Branch Compliance Officer's Course PDF - Canadian Securities Institute

BRANCH COMPLIANCE OFFICER’S COURSE Credentials that matter. ® THE CANADIAN SECURITIES INSTITUTE The Canadian Securities Institute (CSI) has been setting the standard for excellence in life-long education for financial professionals for more than 45 years. CSI is part of Moody’s Analytics Training and Certification Services, which offers education programs and credentials throughout the world. Our experience training over 800,000 global professionals makes us the preferred partner for individuals, financial institutions, and regulators internationally. Our expertise extends across the financial services spectrum to include securities and portfolio management, banking, trust, and insurance, financial planning and high-net-worth wealth management. CSI is a thought leader offering real world training that sets professionals apart in their chosen fields and helps them develop into leaders who excel in their careers. 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Identifiers: ISBN 978-1-77176-632-6 (print) ISBN 978-1-77176-633-3 (ebook) First printing: 2007 Revised and reprinted: 2010, 2013, 2015, 2019, 2021, 2023 Copyright © 2023 by Canadian Securities Institute Course Introduction THE BRANCH COMPLIANCE OFFICER’S COURSE The Branch Compliance Officer’s Course has two related purposes. The first purpose is to prepare participants to pass a proficiency examination to establish their fitness for a position as the branch compliance officer (BCO) within a branch of a mutual fund dealer.1 In that position, they will be responsible for compliance with the requirements of the Mutual Fund Dealers Association (MFDA). The second purpose is to provide the knowledge and skills needed to effectively manage and supervise an operating branch of a mutual fund dealer that is affiliated with a financial institution. The course will help participants to ensure that clients receive high-quality service and informed advice when considering buying or redeeming mutual funds. Furthermore, they will learn how to make sure that the firm’s sales representatives2 are fully trained in product and market knowledge and are always in compliance with securities regulations. After completing the course and the registration examination, participants who meet the proficiency requirements will be prepared to handle the day-to-day administration of a small, medium, or large branch office of a mutual fund dealer. They will have demonstrated an understanding of the legal, compliance, and business implications of managing the branch office and will be well-versed in the rules and ethical standards of business conduct and their legal responsibilities as a BCO. Finally, they will know how to coordinate and administer compliance at the sales representative and branch office level and how to deal effectively and directly with the clients of the mutual fund dealer. THE STRUCTURE OF THE COURSE This course focuses on the role and responsibilities of the BCO of a mutual fund dealer operating within a branch of a financial institution. The BCO’s role relates to the compliance function and the normal administration of the branch’s mutual fund activities. The chapters in the course follow a logical sequence outlining the advisory, supervisory, and compliance processes associated with providing proper service through a branch. They address the rules relating to the client’s contact with a sales representative, the relationship between the BCO and the client, the sales representative’s relationship with the BCO, and the BCO’s relationships and dealings with the supervisory and compliance officers at the head office. 1 Throughout this text, the term branch compliance officer, or BCO, refers to the compliance officer of the branch of a mutual fund dealer operating within a branch of a financial institution. 2 Throughout this text, the term sales representative refers to a qualified, registered mutual funds salesperson. National Instrument 31-103 refers to all persons acting in a registered sales capacity as a dealing representative. © CANADIAN SECURITIES INSTITUTE ii BRANCH COMPLIANCE OFFICER’S COURSE The course is divided into ten chapters within eight sections. Each section represents a learning domain. SECTIONS A The Role of a Branch Compliance Officer Chapter 1 B Mutual Funds Industry Regulation Chapter 2 C Registration Requirements Chapter 3 D Account Opening Chapter 4 E Disclosure and Suitability Requirements Chapters 5 and 6 F Mutual Funds Performance Evaluation Chapter 7 G Dealing with Complaints Chapter 8 H Sales Representatives Supervision and Control Systems Chapters 9 and 10 KEY CHAPTER FEATURES Each chapter is organized around the following key learning features: Icons Features Description Learning Objectives The learning objectives for each chapter reflect what you will be able to accomplish after studying that chapter. Be sure to read the learning objectives before you begin a chapter. Key Terms A list of key terms is provided at the start of each chapter. Understanding the terminology and jargon of the mutual fund industry is an important part of your success in this course. Each key term is boldfaced in the chapter and appears in the glossary included at the end of the textbook. Online Learning Each chapter has learning activities accompanying the text that are Activities available online. To access the online components of your course, log in to your Student Profile at www.csi.ca. Did You Know? This feature provides important information, including facts, statistics, clarifications, and insights, that supports the chapter’s content. Make sure you read the concise material covered in the Did You Know? features to keep your knowledge up to date and be fully prepared to write your exams. Dive Deeper This feature recommends external resources that can provide deeper insight into the content. Further reading in this regard can help you stay informed about the financial markets and the industry to sharpen your understanding and expand your knowledge. By making a habit of staying informed, you will find it easier to reach your goal of becoming a competent and trusted participant in the securities industry. Review Questions Each chapter has a series of multiple-choice questions that allow you to test your knowledge of the subject. The review questions for each chapter are available in the online course. © CANADIAN SECURITIES INSTITUTE COURSE INTRODUCTION iii YOUR JOURNEY THROUGH THE COURSE Although each student will develop an individual technique for studying, you may find the suggestions below helpful. You may be more familiar with some areas of knowledge than others, but we advise strongly against skipping any material you think you already know. You can read the material in any order you choose, depending on your needs and level of familiarity with the content. However, we recommend instead that you avoid shortcuts and read all chapters in the sequence given. DID YOU KNOW? When you practice with our various assessment tools, keep in mind that your journey is not about finding the right answers and memorizing them. Rather, it is about knowing how to arrive at the right answers. Three crucial behaviours will help you succeed: Build good study habits. Turn the page only after you understand the concept. Practice what you learned to assess your knowledge. With this method, you should reap the rewards of your hard work and complete the course successfully. Your registration includes access to online review questions, which are designed to reinforce the textbook content and help you assess your knowledge. © CANADIAN SECURITIES INSTITUTE BRANCH COMPLIANCE OFFICER’S COURSE Content Overview 1 The Role of a Branch Compliance Officer 2 Mutual Funds Industry Regulation 3 Registration Requirements 4 Account Opening 5 Disclosure Requirements 6 Suitability Requirements 7 Mutual Funds Performance Evaluation 8 Dealing with Complaints 9 Sales Representative Supervision 10 Supervisory and Control Systems © CANADIAN SECURITIES INSTITUTE BRANCH COMPLIANCE OFFICER’S COURSE vii Table of Contents 1 The Role of a Branch Compliance Officer 1 3 INTRODUCTION 1 3 THE BRANCH COMPLIANCE OFFICER’S ROLE 1 3 Business Responsibilities 1 3 Compliance Responsibilities 1 4 Efficient Time Management 1 4 Delegation of Supervisory Tasks 1 4 Managing Main and Remote Branch Systems 1 5 PHYSICAL STRUCTURE OF THE BRANCH 1 5 THE RELATIONSHIP WITH THE HEAD OFFICE AND REGIONAL COMPLIANCE OFFICER 1 6 STAFF TRAINING 1 8 SUMMARY 2 Mutual Funds Industry Regulation 2 3 INTRODUCTION 2 3 SECURITIES REGULATION 2 3 Registration 2 3 Disclosure 2 3 Enforcement 2 4 National Instrument 81-102 and Companion Policy 81-102CP 2 4 National Instrument 31-103 2 4 PROVINCIAL AND TERRITORIAL SECURITIES ACTS 2 5 THE CANADIAN SECURITIES ADMINISTRATORS 2 5 SELF-REGULATORY ORGANIZATIONS 2 6 ANTI-MONEY LAUNDERING AND ANTI-TERRORIST FINANCING LAWS 2 9 Cross-Border Currency and Monetary Instruments Reporting Regulations © CANADIAN SECURITIES INSTITUTE viii BRANCH COMPLIANCE OFFICER’S COURSE 2 11 PURCHASERS’ STATUTORY RIGHTS 2 11 Right of Withdrawal 2 12 Right of Rescission 2 12 THE STANDARDS OF CONDUCT 2 15 Enforcing Standards of Conduct 2 16 Cybersecurity and Awareness 2 16 CLIENT FOCUSED REFORMS 2 16 Changes to Conflict-of-Interest Rules 2 17 RULES FOR TELEMARKETING AND THE NATIONAL DO NOT CALL LIST 2 18 Canada’s Anti-Spam Legislation 2 19 SUMMARY 3 Registration Requirements 3 3 INTRODUCTION 3 3 SALES REPRESENTATIVES REGISTRATION PROCESS 3 3 QUALIFICATION AND REGISTRATION OF SALES REPRESENTATIVES 3 3 Sales Representatives Registration Requirements 3 4 Registration Time Limits 3 4 Sales Representatives Registration 3 5 SPECIFIC RESTRICTIONS ON SALES REPRESENTATIVES 3 6 INVESTMENT INDUSTRY REGISTRATION CATEGORIES 3 6 