Account Opening PDF

Account Opening 4 CONTENT AREAS Before Opening an Account The Client and the Registered Sales Representative Relationship Account Opening and Order Forms Completing the Account Opening Form Know Your Client Infor...

Account Opening 4 CONTENT AREAS Before Opening an Account The Client and the Registered Sales Representative Relationship Account Opening and Order Forms Completing the Account Opening Form Know Your Client Information Account Types Account Protection Anti-Money Laundering and Anti-Terrorist Requirements Foreign Account Tax Compliance Act Powers of Attorney Internal Control Systems and Procedures Updating Client Information LEARNING OBJECTIVES 1 | Describe the relationship between the client and the registered sales representative. 2 | Outline the steps registered sales representatives must follow when opening an account for a client. 3 | Identify the various types of accounts and the documentation required for each. 4 | Ensure compliance with the Know Your Client requirements. 5 | Set up internal branch control systems to ensure that Know Your Client information is properly obtained and periodically updated. 6 | Ensure understanding of Account Transfer-In and Transfer-Out requirements. © CANADIAN SECURITIES INSTITUTE 4 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. derivatives registered retirement income fund management report of fund performance registered retirement savings plan mutual fund manager trading resolution minor children unreasonable order periodic purchase plan © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 3 INTRODUCTION The purpose of this chapter is to provide a detailed examination of the steps involved in opening a client account. The focus is on the collection of relevant client information, the required Know Your Client (KYC) information and the determination of the client’s needs. BEFORE OPENING AN ACCOUNT The first step in the sales process is ensuring that your client’s KYC information is complete. This information identifies the key parameters of the client’s situation. The mutual fund dealer should provide sales representatives with training and other materials that outline the various mutual funds and related services available to clients through the dealer. It is your obligation to ensure that the sales representatives are familiar with these materials and with the dealer’s policies and procedures before opening an account or selling a mutual fund. Securities regulations require that dealers and their sales representatives know each client’s personal and financial circumstances, investment knowledge, time horizon, risk profile, and financial objectives. In keeping with this regulation, all clients purchasing mutual funds must provide KYC information regardless of whether the sales representative recommends the mutual funds that are purchased. This requirement cannot be waived by clients. They should complete the KYC information with the assistance of the sales representative. The KYC information is often filled out on the order forms used by mutual fund dealers, but sometimes it is contained in a separate document. This information should be obtained before the initial purchase of mutual funds. On subsequent transactions, the KYC information in the client’s file should be reviewed and updated if necessary to reflect changes in the client’s circumstances. Reviewing the information on subsequent transactions allows the client and the sales representative to examine the impact of a proposed transaction on the client’s overall portfolio. For example, a trade that appears inappropriate, such as a relatively high-risk or particularly volatile mutual fund, might be suitable in the context of the client’s portfolio mix. The law requires that the KYC information of every client be collected and continually maintained. It must be updated whenever there is a trigger event such as a change in marital status, income, net worth, or employment. This obligation is consistent with the ethical and professional responsibility of advisors to ensure that recommendations for the purchase of mutual funds are consistent with each client’s needs and objectives. Furthermore, the KYC information related to a joint or trust account must be obtained from all persons with a financial interest in the account. A current fund facts document for a mutual fund must be supplied to the client before or at the time a fund purchase is accepted. This step initiates the two-business-day right-of-withdrawal period. As a branch compliance officer (BCO), you must ensure that this requirement is met. You may need to provide other documents as well, such as disclosures regarding leverage, confidentiality of client information, fees, and other compensation. Clients may also request other disclosure documents, the simplified prospectus, annual or semi-annual financial statements, the management report of fund performance, or the annual information form. You should be prepared to deliver and discuss these documents with the sales representatives under your supervision and, if necessary, with the sales representative’s client. THE CLIENT AND THE REGISTERED SALES REPRESENTATIVE RELATIONSHIP Materials outlining the products and services available to clients and the dealer’s policies, including a policy and procedures manual, should be available to all registered sales representatives at the branch. It is your obligation as BCO to ensure that your sales representatives have a working knowledge of in-house policies and the general © CANADIAN SECURITIES INSTITUTE 4 4 BRANCH COMPLIANCE OFFICER’S COURSE guidelines of the mutual fund dealer