Securities Industry: Working with Clients

Working with Clients in the Securities Industry

• This chapter outlines the dealing and advising registration categories for dealer member employees in the securities industry.
• This chapter explains the proficiency requirements and permitted activities of Registered Representatives, Investment Representatives, Portfolio Managers, and Associate Portfolio Managers.
• This study material addresses the regulatory requirements and guidelines around marketing, advertising, and other types of communications with clients.
• Conflicts of interest, personal dealings with clients, and the rules regarding handling client data in accordance with privacy regulation are also discussed.

Introduction

• The securities industry is heavily regulated, with many rules regarding what is permissible when contacting clients.
• Regulations pertain to contacting clients by telephone calls and electronic communication, and to the distribution of sales literature and advertising.
• Communicating with new and prospective clients under the permitted conditions is the starting point of a compliant career. Requirements include standard business conduct obligations, such as knowing your client and the suitability of your product recommendations.
• Distributing materials requires care and is considered registrable activity by securities regulators and must be carried out in a specific fashion.
• Written materials recommending a specific security may be considered sales literature and should be properly authorized before distribution.
• Employees should ensure not to pass materials regarding securities on to clients without proper authorization.
• Internal use materials should not be shown to clients or divulged.
• Be mindful of the industry's detailed legislation and guidelines regarding what must be included in mutual fund sales literature.
• No information concerning mutual funds, should be distributed unless authorized by a person who is fully familiar with the regulatory requirements for mutual fund disclosure.
• Be aware of the rules regarding the management and disclosure of conflicts of interest, personal dealings with clients, and proper handling of client data.
• Registered employees in the securities industry must work in compliance with all regulations and within the limits of their registration category.

Registration Requirements

• The different categories of registration in the securities industry have different permitted activities and regulations.
• All registrants share strict regulations around communications with clients.
• When dealing with existing and prospective clients as a registered employee of a dealer member, good communication skills have key importance.
• Have a value proposition that you can clearly articulate to clients in compliance with industry regulations.
• National Instrument (NI) 31-103 requires that persons wishing to trade in securities or to advise on the purchase or sale of securities in Canada be approved and registered in one of the following two categories:
  • Dealing representatives
  • Advising representatives
• Representatives of an investment dealer that is a member of the Canadian Investment Regulatory Organization (CIRO) must be approved by CIRO before registering with the applicable provincial securities administrators as a dealing representative.

Common CIRO Registration Categories

• The most common CIRO registration categories for individuals employed at investment dealer members include Registered Representatives (RRs) and Investment Representatives (IRs).
• Both types of registrants must be registered to operate in the geographic location of their clients.
• CIRO must be notified of the customer type, whether retail or institutional, and the products the RR or IR will trade.
• Employees in both categories must state the number of hours they will work, and explain why if the number is less than 30 hours per week.
• Securities regulated have stringent requirements.
• Registrants must adhere to registered status terms and conditions as a privilege, and must be followed even if reasoning isn't understood.
• Dealing representatives of CIRO member firms must adhere to SRO rules and applicable provincial securities law.
• Dealer members may allow employees to engage in outside business activities under SRO rules if the applicable provincial regulator also allows it.
• Registrants must observe dealer member policies and procedures, which may or may not permit outside activities.
• The stricter of SRO rules and dealer member policies apply when policy conflicts with a rule.
• Securities Registrants occupation cannot bring industry into disrepute, so all outside activities should be disclosed and pre-approved from the dealer member.

Proficiency Requirements and Registration Categories

• Rules for the initial and ongoing proficiency requirements for RRs and IRs have been prepared by provincial securities administrators and CIRO.
• These determine time limits during which proficiencies remain valid, and establish proficiency requirements for both education and experience.

Registered Representatives

• Allowed to advise on the full range of equity and fixed-income securities products.
• Additional proficiency requirements are necessary for an RR to be able to solicit orders for or to advise on trades with respect to options, futures contracts, and futures contract options.
• An RR is often referred to as an investment advisor or broker, but those terms are not official registration categories.
• Roles as RR may encompass knowledge of individual securities, capital markets, economic cycles, the performance of securities within those cycles, and taxation issues.
• Allows investment advice provision and bridges the gap between order-takers and discretionary money managers.
• RRs can sell most products provided by a full-service dealer, unlike a dealing representative registered to sell mutual funds only.
• Extensive industry knowledge, communication skills, and understanding the ethical decision-making process are shared by successful RRs.
• Before recommending any product, registrants are subject to the Know Your Client (KYC) and Know Your Product requirements.