Categories of Registration for Securities Dealers 3 6 Categories of Registration for Individuals 3 7 Outside Activities 3 7 TRANSFER OF REGISTRATION 3 8 POST-REGISTRATION REPORTING AND COMPLIANCE RESPONSIBILITIES 3 8 Notice of Change 3 9 CONTINUING EDUCATION FOR SALES REPRESENTATIVES 3 10 MONITORING SALES REPRESENTATIVES 3 11 SUMMARY © CANADIAN SECURITIES INSTITUTE TABLE OF CONTENTS ix 4 Account Opening 4 3 INTRODUCTION 4 3 BEFORE OPENING AN ACCOUNT 4 3 THE CLIENT AND THE REGISTERED SALES REPRESENTATIVE RELATIONSHIP 4 4 ACCOUNT OPENING AND ORDER FORMS 4 5 COMPLETING THE ACCOUNT OPENING FORM 4 7 KNOW YOUR CLIENT INFORMATION 4 7 The Key Aspects of KYC Information 4 10 Refusal to Supply KYC Information 4 10 KYC Extensions and Special Documentation 4 11 ACCOUNT TYPES 4 11 Non-Registered Accounts 4 11 Registered Accounts 4 11 Tax-Free Savings Accounts 4 12 Corporations 4 12 Partnerships 4 12 Estates and Trusts 4 12 Minors’ Accounts 4 13 Investment Clubs 4 13 School Boards, Public Utilities, Lodges, Societies, and Houses of Worship 4 14 ACCOUNT PROTECTION 4 14 ANTI-MONEY LAUNDERING AND ANTI-TERRORIST REQUIREMENTS 4 15 FOREIGN ACCOUNT TAX COMPLIANCE ACT 4 15 POWERS OF ATTORNEY 4 16 INTERNAL CONTROL SYSTEMS AND PROCEDURES 4 17 UPDATING CLIENT INFORMATION 4 18 Client Transfers 4 19 SUMMARY © CANADIAN SECURITIES INSTITUTE x BRANCH COMPLIANCE OFFICER’S COURSE 5 Disclosure Requirements 5 3 INTRODUCTION 5 3 DISCLOSURE REQUIREMENTS AT BRANCH LEVEL 5 4 Disclosure of Separate Entity 5 4 Disclosure of No Deposit Insurance Coverage 5 4 Disclosure of No Financial Institution Guarantee 5 5 Disclosure of Fluctuating Net Asset Values and Yields 5 6 FUND FACTS AND OTHER DOCUMENTS TO DELIVER 5 10 ADDITIONAL DISCLOSURE REQUIREMENTS 5 11 Disclosure of CIPF Coverage Policy 5 11 Leverage Disclosure 5 12 Past Performance Disclosure 5 12 Relationship Disclosure 5 13 Referral Arrangement Disclosure 5 13 Pre-Trade Disclosure 5 14 Client Relationship Model Disclosure 5 15 Dispute Resolution Disclosure 5 15 THE REQUIRED FORM OF DISCLOSURE 5 16 MAINTAINING EVIDENCE THAT DISCLOSURES HAVE BEEN PROVIDED 5 17 SUMMARY 6 Suitability Requirements 6 3 INTRODUCTION 6 3 SUITABILITY 6 4 Suitability and Redemption Orders 6 5 Acceptability of Orders that are Inconsistent with Recommendations or Asset Allocation Models 6 6 Unacceptable Trades 6 7 SUITABLE INVESTMENTS 6 7 SOLICITED AND UNSOLICITED ORDERS 6 8 Solicited Orders 6 8 Unsolicited Orders © CANADIAN SECURITIES INSTITUTE TABLE OF CONTENTS xi 6 9 THE USE OF LEVERAGE 6 10 Know Your Client and Leverage 6 11 SUITABILITY AND REASONABLENESS 6 11 Important Note 6 12 SUMMARY 6 13 APPENDIX 6.1 – SAMPLE INVESTOR QUESTIONNAIRE 7 Mutual Funds Performance Evaluation 7 3 INTRODUCTION 7 3 PRICE OR NAVPU DETERMINATION 7 3 Offering or Purchase Price 7 4 Redemptions 7 4 TAXATION OF MUTUAL FUND INCOME 7 5 Suitable Tax Advice 7 5 PERFORMANCE MEASUREMENT 7 6 Calculating Rates of Return 7 7 Ex-Dividend Day Price Adjustments 7 9 Risk or Volatility 7 10 Benchmarks 7 11 Combined Performance Measures 7 11 Performance Measures – Uses and Abuses 7 11 Compounded Rate of Return 7 14 EFFECT OF PAYMENT OF DISTRIBUTIONS ON CLIENT’S ACCOUNT 7 17 SUMMARY 8 Dealing with Complaints 8 3 INTRODUCTION 8 3 CLIENT COMPLAINTS 8 4 The Cause of Client Complaints 8 6 Acknowledgement Letter and Client Complaint Form © CANADIAN SECURITIES INSTITUTE xii BRANCH COMPLIANCE OFFICER’S COURSE 8 6 REPORTING A CLIENT COMPLAINT 8 6 MORE SERIOUS COMPLAINTS 8 6 Regulatory Considerations 8 7 Litigation 8 7 Ombudsman for Banking Services and Investments 8 7 COMPLAINT RESOLUTION 8 7 PROBLEM CLIENTS 8 7 Clients Who Abuse the Right of Withdrawal 8 8 Frequent Trader Clients 8 9 SUMMARY 9 Sales Representative Supervision 9 3 INTRODUCTION 9 3 SUPERVISING THE RELATIONSHIP BETWEEN THE CLIENT AND THE SALES REPRESENTATIVE 9 3 The Use of Affiliated Brokers 9 4 Soft-Dollar Transactions 9 4 CONFIDENTIALITY 9 4 Guidelines for Protecting Confidential Information 9 5 MUTUAL FUND PERFORMANCE COMMUNICATIONS 9 5 Need for Standard Performance Data 9 5 Funds with Records of Less than One Year 9 6 Past Performance Disclosure 9 6 Future Price or Value 9 6 Performance Graphs and Charts 9 6 Use of Comparisons 9 7 DESCRIBING FEES AND LOADS 9 8 SUPERVISING THE RATES OF RETURN COMMUNICATIONS TO CLIENTS 9 8 CLIENT ACCOUNT PERFORMANCE REPORTING 9 9 UNACCEPTABLE SALES PRACTICES © CANADIAN SECURITIES INSTITUTE TABLE OF CONTENTS xiii 9 9 NON-REGISTERED SALES STAFF PROHIBITED ACTIVITIES 9 10 Allowable Activities for Non-Registered Sales Staff 9 10 REGISTERED SALES STAFF PROHIBITED ACTIVITIES 9 10 Discretionary Trading 9 10 Selling Mutual Funds to Non-Residents 9 11 Short-Term Trading 9 11 Market Timing 9 11 Late Trading 9 11 Improper Orders 9 12 ORDERS SUPERVISION 9 12 Permitted Orders 9 12 Transmitting the Order 9 13 Telephone Orders 9 14 Electronic Transmittal of Orders 9 14 Written Orders 9 14 Trading Error Corrections 9 14 Client Orders and Instructions 9 14 SALES PRACTICES SUPERVISION 9 15 DISCLOSURE OF CONFLICTS OF INTEREST 9 16 SUMMARY 10 Supervisory and Control Systems 10 3 INTRODUCTION 10 3 CONTROL SYSTEM TO ENSURE REGISTRATION OF SALES REPRESENTATIVES 10 3 CONTROL SYSTEM FOR DISCLOSURE 10 4 CONTROL SYSTEM FOR LEVERAGE DISCLOSURE 10 5 CONTROL SYSTEM FOR ENSURING NEW CLIENT INFORMATION IS COMPLETE AND ACCURATE 10 6 REPORTING AND COMPLIANCE WITH RESPECT TO CLIENT ACCOUNT INFORMATION 10 6 CONTROL SYSTEM FOR PERIODICALLY UPDATING CLIENT INFORMATION © CANADIAN SECURITIES INSTITUTE xiv BRANCH COMPLIANCE OFFICER’S COURSE 10 7 STANDARDS OF SUPERVISION 10 8 Branch Office Supervision 10 8 Head Office Supervision 10 8 Branch Review Requirements 10 9 THE INTERNAL BRANCH SALES CHECKLIST 10 10 BUSINESS AND ETHICAL RESPONSIBILITIES CHECKLIST 10 12 SUMMARY G Glossary © CANADIAN SECURITIES INSTITUTE The Role of a Branch Compliance Officer 1 CONTENT AREAS The Branch Compliance Officer’s Role Physical Structure of the Branch The Relationship with the Head Office and Regional Compliance Officer Staff Training LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1 | Identify and perform the branch compliance officer’s responsibilities and duties. 2 | Describe the legal obligations of a mutual fund dealer when it operates within a branch of a financial institution. 3 | Establish a regular series of staff sales communication and briefing sessions. © CANADIAN SECURITIES INSTITUTE 1 2 BRANCH COMPLIANCE OFFICER’S COURSE KEY TERMS Key terms are defined in the glossary and appear in bold text when they first occur in the chapter. disclosure mutual fund dealer Know Your Client order mutual fund registered sales representative © CANADIAN SECURITIES INSTITUTE CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 3 INTRODUCTION The purpose of this chapter is to provide an overview of the responsibilities, duties, and relationships of a branch compliance officer (BCO) and to examine the concepts and information a BCO should know, including the principles and sources of securities regulation. As BCO, you are responsible for ensuring that the mutual fund dealer activities at your branch are conducted properly. You must see to it that the accounting, audit, and communication systems are functioning properly and are adequately maintained; that the physical structure of the branch conforms to good business practices and applicable rules and regulations; and that all marketing materials contain the required disclosures. You are also responsible for explaining and implementing the policies and procedures that set out what non-registered staff may and may not do and say with respect to mutual fund sales activities. THE BRANCH COMPLIANCE OFFICER’S ROLE As BCO of a mutual fund dealer, you have two types of responsibilities: specific business (or operating) responsibilities and general compliance responsibilities. BUSINESS RESPONSIBILITIES Your business responsibilities may include the following specific duties: Carrying out the day-to-day administration of the mutual fund activities within the branch Overseeing and managing the branch to make sure that clients know they are dealing with the mutual fund dealer and not an affiliated financial institution when purchasing mutual funds Ensuring that sales representatives have received appropriate internal and external training, including product knowledge updates through sales meetings or other means Dealing directly with clients Handling client complaints COMPLIANCE RESPONSIBILITIES Your compliance responsibilities include the following duties: Ensuring that all sales representatives comply with the dealer’s policies and procedures, which should reflect applicable legal and regulatory requirements Enforcing internal control processes for client disclosure requirements Ensuring that only sales representatives conduct mutual fund transactions Enforcing and monitoring compliance with the Know Your Client (KYC) rule and suitability requirements Liaising with your head office and with your regional compliance officer (RCO), who is your immediate designated contact for compliance-related issues and problems The organizational structures of different mutual fund dealers may vary. Business and compliance responsibilities are described in detail later in this course. © CANADIAN SECURITIES INSTITUTE 1 4 BRANCH COMPLIANCE OFFICER’S COURSE DID YOU KNOW? A BCO is often referred to as a branch manager in securities legislation. The terms “branch compliance officer” and “BCO” are used to distinguish the role from that of a branch manager in the banking context, although a single individual might act in both capacities. The term “mutual fund sales representative” describes an individual who is registered with a securities regulator in a capacity that permits him or her to sell mutual fund securities, but no other types of securities. EFFICIENT TIME MANAGEMENT As the