before opening any accounts. During the registration process, individuals must agree that they are bound to maintain their knowledge of applicable securities legislation and regulations. These include policy statements and guidelines issued by the Mutual Fund Dealers Association (MFDA), which change from time to time. Securities regulations require that mutual fund dealers and their sales representatives identify the personal and financial circumstances, level of investment knowledge, time horizon, risk profile, and investment objectives of their clients. To this end, all clients who purchase mutual funds must provide their KYC information regardless of whether the purchase was initiated by a sales representative. To help ensure that all orders are suitable for the client, most order forms contain a KYC section. In other cases, this information is contained in a separate account opening form that must be completed by the purchaser or account owner. Collection of this information is required by law, and clients and prospective clients cannot waive your obligation to obtain it. Neither can they waive liability arising from a sales representative’s failure to collect this information or consider it when making recommendations or assessing the suitability of a proposed purchase of mutual funds. Furthermore, it is essential that they obtain the information to meet their ethical and professional responsibility to match mutual funds to the particular needs and objectives of their clients. The suitability obligation extends to client-directed requests in which the sales representative has not recommended the purchase. The representative still must consider whether it is suitable and, if not, either provide appropriate caution or refuse to process the order. ACCOUNT OPENING AND ORDER FORMS The application or account opening form is used to open new accounts and also to record any changes to the personal information in a client’s file. As BCO, it is your professional and legal responsibility to review all account opening forms and any changes to the forms before any account is opened. You must also sign the forms, either by hand or electronically, as evidence of your acceptance of the account on behalf of the dealer. The order form, which may at some dealers be incorporated into the account opening form, is used to purchase units of a mutual fund. Both the account opening form and the order form are produced at head office, and you must make certain that your sales representatives use them without alteration. It is both permissible and useful, however, for you and the sales representative to make appropriate notations on these forms for recordkeeping purposes. Make sure your sales representatives are fully conversant with the order form because it is the key document in the sales and compliance chain. Keep in mind that a completed order form is only the client’s offer to purchase mutual funds. The mutual fund does not need to accept the offer, although it rarely refuses. However, a mutual fund manager will often refuse to accept an offer if there is a risk that the client is a short-term trader – that is, if they plan to hold units in the fund for a brief period before redeeming them. Short-term trading can be harmful to other unitholders because it increases transaction costs and can force the fund manager to hold an excessive amount of cash in the portfolio to fund redemptions. Fund prospectuses often state the manager’s short-term trading policies. Many funds impose penalties on clients who buy and sell units in a fund within a specified period (often as long as 90 days). A fund manager may also refuse to accept an order from a client who has previously exercised their right of recession (as discussed in detail later in this course). As BCO, you should refuse to open an account or process an order for a client who has not completed all of the KYC information or who refuses to supply information that you believe is pertinent to your obligations under MFDA Rule 2.2.1. Specifically, all sales representatives must apply due diligence to learn the essential facts about each client and each order or account accepted. This rule is in place to ensure that every order accepted for every account is within the bounds of good business practice. It also ensures that every recommendation made is suitable for the client and in keeping with the client’s investment objectives. Furthermore, you can and should refuse any order that is both unsuitable and unreasonable. These concepts are discussed in detail later in this course. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 5 The account opening should generally be done in person. However, the initial order and subsequent transactions may be processed by telephone or electronically (over a secure internet portal or by fax) in accordance with the dealer’s written policies and procedures regarding acceptable electronic correspondence. During the account opening process and all subsequent transactions, it is essential that you protect the client’s confidentiality. The structure and format of order forms vary among mutual fund dealers, but the required information is virtually the same. Remember that only a qualified and registered sales representative should help the client complete the non-administrative, clerical portions of the order form. You must make sure that the sales representatives in your branch understand that all information about clients and client transactions must be kept confidential. Neither the information obtained about a client nor the contents of the client’s file may be disclosed, even to an affiliated financial