Registration Requirements for Registered Representatives

• Requirements to becoming a Registered Representative include:
• Successfully complete the Canadian Securities Course (CSC) and the Conduct and Practices Handbook Course (CPH), administered by the Canadian Securities Institute (CSI).
• The 90-day training period prohibits RRs from obtaining, taking, or soliciting orders for securities or advising on trades in securities and extends to electronic platforms and social media.
• Commission splits are not allowed as compensation during this period.
• However, the following activities are permitted during the 90-day period:
  • Gathering information from existing prospective clients on behalf of another RR.
  • Assisting clients with inquiries and giving quotes, providing that no client accounts are opened until fully registered.
  • Sending out introduction letters, inviting the public to seminars, and forwarding non-securities specific information.
  • Creating and research lists of potential clients for future follow-up work.
• A six-month period of supervision is required following approval as an RR, unless the RR/IR was previously approved for six months with a member of a self-regulatory organization (SRO) or a member of a recognized foreign SRO. To deal with retail customers, the Wealth Management Essentials (WME) is required in the 30-month requirements. The Wealth Management Essentials (WME) course must be successfully completed within 30 months after approval, failure to do so will result in immediate suspension. Maintaining one's licence is conditional on participating in the industry's Continuing Education (CE) program, both professional development and compliance portions
• Additional proficiency requirements are necessary for an RR to be able to solicit orders for or to advise on trades with respect to options, futures contracts, and futures contract options.
• Complete Derivatives Fundamentals/Options Licensing Course or Derivatives Fundamentals/Options Licensing Course to Deal in options trading.
• Complete the DFC and Futures Licensing Course to Deal in futures and futures options.

PMs (Portfolio Manager) and APMs (Associate Portfolio Manager)

• Full-service dealers have continued to move in the direction of providing holistic wealth management services to HNW clients.
• Advisor-managed accounts have experienced extremely rapid growth due to discretionary portfolio mgmt.
• PMs and APMs must meet proficiency requirements and demonstrate a high level of experience that is clearly relevant to discretionary portfolio activities.
• Must demonstrate strong research and analysis and portfolio construction skills with broad range of types of individual securities.
• CIRO takes the following approach to assess RIME for the purpose of PM/APM approval:
  • Assess each exemption application on its own merits and on a case-by-case basis.
  • Take a holistic approach in their review (i.e., there is no single factor that will disqualify an applicant).
  • Use descriptions that are unique to the applicant's case and provide specific, relevant information, rather than "boilerplate" wording that applies to all applicants from a particular firm.

Requirements for PMs

• Must successfully complete the CPH and Canadian Investment Manager designation, or CIM/CFA designation If the Canadian Investment Manager designation or CIM designation is completed:
  • At least four years of RIME; one year of which was gained within the three years before requesting approval acceptable to CIRO.
  • The CFA Charter is completed, at least one year of RIME within the three years before requesting approval acceptable to CIRO.

Requirements for APMs

• Successfully complete the CPH and Canadian Investment Manager designation, or CIM Designation, or Level 1 or higher of the CFA Program
• RIME acceptable to CIRO (2 years) within three years before requesting approval

Investment Representatives

• Registered solely to take or submit client orders for execution.
• Cannot provide clients with investment advice. As with the term RR, IR refers solely to CIRO member employees
• Under NI 31-103, IRs, like RRs, are registered provincially as dealing representatives.
• Proficiency requirements for IRs are similar to those for RRs, but not as extensive.
• Complete the CSC, the CPH, and a 30-day training program, as opposed to a 90-day program.
• IRs are subject to the six-month supervision and to the compliance portion of the CE requirements, but do not need to fulfill the 30-month WME.
• Serve as sales assistant or IR at an Order Execution Only firm/discount broker.

Sales Assistant

• Registered as IRs employed at full-service investment dealers to assist one or more fully registered RRs in managing their business.
• This role largely involves administrative tasks, such as organizing the RR's client records, the account application, and other client documentation.
• May speak with clients but is not permitted to give advice and may take unsolicited orders from clients to buy and sell securities.
• Strong organizational skills are important.
• Strong communication skills.
• Good industry knowledge is needed.
• Strong familiarity of back-office operations.
• This skill combination will allow sales assistants to multi-task/interrelate effectively with RRs, clients, and other departments.

IRs at Order Execution Only Firms

• Are registered to take orders from clients and submit them for execution.
• Must recognize when an order is beyond their authority and pass it on to someone licensed/supervisor.

Restrictions on non-registered staff

• SRO rules restrict activities of non-registered personnel- administrative assistants, office managers, and mailroom clerks.
• Functions restricted include opening client accounts, completing KYC info/making recommendations/soliciting securities transactions/completing client orders. However, may advertise services/deliver or receive securities/arrange appointments.
• Individuals enrolled in either the 30- or 90-day training program cannot engage in any activity furtherance of a trade
  • providing recommendations /opinions/advice re: securities as defined in provincial securities acts
  • soliciting, accepting, or processing any orders.
  • handling mutual funds. To Registered Representative within 18 months of initial approval and cannot transact in any non-mutual fund securities with anyone during the training period, but may receive a referral.
• A fit and proper test is run and registration reviews are made.

Continuing Education (CE) Requirements

• CE is vitally required to maintain the proficiency of the chosen field of expertise to stay abreast of product development, legal and compliance issue and emerging industry trends. CE must design and deliver their own professional development in accordance with CIRO's accreditation process, but can take courses from several sources ex CSI
• 20H professional/Development and 10h compliance are required/ 5h required with Canadian compliance issues
• Cycles with required program and dealer members document the proficency, and failure to complete can be suspended.
• In case of transfer, credits can be transferred to the new employer.