BCO, you are responsible for multiple, and often competing, daily and monthly tasks. You must be able to manage your time effectively so that you are in control of all the demands of your position, rather than controlled by them. The following guidelines will help you with time management: Set goals and plan your day. Determine your priorities. Eliminate low-payoff activities by making sure staff know where to go to get answers; it must not always be the BCO. Identify activities that may be eliminated, delegated, or reduced. Identify the few items that must always be done promptly. Compare experiences or challenges with other BCOs at similar-sized branch offices or in similar situations. DELEGATION OF SUPERVISORY TASKS As the BCO, and in accordance with your dealer’s requirements, you may designate, in writing, a qualified assistant or alternate BCO who will supervise during your absence or where branch size and volumes require it. The assistant must also be familiar with all policies and procedures, and his or her function must be communicated to all sales representatives. Written copies of the delegations should be kept on file for regulatory and head office audit purposes. Anyone designated as an assistant or alternate BCO must be qualified to perform the required tasks. It is expected that tasks will be delegated only to individuals with the same proficiency as the BCO. In certain limited circumstances, it may be acceptable to delegate certain tasks to someone who has not satisfied the equivalent proficiency requirements as long as they have sufficient training, education, or experience to perform the delegated function. Activities must never be delegated unless the designated person understands the purpose of and is fully qualified to handle the tasks given to them. There must be ongoing monitoring by the BCO to ensure that the designated person is performing the delegated activities correctly. Delegations of supervisory tasks must be in writing to avoid any misunderstanding between parties. Although a task may be delegated, the ultimate responsibility remains with the BCO. As BCO, you must take reasonable steps to ensure that all delegated tasks are completed promptly and thoroughly by the designated individual. MANAGING MAIN AND REMOTE BRANCH SYSTEMS The accounting, audit, and communication systems are normally installed or designed by the head office of your financial institution or mutual fund dealer. It is your job to ensure that they are functioning properly and are adequately maintained. Accounting and recordkeeping systems, account opening, client complaints, audit systems, audit trails, mail, communication systems, and electronic data processing systems all fall into this category. © CANADIAN SECURITIES INSTITUTE CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 5 In addition, as BCO, you may have other branches to supervise, typically small branches with a limited number of sales representatives. Under MFDA Policy No. 2, mutual fund dealers with such arrangements must maintain detailed records of BCOs and the branches and sub-branches they are responsible for supervising. Where supervisory tasks and functions associated with a location are divided among two or more individuals at the mutual fund dealer, the division in terms of who is responsible for performing which supervisory tasks or functions must be clearly documented. For example, a mutual fund dealer may centralize trade reviews and new accounts approval at the BCO’s main branch while assigning responsibility for reporting complaints to head office to staff at the remote branch. As the BCO you should understand and acknowledge in writing your responsibility at your location and any remote locations you supervise. PHYSICAL STRUCTURE OF THE BRANCH As BCO, you are responsible for ensuring that the physical structure of the branch conforms to both good business practices and applicable legislation. Good business practice means that the branch should have the appropriate appearance and an image that instils confidence in prospective clients. Branch compliance officers and registered sales representatives must ensure that clients are made aware of the identity of the dealer they are dealing with through the use of signage, business cards, and other means. Clients must understand that, when they purchase mutual funds within a branch of a financial institution, they are dealing with a mutual fund or securities dealer that is separate from the financial institution. It must be made clear that the funds are not guaranteed by the institution or covered by deposit insurance and that they will fluctuate in terms of value and returns. To ensure that the clients understand, they must be advised in writing and must acknowledge having read the written disclosure. As BCO, you must also ensure that a sales representative in a shared office space does not make it a requirement for a client to purchase any other product or service or invest in any other investment as a condition of purchasing a particular product or continuing to receive a particular service of the financial institution. THE RELATIONSHIP WITH THE HEAD OFFICE AND REGIONAL COMPLIANCE OFFICER An important aspect of the client service process is the BCO’s close relationship with the RCO and the mutual fund dealer’s head office. You are the liaison with the dealer’s head office and are responsible for the registration of staff, mutual fund sales, order-taking and order-processing functions, client complaints, and the dealer’s compliance process. The compliance structure of mutual fund dealers varies from one institution to another. Typically, there is a head office compliance officer (HCO) who is a senior officer of the mutual fund dealer. You may communicate from time to time with the HCO, but only under special circumstances. Most of your communications will be with the RCO or district compliance officers. The RCOs are responsible for compliance with mutual fund regulatory requirements within the designated district or region. Branch compliance officers report to and assist the RCOs in their compliance responsibilities. National Instrument 31-103 requires dealers to establish a system of controls and supervision to provide reasonable assurance that the dealer and individuals acting on its behalf comply with securities legislation and manage risks associated with its business. Typically, once registered as BCO, you will need to ensure that any changes to your status or the status of sales representatives assigned to your branch location are immediately communicated to the RCO. NI 31-103 is discussed in detail later in this course. © CANADIAN SECURITIES INSTITUTE 1 6 BRANCH COMPLIANCE OFFICER’S COURSE STAFF TRAINING Staff training and briefing sessions should be held regularly to review important topics such as disclosure, sales communications, compliance, and behavioural issues and to check whether internal control systems are functioning properly. It is your responsibility as BCO to hold these sessions and make sure sales representatives are up to date with the latest information in the industry. The topics that can be presented for these regular sessions are as follows: Functions of registered Review the allowable and prohibited activities of non-registered and registered staff and non-registered at regular meetings. staff You may also periodically circulate a memorandum in which you set out allowable and prohibited functions for non-registered employees. Account Review account documentation requirements, including identity verification documentation requirements. Order-taking and Review the manner in which orders are collected and transmitted. transmittal Reiterate that orders must be transmitted immediately. Instruct your sales representatives to advise clients about the dealer’s policies on order executions and about the possibility that their order could be delayed. Review the rule restricting inter-provincial phone calls to purchase mutual funds. Review the order-taking process, including the requirement that your sales representatives repeat orders back to the client. Maintaining KYC Review factors that indicate a material change in the client’s circumstances, which information may include: Securities received into the client’s account by way of deposit or transfer Change of address or marital status change Employment change or retirement A change in the sales representative responsible for the account Confirm that the sales representative conducts periodic suitability reviews and uses the review discussion as an opportunity to ask the client whether there are any material changes in his or her circumstances. Ban on discretionary Make sure your sales representatives understand that unauthorized or discretionary trading trading is a forbidden practice that could (and probably will) lead to dismissal. Forward pricing of Make sure the sales representatives can clearly explain to their clients how the mutual funds forward pricing aspect of mutual funds works. Advertising and Remind the staff that all advertising and promotional materials, including promotions prospecting letters, must be approved by head office. Client complaints Discuss the process for dealing with client complaints. © CANADIAN SECURITIES INSTITUTE CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 7 Leveraged trades Discuss the implications of clients using borrowed funds to make investments and the additional due diligence required. Discuss the need to ascertain a client’s full comprehension of the risks of a leveraged purchase of mutual funds. Performance Review mutual fund performance criteria, including the requirement that the criteria and sales standard performance data supplied to clients is current and that the use of past communications performance is appropriately