Securities Industry: Dealing with Clients

• This section addresses how to deal with clients in the securities industry
• It explores the dealing and advising registration categories for dealer member employees
• The importance of registration and licensing in the securities industry is explained

Key Learning Objectives

• Understanding dealing and advising registration categories
• Understanding proficiency requirements and permitted activities for Registered Representatives, Investment Representatives, Portfolio Managers, and Associate Portfolio Managers
• Learning regulatory requirements and guidelines for marketing and advertising
• Understanding rules regarding conflicts of interest and personal dealings with clients
• Knowing to handle client data under privacy regulations

Registration Requirements of a Registered Representative

• Registration categories in the securities industry have varying permitted activities
• All registrants have strict regulations regarding communications with clients
• Good communication skills are key when dealing with clients
• Registrants must have a value proposition that is compliant with industry regulations
• NI 31-103 mandates approval and registration for those trading or advising on securities in Canada
• Representatives of investment dealers that are members of CIRO need CIRO approval before registering with provincial securities administrators
• The most common CIRO registration categories include Registered Representatives (RRs) and Investment Representatives (IRs)
• Both RR and IR registrants must operate in the geographical location of their clients
• There is a notification to CIRO about the customer type, as either retail or institutional, and the products registered representatives and investment representatives will trade
• Both representative types must state the number of hours they will work and explain why, if it's less than 30 hours per week

Regulations and Registrants

• Regulators impose stringent requirements on registrants
• Registered status is a privilege, requiring adherence to terms and conditions
• Dealer representatives of CIRO member firms must follow SRO and provincial securities laws
• Dealer members can allow employee engagement in outside business activities with provincial regulator approval
• Registrants must observe dealer member policies, where stringent option applies if policies conflict with a rule
• CIRO mandates disclosure and pre-approval for registrants engaging in other occupations that might discredit the securities industry
• Provincial securities administrators and CIRO have rules that define proficiency requirements for Registered Representatives and Investment Representatives
• The rules stipulate proficiency requirements for education and experience and determine periods of supervision
• These rules also set the time limits to keep proficiencies valid

Registered Representatives (RR)

• RRs may provide advice on the entire range of equity and fixed-income securities products
• RRs need additional proficiency to solicit orders or advise on options, futures, and futures contract options trades
• RRs are often known as investment advisors or brokers
• RRs must have industry knowledge on securities, markets, economic cycles, and taxation issues
• This knowledge allows investment advice and bridges the gap between order-takers and discretionary money managers
• Unlike a dealing representative registered to sell mutual funds, an RR has a broader scope
• RRs typically possess strong communication skills and understanding of ethical decision-making

Formal Training

• New RRs must meet specific requirements
• Completion of the Canadian Securities Course (CSC) and the Conduct and Practices Handbook Course (CPH) is required
• The CSI administers both of these courses

Ninety-Day Period

• Before fully registering as an RR, there is a ninety-day training period
• Contact with customers or prospects to obtain orders or advise on securities is prohibited during the training period
• This prohibition extends to electronic platforms and social media
• No commission splits are allowed during this period
• Activities that are permitted include gathering information from existing or prospective clients on behalf of RRs, completing account inquiries, and providing clients with quotes
• Creating and researching lists of potential clients for future follow-up is also permited

Supervision

• After approval, an RR is closely supervised by their supervisor
• The supervision is not required when Previously approved for six months with a SRO member/recognized foreign SRO

Requirements for Retail Customers

• To deal with retail customers Wealth Management Essentials must be completed in 30 months of approval
• Failure to complete WME will result in suspension until completion

Continued Training

• Participation in continuing education (CE) is a condition of license maintenance
• CE program portions are professional development and compliance
• Additional proficiency is required to solicit orders for or to advise on trades with options, futures contracts, and options on futures contracts
• Derivatives Fundamentals and Options Licensing courses are required to deal in options trading
• DFC and Futures Licensing Course needed to deal in futures and futures options

Portfolio Managers (PMs) and Associate Portfolio Managers (APMs)

• Dealers are moving to providing holistic wealth management services
• Individuals dealing with or providing discretionary portfolio management need approval as Portfolio Manager or Associate Portfolio Manager
• Portfolio Managers and Associate Portfolio managers must possess proficiency requirements
• High level of experience is required, along with relevant investment management experience (RIME)
• Strong research and analysis, as well as portfolio construction, are necessary for applicants
• RIME is assessed by CIRO through individual merits and holistic review using applicant-specific and relevant information

