bids

• The province has some regulatory powers
• There are many things an issue has to follow in order to become viable
• Need a valid third party valuation
• There is some exemption process depending on the situation

Normal Course Issuer Bids

• Must follow normal rules when following bids
• Exchanges need to prepared for this process

Summary

• Registered representatives must know everything relating to best serving their clients best
• There are several topics that RR's need to understand. Specifically take over bids and normal trade practices

Generate study notes from the above.