disclosed. Discuss the fact that the only performance data model portfolios and portfolio mixes that may be used are those prepared at head office. Unacceptable trades Discuss the distinction between suitable, acceptable, and unacceptable trades. Review the procedure for giving cautionary advice on an acceptable trade, including the need to ascertain that the client understands the cautionary advice and has signed the caution form. Discuss the process for handling unacceptable trades. Discuss the analytical process to follow when a client’s request to switch mutual funds has no apparent investment benefit for the client. Disclosure Discuss the disclosure documents that must be provided to clients before they can purchase a mutual fund, and explain how to maintain evidence that these documents have been provided to clients. Fees and loads Clarify the distinction between no-load and load in conjunction with trailer fees (if applicable). Discuss the fees with clients before they purchase a fund, as required under the Client Relationship Model. This can generally be achieved by providing the fund facts document and reviewing the associated fees with the client at the time of the sale. Appropriate behaviour Review all aspects of appropriate sales representative behaviour, including the need to keep client information confidential. Approved mutual fund Review the approved product list with your sales representatives, and make sure dealer products they understand the product offering. Requests from non- Discuss the process for dealing with trade requests and requests for information residents from non-residents of Canada. Developments Discuss any new products, regulatory requirements, and developments applicable to your operations, along with any questions you have. © CANADIAN SECURITIES INSTITUTE 1 8 BRANCH COMPLIANCE OFFICER’S COURSE SUMMARY Now that you have completed this reading, you should be able to meet the following objectives: 1. Identify and perform the branch compliance officer’s responsibilities and duties. The BCO of a mutual fund dealer has two types of responsibilities: specific business responsibilities and general compliance responsibilities. The BCO may designate an assistant or alternate BCO who has the qualifications and required proficiency to perform the BCO’s tasks during the BCO’s absence. 2. Describe the legal obligations of a mutual fund dealer when it operates within a branch of a financial institution. Mutual fund dealers operating within a branch of a financial institution such as a bank or trust company must make it clear to clients of the institution that the mutual fund dealer is a separate entity. 3. Establish a regular series of staff sales communication and briefing sessions. Staff sales communication and briefing sessions provide an excellent opportunity for the BCO to review important disclosure, sales communication, compliance, and behavioural issues, and to check whether internal control systems are functioning properly. © CANADIAN SECURITIES INSTITUTE Mutual Funds Industry Regulation 2 CONTENT AREAS Securities Regulation Provincial and Territorial Securities Acts The Canadian Securities Administrators Self-Regulatory Organization Purchasers’ Statutory Rights The Standards of Conduct Client Focused Reforms Rules for Telemarketing and the National Do Not Call List LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1 | Provide a general description of the scope of securities law as it applies to mutual funds and how to comply with it. 2 | Describe and implement a program of standards of conduct within the branch of the mutual fund dealer. 3 | Implement a system for enforcing standards of conduct. © CANADIAN SECURITIES INSTITUTE 2 2 BRANCH COMPLIANCE OFFICER’S COURSE KEY TERMS Key terms are defined in the glossary and appear in bold text when they first occur in the chapter. annual information form National Instrument assets portfolio bonds power of attorney cold calls prospectus conflict of Interest right of rescission dividends right of withdrawal load simplified prospectus misrepresentation © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 3 INTRODUCTION The securities industry is heavily regulated by various governmental and industry organizations that impose rules and restrictions on participants in the securities marketplace to promote market integrity and protect investors. Mutual fund dealers and their representatives must abide by the rules governing their conduct. For example, securities regulations specify the responsibilities that mutual fund salespersons have to their clients when making recommendations to buy or sell securities and when providing information to clients. Mutual fund dealers must supervise their employees’ conduct and use care when handling client assets. These rules, among others, promote a fair and efficient securities marketplace. In this chapter, we discuss the basic principles of securities regulation, the functioning of provincial securities legislation, and the rules, regulations and guidelines of the self-regulatory organization (SRO) in the industry. SECURITIES REGULATION In the United States, the Securities and Exchange Commission has exerted considerable regulatory authority at the national level since the early 1930s. In contrast, no formal federal securities regulatory body exists in Canada. Thirteen provincial and territorial securities commissions and agencies are the regulatory bodies responsible for the administration of securities legislation in their respective provinces and territories. The establishment and issuance of mutual funds and the activities of mutual fund dealers fall under provincial and territorial jurisdiction. Provincial or territorial securities regulators have the power to create and enforce their own laws and regulations and can delegate some of their powers to the appropriate self-regulatory organization (SRO), as discussed later in this chapter. The securities regulators’ powers and responsibilities as they pertain to mutual funds fall within three main categories: registration, disclosure, and enforcement. REGISTRATION Anyone who sells mutual funds or other securities or who provides investment advice to a client must be registered with the securities regulator in the jurisdiction in which the client resides. Mutual fund dealers must also register with the securities regulator in the jurisdiction in which the clients of its sales representatives reside. In addition, mutual fund dealers and their sales representatives must register with the appropriate SRO. Chapter 3 explains in further detail the registration requirements. DISCLOSURE National Instrument 81-101 and Companion Policy 81-101CP set out the requirements of mutual funds with respect to documentation of initial disclosure. Mutual funds must regularly file disclosure documents, including the fund facts document, simplified prospectus, annual information form (AIF), and financial reports with the securities regulators. Disclosure documents are consistent with the basic principle behind provincial securities regulation, namely, that of “full, true, and plain disclosure.” The better the information and the more disclosure provided, the greater the investor’s opportunity to make informed investment decisions. Disclosure is also an important issue with regard to allowable sales communications practices. ENFORCEMENT Securities regulators enforce the securities legislation in their respective provincial and territorial jurisdictions. The securities regulators have the power to subpoena witnesses, seize documents for examination, act as an © CANADIAN SECURITIES INSTITUTE 2 4 BRANCH COMPLIANCE OFFICER’S COURSE administrative tribunal, and prosecute offenders in the criminal courts. They may also prosecute alleged violators of the law before administrative tribunals. As part of this function, regulators may perform audits of registrants, including mutual fund dealers, to assess their compliance with securities legislation. The SRO can enforce compliance with its rules, but its powers are less extensive than those of the securities regulators. However, the SRO can refer matters to the securities regulators for enforcement if it feels that the offence justifies a harsher penalty than it can impose or if the investigative powers of the securities regulators are required. NATIONAL INSTRUMENT 81-102 AND COMPANION POLICY 81-102CP National Instrument 81-102 is the primary legislation relating to the regulation of mutual funds in Canada. It has been adopted in every jurisdiction in Canada and is enforced by all securities regulators. It deals with many aspects of mutual fund activities, including setting out limitations and prohibitions with respect to the investments that mutual funds can make, outlining settlement procedures for sales and redemptions, establishing restrictions on advertising, and setting custodial requirements. Companion Policy 81-102CP provides interpretative guidance on the language of NI 81-102. A branch compliance officer (BCO) is not expected to be able to interpret in detail the entire contents of NI81-102 and its companion policy. Some legal training is normally required for that purpose. Nevertheless, BCOs should be familiar with several provisions of the instrument and its overall intent. NATIONAL INSTRUMENT 31-103 National Instrument 31-103 establishes registration requirements for all sellers of securities. It has rationalized and codified a number of requirements applicable to all registered dealers and registrants, including mutual fund dealers and their sales representatives. It also addresses registration categories, proficiency qualifications, registration requirements and categories of registration, compliance requirements, disclosure requirements, and dealings with clients. Under NI 31-103, the