Registration Requirements for PMS

• Complete the CPH and Canadian Investment Manager designation, or a designation as a Chartered Investment Manager/Financial Analyst

Registration Requirements for APMS

• CPH, Canadian Investment Manager and Level 1/higher of the CFA Program completion required
• RIME of two years under CIRO acceptability within three years of applying also required

Investment Representatives (IRs)

• Investment Representatives only take or submit client orders for execution and cannot provide client investment advice
• Under NI 31-103, they are provincially registered as dealing representatives

IR Proficiency

• IR proficiency is similar to, but less extensive than, RRs
• IRs need to complete the CSC and CPH as well as a 30-day training program
• A six-month supervision period is also required
• They need to fulfill the compliance portion of CE requirements, but do not need to fulfill the 30-month WME requirement
• IRs may act as sales assistant or at an Order Executes firms and have the option role online or as a discount broker firm

Sales Assistants are

• IRs at full-service investment dealers
• They assist fully registered Registered Representatives in business management
• Mostly involves administrative tasks (organizing RR's client records,client documentation)
• Assistants may speak to clients, without giving advice
• Sales assistants can also take unsolicited orders from clients to buy and sell securities

Investment Representatives: Firms

• IRs take orders from clients, while properly licensed to someone or supervisor
• For example, only those licensed in a specific province can take orders from clients in that province
• Additional compliance, proficiency and licensing rules apply to accepting options orders

Restrictions on Non-Registered Staff

• SRO rules restrict the activities of non-registered personnel, for example, administrative assistants, from certain tasks
• Examples include opening client accounts, completing the Know Your Client (KYC) process on account applications, providing recommendations or soliciting
• Non-registered staff are permitted to advertise services, deliver securities, and arrange appointments

Limitations of Trading Programs

• Any enrolled party in the 30 or 90 day trainee program is not permitted to perform any activity in support of any trades
• Prohibited actions include advice, opinions, or solicitation or any activity, written/oral, with provincial securities acts
• Only those who deal in mutual funds, and work for a registered investment dealer, can deal with their existing mutual fund client list
• But they can only purchase and sell mutual funds

Referrals

• After the applicable training period, registrants must be fully registered as Registered Representative within 18 months from initial approval
• Those in a mutual funded registered individual can refer to a RR
• In cases with referrals, suitability to perform the task must be assessed

Canadian Investment Regulatory Organization (CIRO)

• CIRO registration staff conducts suitability reviews
• These reviews, known as fit and proper tests, are for individuals seeking CiRO approval or registration under securities legislation
• Reviews are conducted in jurisdictions where CIRO has been delegated
• Statutory authority for individual registration is done by a securities commission
• CIRO also evaluates terminations and regulatory and financial disclosures filed on the National Registration Database
• Best hiring practices are in place should firms regulated by CIRO want to adopt them

Initial Submissions

• Completed on Form 33-109F4 on behalf of registered individuals applying for registration first time through NRD
• Used for transferring or getting registered in jurisdictions

Notice Requirement

• A change of registration triggers submission in NRD through dealer members

Proper Fitness

• Encompasses integrity, competence and financial solvency for employees of financial firms
• Competence evaluations include having and maintaining appropriate proficiencies
• Regulators conduct registration review if problems found
• CIRO can refuse applications when applicants don't meet the requirements prescribed by the rules
• Rules include applicant meeting compliancy, qualifications, integrity, credit worthiness, training, and experience
• Applications otherwise not in the public interest may be in violation

Continuing Education programs

• Continuing education is needed to stay on top of legal, market, and product developments
• Dealer members can design programs with CIRO’s accreditation process, employees can use sources like CSI
• Online CIRO reporting lets dealer members find out requirements and reports employee completion

RR Continued Education

• Requirements have five hours on Canada and at least ten hours on compliance, with twenty in professional development, every two years
• Failure may result in fines, suspensions and record keeping from member dealers
• Your privilege includes certain obligations with CE maintenance
• Check with the compliance departments to ensure courses can be credited and completed

Communicating with the Public

• Registrants must be aware of client contact permissions under rules, including telephone, mail, email, or internet
• Rules govern contact and how clients can represent themselves with marketing and advertising
• Certain states have prohibited registrant use of another registrant name on signs or ads, displaying registrations, or claiming approval by securities administrator