Communicating with the Public

• Registrants must be aware of what is/is not permitted with client contact.
• Ex CIRO and rules re: contacting clients on the phone, and what can or cannot be sen via mail/email/ the internet and how to represent the company for advertising perspective. The following communications have been specifically prohibited in many provinces:
  • No registrant is permitted to use the name of another registrant on signs or other advertisements, unless the other registrant gives authorization in writing or is a partner, officer, or agent of the registrant.
  • Registration certificates cannot be displayed by the registrant or the business location; course completion certificates may be displayed.
  • No registrant is permitted to represent that a securities administrator approved the investment merits of a security or the financial standing, fitness, or conduct of any registrant. CRTC has the telemarketing/National Do Not Call List (DNCL) and framework- establish day times, intro, records must subscribe to, and penalties.
• The anti-spam legislation (CASL) and similar rules must have express/opt-in commercial electronic messages (CEMs) by either express or implied consent.
• Must clearly identify the sender and have contact info. The provincial securities laws have materials with views of balance and products to the public must omit qualifications.

Electronic Advertising and Social Media

• Communication has difficulties from being controlled, but internet access is easier and faster from the social media sites.
• The regulators supervise as diligently if electronic no less delivered on harder/Traditional Additional CIRO(IIROC)
• Guidence 26000-21002- social media usage on Facebook/Twitter/ and YouTube. Compliance- must be ensured/applicable securities legislation for advertising.

Social Media Guidance

• Record keeping responsibilities Business activities, affairs, Content posts, transactions/ Twitter, Facebook. Material emailed, Communications materials
• Suitability recommendations- Through social or written must be followed according to rules.

Training materials- only restricted/prohibitive websites can be accessible depending on how competent the registrant is

• Orders and voice mail Discouraged for orders but informed of the risks if the trades cannot be traded at their intended request in real time.

Third-party/Communications and Research

• Activity of the media may consider the dealer has endorsed third-party and may result in regulatory and legislative requirements.

Sales Literature

Advertising should not take into accounts of other materials as commercials/commentaries/public promoting business for a product and/or strategy.

• The registrants typical material with news/company/ product such as new installment as well as prospects, all reports.
• Reports may have information in the company as wells as the business plans the strategies to manage and performance.
• One should be aware not to pass the information or be for "internal use accordingly" all correspondence with clients approval by personnel/retain the document/can´t create the ad material on your own.
• The dealer must provide someone authorized with the supervisor approval as part of functions must that regulatory adheres such as truthful Must create fair and balanced view/ and if the data is limited, do not produce with overstate or security

Mutual Fund Sales Communications

Rules have the permissible content of mutual fund advertising to contain:

• not misleading/ statements
• not conflict with annual information form like facts/prospectus for the fund.
• NI 81-102 - 1.4* Must be delivered with investor must contain fact of the key language as in page of manager on delivery must fulfill delivery requirements(Fund document fact)
• The purpose/fact Must fulfill with knowledgeable investor, or fund following historical/risks/fee data description

Performance Data

• Measurment of the distribution fund investment ex volatily any/communication that if contains and use/data from a communication Standard form (current of types and calculations NI 81-102 With address of sales with overall/ with communicate rule

It must contain:

• standard form
• return elements
• Under term prospectus securities reflection/ period
• Manage data/fund/obj similar fund.index average Clearly the change in performance measurement period Standard performance data (more up to date
• only rating independent contains Only independent recent

Under rating lowest Advertisment use is prohibited Changes may include, mgnt objectives/ changes/ market, data review be transparent on the influence.

Additional with those contain funds not grantee the indicate is past for future It does consider cost/payable/expenses

Dealing with Clients and Conflicts

• Have clients/manners/ handling the client data the way that it was in the start with the conflict data. Conflict in the party will be the divergence.
• The existing conflict is on existing-or have the possibility The 3rd party that in with, could possible conflict.
• A conflict may not and the can resolve as there in an impropriety.

For not identify the appropriated conflict and to avoid any equal way avoid conflict to take it the best interest. The fact should be addressed for compensation that requires for them by reporting

To know the interest. They must comply their product shelf

• Position and may will over more beneficial or not. Unless had disclosure prior during before deal.

It is requires and the be and outside company. The client´s dealings are general prohibited. The company accepts the value for client actions, unless had approaved. And set agreed within writing That the client cannot used/borrowed to unless a person ( Canada Income law)- family wise

Must all has client´s personal affairs The authority the follow the rules that are mandatory

• Report before heading outside that may the activity on them or on period under NI 3309
• Be known by you under assessed as interest the volunteer- not needed NRD- always to the determine

Cyber Security and Privacy Protection

• Gathering information (RR) to protect the data and building of the the Personal Information Protection and Electronic, Documents Act (PIPEDA).
• Those should collected/ use /disclosed.
• Unless they have consent that said that is needed or lawful.
• A conflict had by sharing information to use client- then analyst is breach the law
• The client should follow the data with responsible