registration category of a mutual fund dealer representative is called a dealing representative. A dealing representative may any trade securities that the individual’s sponsoring firm is permitted to trade. The individual branch manager category of registration was not retained in NI 31-103. That instrument requires dealers to establish systems of controls and supervision to provide reasonable assurance that the dealer and individuals acting on its behalf comply with securities legislation and manage risks associated with its business. However, the SRO did retain the branch manager category, and BCOs are generally registered with the SRO under this category. Mutual fund dealers that are members of the SRO must report any material change to the BCO directly to the SRO within five business days. PROVINCIAL AND TERRITORIAL SECURITIES ACTS The provincial and territorial securities acts, regulations, and rules provide a comprehensive framework for securities activities, including definitions, rules, and technical details associated with registration requirements, as well as prohibitions and restrictions on certain activities. Each province and territory has its own securities regulator in the form of a securities commission or a superintendent of securities to enforce the securities acts in their jurisdiction. The requirements of securities regulations differ among the provinces and territories. For example, in Manitoba and the Northwest Territories, there is an explicit and absolute ban on unsolicited calls, or cold calls. The legislation specifically prohibits sales representatives from making unsolicited telephone calls or personal visits to non- clients in an effort to sell securities or solicit mutual fund trades. In Quebec, solicitation is permitted, but certain requirements must be met. Given these and other variances, it is important to be familiar with and follow your dealer’s policies and procedures, which should reflect the requirements of its province or territory. © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 5 THE CANADIAN SECURITIES ADMINISTRATORS Although there is no formal federal regulatory body in Canada responsible for securities regulation, and each regulator has its own set of rules, the securities regulators from the 10 provinces and three territories have formed a joint panel known as the Canadian Securities Administrators (CSA). The CSA is a voluntary umbrella organization whose objective is to improve, coordinate, and harmonize the regulation of the Canadian capital markets. It aims to achieve consensus on policy decisions that affect the capital markets and their participants. It also works collaboratively to deliver regulatory programs across Canada, such as the review of continuous disclosure and prospectus filings. The mission of the CSA members is threefold: To protect investors from unfair, improper, and fraudulent practices To foster fair and efficient capital markets To reduce risks to the market’s integrity and threats to investor confidence in the markets As an informal body, the CSA functions through meetings, conference calls, and day-to-day cooperation among the regulatory authorities. The CSA Chairs meet quarterly in person and monthly by conference call. Each CSA member carries out the following activities: Formulating policy Making rules Sitting on administrative tribunals in hearings on securities-related matters Hearing appeals from decisions made by staff or the SROs SELF-REGULATORY ORGANIZATIONS The SROs are industry organizations that regulate their own members. In the Canadian securities industry, the SROs have been officially granted their regulatory powers by the administrators. Authority is typically given in the form of a recognition order. The SROs are responsible for enforcing their members’ conformity with securities legislation. They also have the power to prescribe their own rules of conduct and financial requirements for their members. The SRO rules and regulations are designed to uphold the principles of securities legislation. The administrators monitor the conduct of the SROs and review their rules to ensure that they do not conflict with provincial securities legislation. The rules of the SROs must be in the public’s best interest and must set a standard equal to or higher than those imposed by the provinces. The SROs have extensive powers to investigate possible violations of their rules and to take disciplinary action against member firms and their employees when appropriate. Sanctions for less serious offences may include fines, strict supervision, and the requirement to rewrite qualifying exams. Serious offences may result in the loss of registration and substantial fines. Prior to January 1, 2023, there were two SROs in Canada, the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA). IIROC Until 2023, IIROC was the pan-Canadian self-regulatory organization overseeing all investment dealers and trading activity on the equity and debt marketplaces in Canada. It was responsible for enforcing the regulations regarding sales, business and financial practices, and trading activities of the individuals and dealer members under its jurisdiction. It also established new rules and developed recommendations to interpret and amend existing rules. © CANADIAN SECURITIES INSTITUTE 2 6 BRANCH COMPLIANCE OFFICER’S COURSE THE MFDA The MFDA was the mutual fund industry’s SRO responsible for regulating all sales of mutual funds by its members in all provinces except in Quebec. It did not regulate the mutual funds themselves; this responsibility remains with the securities regulators. All mutual fund dealers outside of Quebec had to be members of the MFDA. In Quebec, the mutual fund industry was regulated by the Autorité des marchés financiers (AMF), the Quebec securities regulator. An agreement had been signed between the AMF and the MFDA to avoid regulatory duplication for mutual fund firms operating both in Quebec and elsewhere in Canada. The Chambre de la sécurité financière (the CHAMBRE) is Quebec’s self-regulatory organization in the mutual fund and insurance industry. The CHAMBRE is responsible for setting and monitoring continuing education requirements and enforcing a code of ethics among the licensed representatives. The policies and regulations of the MFDA set minimum standards for mutual fund dealers. Mutual fund activities must comply with all aspects of applicable securities laws and regulations, including policies and regulations set out by the MFDA. IIROC AND MFDA MERGER As of January 1, 2023, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) have combined to form New Self-Regulatory Organization of Canada (New SRO). The New SRO is the national self-regulatory organization that oversees all investment dealers, mutual fund dealers, and trading activity on Canada’s debt and equity marketplaces and is carrying on the regulatory functions of IIROC and the MFDA. Any references to IIROC and MFDA on the website and other course materials remain, and refer to the New SRO, until a new name is formed. Along with the merger of IIROC and MFDA, the two investor protection funds - the MFDA Investor Protection Fund (MFDA IPC) and the Canadian Investor Protection Fund (CIPF) - have merged into a single investor protection fund under the CIPF designation. Prior to January 1, 2023, Quebec’s mutual fund dealers were regulated by the AMF. Mutual fund dealers registered in Quebec must become members of the new SRO by January 1, 2023. Dealers registered as mutual funds dealers as of December 31, 2022, automatically become members of the New SRO, with no additional formality. Mutual fund dealers registered in Quebec have been allowed a transitional phase to give them time to integrate their Quebec activities under the new SRO. The new SRO’s regulatory requirements, with the exception of the rules necessary to ensure its smooth functioning, will not apply to the dealers’ activities in Québec during this period. The AMF will continue to supervise the mutual fund dealers registered in Quebec during the transitional phase. Recognition of the new SRO by the AMF will not alter the mandate, functions, or powers of the Chambre de la sécurité financière (CSF), as stated in the Act respecting the distribution of financial products and services. The CSF is Quebec’s SRO of the mutual fund and insurance industry and is responsible for setting and monitoring continuing education requirements and enforcing a code of ethics for licensed representatives. ANTI-MONEY LAUNDERING AND ANTI-TERRORIST FINANCING LAWS Securities firms are subject to various regulatory and statutory requirements with respect to money laundering and terrorist financing. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations, also known as the PCMLTFA and PCMLTFR, were implemented primarily to detect and deter money laundering and terrorist financing activity, respond to threats posed by organized crime, and assist in fulfilling Canada’s international commitments to fighting transnational crime. Its requirements are supplemented by IIROC rules. The object of PCMLTFA is to implement measures to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of those offences. It establishes recordkeeping © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 7 and client identification requirements for persons and entities that engage in activities that are susceptible to offences related to money laundering or terrorist financing. It also requires the reporting of suspicious financial transactions and cross-border movements of currency and monetary instruments. The PCMLTFA established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the agency responsible for ensuring compliance with the Act and for dealing with reported and other information. FINTRAC collects, analyzes, assesses, and discloses information to assist in the detection, prevention, and deterrence of money laundering and terrorist financing. It is authorized to provide key identifying information on suspicious transactions to law enforcement agencies if there are reasonable grounds to suspect that the information would be relevant to the investigation or prosecution of a money laundering offence. This information could also be provided to the Canada Revenue Agency (CRA), the Canadian Security Intelligence Service (CSIS), and Immigration Canada if there is reason to suspect tax evasion or a threat to national security. FINTRAC is also primarily responsible for monitoring the compliance of financial intermediaries with recordkeeping requirements, the Know Your Client (KYC) rule, and mandatory suspicious transaction reporting requirements. Some important considerations for the securities industry include the following information: The definition of securities dealing in PCMLTFA includes “other financial instruments”, which makes it clear that dealer members dealing solely in financial instruments that fall outside the definition of securities, and not only those authorized under provincial legislation to deal in securities, are included. In other words, dealers who deal with any type of financial instruments or commodities must also comply with the legislation. PCMLTFA requires the reporting of an attempted transaction where there are reasonable grounds to believe it is related to a real or attempted money laundering or terrorist financing offence. This requirement applies to both completed and attempted transactions. Dealer members are required under the Criminal Code to disclose to the Royal Canadian Mounted Police (RCMP) and CSIS “the existence of property in their possession or control that they know is owned or controlled by or on behalf of a terrorist group” and any transactions or proposed transactions related to such property. Dealer members must also file a report on any such disclosure with FINTRAC and to disclose to the RCMP, CSIS, and FINTRAC the possession of the property of listed persons under the Regulations Implementing the United National Resolutions on the Suppression of Terrorism (UNST Regulations). Dealer members must determine whether they are dealing with a foreign or domestic politically exposed person (PEP) or a head of an international organization (HIO) established by the governments of more than one country. A foreign PEP is a person who “holds or has held an office or position in or on behalf of a foreign state.” A domestic PEP is a person who holds a specific office within or behalf of a Canadian federal, provincial, or municipal government. When a dealer member has determined that a client is a foreign PEP, it must take reasonable measures to establish the source of any funds deposited or expected to be deposited to the client’s account. It must also obtain the approval of senior management to keep the account open within 30 days of its activation. For existing accounts for which the client is found to be a foreign PEP, the approval must be completed within 30 days of that finding. Upon approval to deal or continue dealing with the foreign PEP, the dealer member must conduct enhanced, ongoing monitoring of the activity in the foreign PEP’s accounts. This requirement also applies to the spouse, common-law partner, child, mother, father, sibling, or spouse’s or common- law partner’s mother or father of any such person. It should be noted that the definition of a foreign PEP covers only those holding such positions in a national state, not those holding offices in provinces or municipalities. If a dealer member determines that it is dealing with a domestic PEP, an HIO, or a family member of a domestic PEP or HIO, the firm must perform a risk assessment to determine whether the individual is at high risk of money laundering. If so, the dealer must also take reasonable measures to determine the source of funds in the account and obtain within 30 days senior management’s approval to keep the account open. © CANADIAN SECURITIES INSTITUTE 2 8 BRANCH COMPLIANCE OFFICER’S COURSE Dealer members must assess the risk of a money laundering or terrorist financing offence and take special measures regarding activities that pose a high risk. Anti-money laundering and anti-terrorist financing (AML/ATF) compliance policies and procedures must be written, kept up to date, and approved by a senior officer, and a training program for employees or agents must be put in place. In addition, the AML/TF compliance program must be audited every two years, and the review must cover both the AML/ATF policies and procedures and the risk assessment and training programs. Furthermore, the review must be documented, and its findings must be reported in writing to an officer within 30 days of the assessment. Dealer members must obtain the client’s date of birth in addition to information already required. They are prohibited from opening an account for a client if they cannot establish the client’s identity using the means required by the PCMLTFA regulations. They must ensure that their wholly owned subsidiaries and business locations carrying out activities similar to those of dealer members in countries that are not members of the Financial Action Task Force (FATF) have developed and implemented policies and procedures consistent with the requirements of the PCMLTFA, unless a particular policy or procedure contravenes the laws of the country in which it is located. For recordkeeping purposes, dealer members must record the intended use of every new account opened. They must verify the identity of an individual opening an account before any transactions are conducted other than an initial deposit. Documents viewed must be originals and cannot have expired. The recordkeeping provisions allow the recording of the type, reference number, and place of issuance of the piece of identification to be maintained on or with the new account form or signature card. Until the identify verification process is complete, any transactions except an initial deposit are prohibited. Dealer members must consider several issues regarding the initiation of an account transfer (which is considered an initial deposit) before the identity verification has been completed. Two considerations are the risk that the client will be unable to effect transactions and the possibility that the transfer itself could be part of a layering operation. Dealer members filing a suspicious transaction or attempted transaction report must also keep a copy. Under the suspicious transaction reporting regulations, “suspicious” is defined as “reasonable grounds exist to suspect a money laundering offence”. “Reasonable grounds to suspect” is determined by what is reasonable in the circumstances, such as normal business practices and systems within the industry. These reporting requirements apply not only to regulated financial institutions, securities dealers, and currency exchange businesses, but also to individuals acting as financial intermediaries, such as accountants. Under these provisions, failure of an individual to report a suspicious transaction is an offence punishable by up to five years imprisonment, a maximum fine of $2 million, or both. In addition, FINTRAC has legislative authority to issue an administrative monetary penalty of up to $500,000 to reporting entities that are in non-compliance with PCMLTFA. The transaction (or attempted transaction), and specifically what led to a suspicion, is the significant information in a suspicious transaction report. Once it has been determined that there are reasonable grounds to suspect that a transaction or attempted transaction is related to the commission of a money laundering offence, the dealer member must send a suspicious transaction report to FINTRAC as soon as practicable. To comply with this requirement, the dealer might implement a policy requiring representatives to escalate money laundering concerns immediately. If done in good faith, dealer members and their employees who report suspicious transactions to FINTRAC are protected from criminal and civil legal proceedings for doing so. There is no monetary threshold for making a report on a suspicious transaction, and an employee cannot be convicted of failing to report if a suspicious transaction is reported to his or her superior or supervisor. Representatives are not allowed to inform (or “tip”) anyone, including the client, about the contents of a suspicious transaction report or even that a report has been made because such notification could impair a criminal © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 9 investigation. Failure to comply with the reporting requirements can lead to criminal charges against a dealer member or an individual employee, or both. Depending on the facts surrounding a tip, a sales representative could be liable to a Criminal Code prosecution for potential offences, including counselling an offence, accessory after the fact, breach of trust by a public officer, obstructing a peace officer, obstructing justice, and public mischief. Willful blindness occurs when someone is aware that a situation should be investigated but fails to follow through, usually because they do not want to jeopardize a business deal or business relationship. Failure to report a suspicious transaction through willful blindness is punishable by a fine of up to $2 million, imprisonment for up to five years, or both. Knowing involvement in money laundering carries higher penalties than willful blindness (up to 10 years in prison). However, it is not always easy to tell the difference, which puts anyone ignoring signs of money laundering or terrorist financing activity at higher risk. CROSS-BORDER CURRENCY AND MONETARY