institution such as a bank, except with the client’s permission or by order of a securities regulator or other proper authority. You may not demand that a client consent to the disclosure of their personal information as a condition of accepting their account unless the information is necessary to provide the product or service the client has requested. COMPLETING THE ACCOUNT OPENING FORM The sales representative’s first step when completing the account opening form is to obtain the client’s personal data, as follows: Full legal name Each account must be opened under the full, correct, legal name of the client and not in an abbreviated form. For example, David Edward Smith should not be abbreviated to “Dave Smith”. This requirement provides an additional level of defence against possible forgery or other deception. Home address The home address is the full address of the client’s permanent residence. The address must be obtained to satisfy anti-money laundering and securities regulations. It also enables the sales representative to verify that they are registered in the province where the client resides. If it is not possible to obtain a permanent address, the sales representative should proceed with caution. In any questionable case, they should bring the matter to your attention (or to the attention of the person responsible for enforcing policy in this regard). Under no circumstances may the sales representative’s residence, post office box, or other address be used for client mail. This prohibition includes “c/o the sales representative” at the office. It is a serious conflict of interest for a sales representative to act in any way as an intermediary in the mailing of trade confirmations, dealer statements, or other communications to a client. A client may ask that mail confirmations be sent to a different address than the one given as the home address. However, because clients must receive confirmations, the sales representative must make sure that the client’s home address is valid and that the mailing address is a real address and not a mailbox. © CANADIAN SECURITIES INSTITUTE 4 6 BRANCH COMPLIANCE OFFICER’S COURSE Social Insurance A social insurance number (SIN) is required for tax reporting; without one, registered Number accounts cannot be registered with the Canada Revenue Agency (CRA). Requesting the SIN is a legal requirement. If the client refuses to supply it, the sales representative should state that fact in writing on the account form. However, the order may be executed and the account opened even if the SIN is not obtained. Sales representatives must make a reasonable effort to obtain a client’s SIN, and failure to do so may render them liable to the CRA for a $100 fine per infraction. They may advise their clients that, if they refuse to provide their SIN, the sales representative may be liable for a $100 fine. A SIN is also required for all beneficiaries of a registered education savings plan before an application can be made for the Canada Education Savings Grant. Date of birth The client’s date of birth is often required to ensure that the client is of legal age to subscribe to or redeem mutual funds. Minors can legally purchase mutual funds, but they cannot be contractually bound and can therefore revoke the purchase at any time before reaching the age of majority. In such a case, they would be entitled to receive the full initial amount of investment, even if the mutual fund’s units had dropped in value. For accounts holding a registered retirement savings plan (RRSP), the birth date provides a record of when the RRSP matures and must be converted to a registered retirement income fund (RRIF), annuity, or other maturity option. Without the client’s date of birth, orders cannot be executed, and registered accounts cannot be opened. Type of account/ The account opening form should indicate whether the account is an RRSP account. purchase Clients opening such accounts outside of Quebec should be told that they can designate a beneficiary to whom their RRSP funds can be directed upon their death. Designating a beneficiary is not mandatory, but clients should be informed that the proceeds of their RRSP will go to their estate if they do not name a beneficiary. If the proceeds go to the estate, there could be additional costs and delays in the distribution of funds due to probate requirements and estate taxes. If the purchase represents a contribution to a spousal RRSP, this fact should be stated on the form. In Quebec, a beneficiary cannot be designated on a conventional RRSP. Beneficiary designations are only allowed through wills, marriage contracts, insurance contracts, and other products that are combined with insurance contracts. Under the Act respecting trust companies and savings companies, a beneficiary designation is only allowed in RRSP products sold by insurance companies or for RRSPs structured as fixed-term annuities, which combine insurance with the fixed-term annuities paid by trust companies. Other accounts that are not owned by a single individual require special documentation. These include joint accounts and accounts in the name of corporations, estates, trusts, partnerships, minors, investment clubs, school boards, public utilities, or religious societies. Documentation requirements for these account types are discussed in detail later in this chapter. Certain types of accounts owned by a single individual, such as locked-in retirement funds and life income funds, also have distinct documentation requirements. As BCO, you must ensure that your sales representatives are aware of the dealers’ requirements regarding the collection and protection of client information deemed relevant to the operation of clients’ accounts. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 7 KNOW YOUR CLIENT INFORMATION The next step in the account opening process is enforcing the KYC requirements. All clients purchasing mutual funds must provide KYC information, regardless of whether a sales representative has recommended the purchase. This information must be obtained about all persons with trading authority for the account, as well as any beneficiaries or other persons with a financial interest in the account. These may include joint account holders, beneficiaries of spousal accounts, or children who are beneficiaries of trust accounts. This information is required to comply with securities laws and anti-money laundering requirements. To help assess whether orders are suitable for a client, most order (application) forms contain a KYC section. In some instances, the KYC information may be contained in a separate document that is to be completed by the purchaser (often with the assistance of the salesperson). THE KEY ASPECTS OF KYC INFORMATION At a minimum, KYC information should address five key aspects of the client’s situation: Financial and personal circumstances Investment knowledge Risk profile Investment time frame or horizon Investment objectives Compliance with the KYC requirement is essential if one is to provide adequate advice to a client. It applies to sales representatives who sell securities as well as to mutual funds sales representatives. The Conduct and Practices Handbook Course (provided by CSI) requires that registered sales representatives request detailed information from their clients. It reads as follows: “The Know Your Client (KYC) rule is paramount for the industry. All registrants, except those granted the exemption from the suitability requirement, must make a diligent and business-like effort to learn the essential financial and personal circumstances and the investment objectives of each client. Client account documentation should reflect all material information about the client’s current status, and should be updated to reflect any material changes to the client’s status in order to assure suitability of investment recommendations”. When completing the account opening form, the sales representative simultaneously obtains the relevant KYC information. Complete and accurate KYC information on the form is an imperative requirement that should be discussed regularly at branch sales meetings. It must be emphasized that failure to complete the form carefully and accurately is not only a breach of securities regulations but also an imprudent business practice that could be very costly to the mutual fund dealer. It could also endanger the sales representative’s registration status and even lead to loss of employment. If a disgruntled client sues the mutual fund dealer, you, as BCO, and the sales representative must be able to demonstrate that all due diligence was employed in obtaining the KYC information and that the recommendations were suitable and reasonable in terms of the client’s stated objectives. Impress upon your sales representatives the fact that simply obtaining the KYC information is not enough to meet their due diligence requirements. The information in the various KYC sections must also be evaluated for consistency. (For example, a low risk profile is not consistent with a very aggressive investment objective.) In most cases, when specific aspects of the information are in conflict, the account opening form or order form should be reviewed and inconsistencies addressed before any purchase is processed. National Instrument 31-103 specifies that sufficient information regarding the client’s investment needs and objectives, financial circumstances, and risk profile must be obtained and recorded. Where the dealer is financing the purchase of securities by a client, the client’s creditworthiness must also be assessed. Furthermore, reasonable steps must be taken to keep all KYC information current. © CANADIAN SECURITIES INSTITUTE 4 8 BRANCH COMPLIANCE OFFICER’S COURSE The minimum amount of information required for each area of the KYC section is described below. PERSONAL AND FINANCIAL CIRCUMSTANCES Personal data In addition to the client’s full name, home address, mailing address, SIN, and date of birth, it is useful, although not required, to obtain their marital status, number of dependants, and state of health. Annual income This amount should represent income from all sources. The amount may be stated as a range, such as $50,000 to $60,000 per annum. Policies on how annual income is described vary among financial institutions. For example, some institutions recommend that the average gross income of the past two to three years be used. Personal net worth This amount represents the client’s assets less liabilities. Normally, assets should include only marketable financial assets and not personal-use assets such as furniture, fixtures, appliances, and clothing. Collectibles such as stamp and coin collections should be included in assets unless they are of only trivial or sentimental value. The client’s net worth should include the total value of all investments and assets held at all institutions, not only those with your dealer or its affiliated financial institutions. Portfolio value This amount is a sub-set of the assets section of the client’s personal net worth. It should include all investment assets the client holds in all financial institutions, not only those held with your dealer and its affiliated financial institutions. Employer/occupation