Rules for Telemarketing

• CRTC has a framework for telemarketing calls including the National DNCL
• This establishes rule for times, intros, penalties, and maintenance
• This applies to third party orgs on the firms behalf
• List must be checked for telemarketing exceptions
• NDCL does not apply to telemarketing comms to businesses

Regulations

• CRTC helps enforce CASL
• It establishes rules for sending CEMs
• Businesses need to retain opt in consent
• Marketing and ads are under regulators in the industry
• Materials must have fair and balanced view of risks involved, communications must include qualifications as not to mislead

Electronic Advertising and Social Media

• The Internet provides easy fund access
• More difficult to control, social media is used, including Facebook, Twitter, and LinkedIn
• Must maintain diligence with written compliance or paperwork
• CIRO in notice addresses sites
• Ciro ensures compliance and securities legislation is being followed
• The advertisement faces applicable laws and oversight, subject to the rules
• Compliance includes business activities, client transactions and correspondence

Social Media Record keeping

• Social Media Business Records are financial affairs and client transactions, it should also include content posted online and e-mail messages or notes that summarize oral communications with clients
• Suitability should be considered using correspondence under CIRO rules
• Dealers evaluate adequacy and communication
• Access is a need when websites prohibit compliant supervision
• Restrict use as in past or to only registrants with training on firm's policies

Voicemail

• Acting on instruction leads to price variations and inconsistent intent
• Only using sites for business with mindfulness
• Consider the media activity with consulting for approval from you

General Regulations

• Includes regulations for sales literature
• CIRO rules for advertising is any publicity or marketing which could create strategy
• Information about investments, like products or research, are included, and even preliminary releases for newly issues securities

Reports & Disclosure

• Ensure not all info your dealer member provides is passed on to clients
• Need documents prepared with proper suitability and care to clients
• Must be approved by supervisory personnel and be retained

Member Standards

• Designate a supervisor that meets the following like fair material standards
• Cannot contain opinions or forecasts under the proper labelled, unjustified results, and not include potential client risks

Funds and Communications

• Governed by rules in NI 81-102, summarized below
• Sales communications for funds cannot contain untrue or misleading statements with Fund facts document
• The above document should have plain language and cover key information about funds
• They must be accessible on a funds website should be delivered prior to purchase, satisfying delivery requirements
• Fund facts should help investors understand investment decision
• No more than two pages length with a language easy to understand
• Fund info should describe items such as the holdings or historical data

Performance of Use Data

• Addressed by investment performance measures and metrics found in NI 81-102
• Cannot mislead, must include any other performances prominently in sales communication
• Needs must have both the element of return and the funds under common management, the period calculations must also be clearly labelled
• Lowest ratings used must be independent of one, if rated by more than one, you must not use in broadcast advertisements
• There might be material changes to the funds, such as fees, objectives of investments or funds status, for the performance period

Additional Warnings

• Material includes potential investors
• Data for performances, indicated rates of return, cannot guarantee
• Should be provide clarifications and cannot mis represent, and must have clearly been explained and labeled as such

Dealing with Clients

• You must properly handle client data and be aware of conflict of interest rules
• A conflict of interest occurs when divergent parties' interests clash
• Any materials under conflict that are potentially unfair, inequitable, cannot be used

Conflict of Interest

• Part 13 of NI 31-103 says it requires firms and individuals to identify and address, including the best interest of the client, when is conflict of interest considered
• Identification can't be used unless it is addressed with avoidance
• RR must disclose company or their position of influence

Financial Dealings

• Limited based on CIRO regulations
• You cannot accept cash from any activities you do on their behave
• Consent is required and not entering to an agreement, no borrowing from clients, must not acting as a power of authority in the situation

Outside Activities

• SRO rules should be met for approval and time period

Accounts and Records

• Written permission required on records or accounts at other firms
• Accounts need be reviewed or be non customer type

Cybersecurity & Privacy

• Paramount importance to treat info in accordance with obligations and with PIPEDA
• Disclose needs an client consent with limits with a third party

Jerome: Ethical RR Case Study

• Violated private client's confidentiality, and other clients

Cybersecurity

• Cybersecurity is of growing concern, similarly with money laundering
• Enterprise-wide solutions require a threat to operate as a going concern
• Has issued best practices and provides resources
• Cybersecurity incidents may report in day over discovery or 30 with investigations needed