INSTRUMENTS REPORTING REGULATIONS Regulations regarding cross-border currency and monetary instruments reporting require all persons and entities to report the importing and exporting of currency and monetary instruments of $10,000 or more, or the equivalent in a foreign currency, to the CRA. There are, however, no restrictions on the amount of currency or monetary instruments that may be imported into or exported from Canada, simply that they must be reported. The law applies to any movement across the border, including by mail, courier, or other conveyance, unless the currency or monetary instruments are transported without leaving controlled areas. IIROC rules clarify the definition of monetary instruments to include those that are in bearer form only, or another form if title to them passes on at delivery. These include stocks, bonds, debentures and treasury bills, negotiable instruments such as bank drafts, cheques, promissory notes, traveler’s cheques, and money orders. Instruments specified as belonging to a named individual or entity, such as cheques made out to a specific person or company and not endorsed, as well as fully registered securities that have not been signed off, do not need to be reported. THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS The Office of the Superintendent of Financial Institutions (OSFI) has no legislated role with respect to PCMLTFA; however, it does subscribe to the core principles of supervision of deposit takers and insurance companies. It requires that it be able to determine whether banks have adequate policies, practices, and procedures in place, including strict KYC rules that prevent banks from being used by criminal elements. OSFI also shares the results of its AML/ATF assessments on all federally regulated financial institutions with FINTRAC. Their assessments focus on three key areas: Whether the institution has implemented the policies and procedures needed to comply with PCMLTFA Whether it has the requisite framework of controls in place to report designated transactions to FINTRAC Whether the quality of those controls and the supporting risk management processes are adequate Canadian securities dealers must report monthly to their principal supervisory or regulatory body concerning the possession or control of any property described above. Securities dealer members report to the new SRO, federally regulated financial institutions report to OSFI, and mutual fund dealers report to the provincial securities administrators. TERRORIST FINANCING REPORTING OBLIGATIONS CSA Staff Notice 31-352 describes the terrorist financing reporting obligations for registrants, exempt international dealers, and exempt international advisors. The Notice introduced a new consolidated reporting form that must be submitted to the principal regulator by email on or before the 14th day of each month. IIROC dealer members continue to report monthly to IIROC using the appropriate reporting forms issued by IIROC. © CANADIAN SECURITIES INSTITUTE 2 10 BRANCH COMPLIANCE OFFICER’S COURSE The consolidated report should be signed by a senior officer of the firm, preferably the chief compliance officer. The Notice imposes the following requirements on registrants, exempt international dealers, and exempt international advisors: They must regularly review their records to determine whether they are in possession or control of property owned or controlled by or on behalf of a designated person, and report these findings monthly. They must take necessary measures to determine whether clients are designated persons. If a client is identified as a designated person, in addition to filing the monthly report with their principal regulator or IIROC, registrants must “freeze” the property and report the details to the RCMP and CSIS. A terrorist property report to FINTRAC may also be required. They must file a “Nil” report with their principal regulator or IIROC once it is determined that, for that month, none of their clients is considered a designated person. Furthermore, these regulations require anyone in Canada, as well as Canadians outside Canada, to disclose to FINTRAC, the RCMP, and CSIS the existence of any property in their possession or control that they believe is owned or controlled by or on behalf of anyone on this list. This includes information about any transaction or proposed transaction relating to that property. In addition, reporting is required under the UN Reporting System. The report must be filed no later than the 15th day of each calendar month unless the 15th falls on a Saturday, Sunday, or statutory holiday (in which case the report is due on the next business day). Reports must be submitted using the UN Reporting System found on IIROC’s website. It is an offence under the United Nations Act to deal in property of a designated person or otherwise contravene the regulations. This includes the debiting of service charges and the crediting of interest, or, if the frozen property is a securities portfolio, the crediting of interest, dividends, or other entitlements and the charging of custody fees, transaction fees, or any other debits or credits to the account. This system is for use by IIROC dealer members only. Canadian financial institutions that are not IIROC members must use the appropriate reporting form issued by the relevant province or SRO. JOINT INITIATIVES OSFI and FINTRAC have a memorandum of understanding (MOU) under the authority of the Public Safety Act for exchanging information about money laundering and terrorist financing. The MOU minimizes the potential overlap of work and reduces the impact of administrative requirements on federally regulated financial institutions. FINTRAC and IIROC also have an MOU to exchange information related to money laundering and terrorist financing. Under the agreement, FINTRAC provides information to IIROC to facilitate its risk assessment of dealer members subject to PCMLTFA. In turn, IIROC provides FINTRAC with information regarding dealer members’ adherence to and compliance with PCMLTFA. In addition, the Financial Institutions Commission of British Columbia (FICOM) and FINTRAC have an MOU to exchange compliance information in their joint fight against money laundering and terrorist financing. FICOM is responsible for the administration of The Financial Institutions Act, The Credit Union Incorporation Act, and The Insurance Act. It provides FINTRAC with the results of its assessments of compliance with AML/ATF measures. In return, FINTRAC provides information to help facilitate FICOM’s risk assessment within its regulated sectors. The agreement facilitates the exchange of compliance information and also minimizes the potential overlap of work. To successfully combat international organized crime and terrorism, those involved must be deprived of the monetary proceeds of their criminal activities. Unfortunately, individual jurisdictional efforts aimed at curtailing money laundering have proven to be insufficient. Coupled with the existence of jurisdictional boundaries, global law enforcement efforts to tackle this threat have become strained. The need for cooperation and coordination © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 11 to deter and detect international money laundering has led to the development of numerous international initiatives. For example, Canada is a member of the Asia/Pacific Group on Money Laundering, a regional body comprising 31 member nations, including the U.S., Japan, Australia, and India. Perhaps the best known of these international initiatives is the Financial Action Task Force on Money Laundering (FATF), which was established by the G-7 countries in 1989. The FATF is an intergovernmental body comprising 37 countries (including Canada) and two regional organizations. Its purpose is to establish international standards, to improve national legal systems and strengthen international cooperation in the fight against money laundering. The FATF has identified certain “choke points” in the money laundering process that are very difficult for launderers to avoid and where they are most vulnerable to detection. The three choke points that have been identified are the entry of cash into the financial system, transfers to and from the financial system, and cross- border flows of cash. It is at the point of entry of cash into the financial system where money laundering is most likely to be detected. The FATF maintains and publishes a list of “high-risk and non-cooperative” jurisdictions that have inadequate AML/ATF financing regimes. PURCHASERS’ STATUTORY RIGHTS The CSA have adopted a statement of withdrawal and rescission rights for purchasers, which is summarized in this section. RIGHT OF WITHDRAWAL Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to withdraw from an agreement to purchase mutual funds within two business days after receiving the fund facts document. As discussed later in this course, the fund facts must be delivered to clients before any mutual funds are purchased. In addition, securities legislation in certain provinces provides purchasers of mutual funds with a limited right to cancel their purchase within 48 hours of receiving confirmation of their order. The client is entitled to receive the original purchase price back on exercise of this right. Any load commissions are returned, and early redemption penalties do not apply in the case of no-load funds. If units of a mutual fund are purchased under a reinvestment plan, the purchaser has no right of withdrawal with respect to the units purchased (after the initial purchase) unless they asked to receive subsequent fund facts and amendments upon renewal. The right of withdrawal can cause problems if a branch staff member fails to deliver the fund facts to the unitholder when an account is opened (or when the offering documents are amended or renewed) because the right of withdrawal remains intact. In some provinces, this open-ended right is subject to a time limit or does not apply to purchases over a certain amount. Because of this continuing right to obtain the original purchase price back, the BCO should implement a system to ensure that investors receive the fund facts before accepting an instruction to purchase a mutual fund. A checklist form such as the one described in Chapter 10, Supervisory and Control Systems, may be useful. If a client asks to exercise the right of withdrawal, refer the matter to your head office or the legal or compliance department. © CANADIAN SECURITIES INSTITUTE 2 12 BRANCH COMPLIANCE OFFICER’S COURSE RIGHT OF RESCISSION In several provinces and territories, securities legislation provides purchasers with a right of rescission or damages if the offering documents (fund facts, prospectus, or AIF) or any amendment to those documents is shown to contain a misrepresentation. These rights usually must be exercised within certain a time limit. There is little likelihood that this right will be exercised, but if a client makes such a claim, you should immediately contact your head office or the legal or compliance department and follow your dealer’s written procedures. If a client wishes to invoke a right of rescission, you should contact the mutual fund dealer’s legal or compliance department or follow your mutual fund dealer’s procedures. THE STANDARDS OF CONDUCT The clients of your branch are entitled to the highest standards of service and ethical conduct. A breach of those standards may give rise to client complaints, which you will have to address. A fair and even approach to all client disputes is required, including supporting your sales representatives when warranted. Despite the age-old adage, the client is not always right in the investment world. Sometimes the cause of a dispute is an unreasonable request or demand on the part of the client. The key standards of conduct your sales representatives must comply with (and which you must continually reinforce) are as follows: Know your client As emphasized throughout this course, the sales representative must make a diligent effort to learn the client’s essential and current financial and personal circumstances, investment knowledge, risk profile, investment time frame, and investment objectives. This can only be accomplished by completing the KYC form, periodically reviewing and updating it, and maintaining it along with any supplemental notes or records. Know your product In addition to meeting their KYC obligations, mutual fund representatives must fully understand the structure, features, fees, and risks of the products they recommend to clients and how the products can be used to help clients achieve their investment objectives. The approval of an investment product by the firm is not enough in itself to discharge the representative’s obligation to take reasonable steps to understand the product and its suitability for a client. It is important to keep in mind that know-your-product obligation is a distinct obligation of individual representatives, separate from the product due diligence responsibilities of the firm. Suitability and All recommendations must be based on an analysis of the KYC information, the acceptability proposed transactions, and the client’s account. Any client order, whether solicited or unsolicited, should be subject to both the suitability and acceptability requirements. This objective may be achieved by the review of the KYC information and the examination of the impact of a trade on the client’s asset allocation. Trades that would exceed the risk exposure, as indicated in the client’s KYC profile, are generally unreasonable. © CANADIAN SECURITIES INSTITUTE CHAPTER 2 MUTUAL FUNDS INDUSTRY REGULATION 2 13 Appropriate cautions All trades must be reviewed for suitability. If a trade is found to be unsuitable based on a client’s objectives, risk profile, or other circumstances, the sales representative must take appropriate measures to deal with the unsuitable order. These include advising against proceeding with the order and recommending suitable alternatives. The sales representative must document any actions they take. Sales representatives should only recommend suitable and reasonable mutual fund investments that are consistent with the profile of their clients. Integrity of client The information provided by the client is to be used for the benefit of the client information and assets only. This objective may be accomplished by ensuring that both you and the sales representatives maintain arm’s-length relationships with clients. For example, it is improper for a sales representative to ask a client for a personal loan. Even if the client and the sales representative have a long-standing relationship, by acting in this manner, the sales representative is making personal use of the client’s KYC information. Besides profiting from the knowledge that the client can afford to extend the loan, the representative is also interfering with the client’s investment opportunities by appropriating some of their investing potential. If a sales representative engages in this type of behaviour, you should immediately refer the case to the regional compliance officer (RCO) for disciplinary action. The human resources function at your mutual fund dealer should also be informed promptly. Accuracy and All product and market knowledge passed on to all clients must be complete and completeness of accurate. All sales representatives must be fully familiar with and understand the information relayed to content of the fund facts documents, prospectuses, and annual information forms of the client the mutual funds they offer, and they must be able to demonstrate that they know the product. This objective may be accomplished by ensuring that your sales representatives have a solid understanding of the mutual funds and asset allocation services your dealer offers and can accurately describe their features to clients. For example, if a client wants a product that will hold its value when interest rates rise, the sales representatives should be able to tell him or her that only a money market mutual fund meets this requirement. Confidentiality of client All information concerning the client’s accounts must be considered confidential and Information must not be disclosed to anyone outside the mutual fund dealer without the client’s written permission. Where a client provides permission, it is essential that they understand the nature of this action and its possible consequences. This objective may be accomplished by ensuring that sales representatives refrain from discussing client information with anyone outside the mutual fund dealer and by ensuring that client lists, KYC information, and other client-specific information be maintained in secure locations. © CANADIAN SECURITIES INSTITUTE 2 14 BRANCH COMPLIANCE OFFICER’S COURSE No outside deals Sales representatives must not engage in outside deals that appear to involve the mutual fund dealer (or any affiliated financial institution). This objective may be accomplished by ensuring that sales representatives refrain from trading in any other securities, including private placements and private deals. For example, if a client offers a branch sales representative the opportunity to participate in a business he or she is starting, the sales representative should either decline the offer or obtain head office approval before entering into the deal. The danger is that the branch of the mutual fund dealer or affiliated financial institution might appear to be involved in the financing beyond the institution’s usual manner such as providing a small business loan. It is your job to ensure that sales representatives avoid any action that could compromise the integrity and reputation of the mutual fund dealer or affiliated financial institution. Responsible behaviour Sales representatives must not engage in behaviour that could improperly influence a client. This objective may be accomplished by insisting that sales representatives keep their personal business affairs confidential and that they maintain personal integrity. For example, sales representatives should not discuss their personal investment approach or philosophy or their investment holdings with clients except in the most casual manner. For example, saying to a client “I really like our firm’s Asian Pacific Growth Fund. I bought $20,000 of it myself” is improper behaviour that could unduly influence a client to buy units in the fund. The purchase may not be suitable or reasonable for their financial circumstances, risk profile, personal circumstances, investment knowledge, time horizon, or investment objectives. Avoiding the use of All branch employees must avoid using insider information, such as information about insider information a planned takeover bid or the settlement of a material lawsuit involving a public company (that is, a company whose shares are traded on a stock exchange). This objective may be accomplished by ensuring that the flow of information is secure within the branch. In some cases, some information (possibly a misplaced fax message or confidential memorandum) could reach employees inadvertently. Although the information may be innocently obtained, its use by an employee or any person the employee shares the information with may be illegal. Even if the use of such information will not likely affect mutual fund values and cannot directly harm a client, the indirect effect on the financial institution or the mutual fund dealer?

Branch Compliance Officer's Course PDF - Canadian Securities Institute

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