The client’s occupation, current employer, address, and type of business are listed here. If the client is retired, their previous occupation is useful information in that it may provide insight into the client’s investment knowledge. For example, a retired economics teacher would likely have some knowledge of investment finance. This information also is helpful in assessing the stability of income. INVESTMENT KNOWLEDGE The sales representative should find out how long the client has been investing, the scope of the investment experience, and the types of investment instruments used. Determining the length of experience alone is of little assistance; for example, a person who has invested in guaranteed investment certificates for forty years does not have a great deal of experience in investing. Investors should be asked to state their level of investment knowledge. A scale such as the one below is useful in this regard: Table 4.1 | Investment Knowledge Nil/Poor Fair Average Good Excellent No investment Very limited Some investment A reasonably experienced A knowledgeable knowledge or exposure to experience; can investor who has investor who requires experience. investments. distinguish between engaged in various types little or no direct the basic investment of investing in the past. guidance from a sales types and describe representative. their characteristics. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 9 The investment knowledge information must be consistent; the KYC documents cannot have incompatible statements. For example, the order form might state that a client’s investment knowledge is poor while at the same time indicating a past experience of short selling securities and trading derivatives. In such a case, the sales representative should correct the form in consultation with the client and resubmit it to you. Information on the form should not be changed simply to address an inconsistency; once corrected, it should reflect the client’s true situation. If the discrepancy is not resolved, you should refuse the order or refer it to the regional compliance officer. RISK PROFILE The client’s risk profile can be estimated in several ways. Some financial institutions use the following scale or something similar: Table 4.2 | Risk Profile Scale None Minimal Moderate Substantial Unwilling to accept Willing to accept a small Willing to accept a moderate Willing to accept a any risk or volatility. amount of risk to earn amount of risk to earn higher considerable amount some portfolio income. portfolio income and growth. of risk. The client and the sales representative should define unacceptable risks together. The client’s attitude toward risk will be a major factor in determining the ratio of conservative to aggressive investments. Even if growth-oriented investments appear suitable according to the other criteria, clients who are emotionally ill-equipped to deal with the risk of loss and should be counselled away from equity mutual funds and other riskier investments. Risk profile and investment objectives can vary from one account to another for the same client, and the account may have a particular purpose. For example, the client may have a registered account for retirement savings and a non-registered account for a down payment on a house. The client might indicate moderate risk for the non- registered account and minimal risk for the RRSP account. The client’s risk profile factors must be consistent with their stated investment knowledge. For example, a client who claims to have a high tolerance for risk along with poor investment knowledge has probably made incompatible statements. The sales representative should review the form with the client and make changes or provide an explanation before resubmitting it to you for approval. INVESTMENT TIME FRAME The investor’s time frame is set based on when the money will be needed to reach a particular goal (e.g., retirement, purchasing a car, or a down payment on a home). If the client has multiple goals, multiple accounts with different time frames may be appropriate. The sales representative should ask the client about special financial needs and time constraints when formulating investment objectives. The stated time horizons should be compatible with the client’s financial circumstances. INVESTMENT OBJECTIVES Investment objectives are determined primarily on the basis of the client’s answers to questions about his or her financial and personal circumstances, investment knowledge, risk profile, and investment time frame, and they should be consistent with these other factors. Objectives can be described in either a general or specific format. The appropriate components of a portfolio vary from investor to investor. For some, the emphasis will be on capital gains and growth, whereas others may want a fixed income-oriented program to augment their retirement income. The desire for capital preservation for estate planning purposes may dominate the planning for other types of investments. Regardless, a basic set of principles is critical. The major investment objectives are safety of principal, stability of income, capital growth, and liquidity. Not all clients have all four objectives. The asset allocation should be based © CANADIAN SECURITIES INSTITUTE 4 10 BRANCH COMPLIANCE OFFICER’S COURSE on the objectives and should match the personal and financial circumstances of the client. For example, a retired person’s primary objective may be safety of principal, but they may also need some growth in the value of their portfolio to counter the effects of inflation. Objectives are usually stated in terms of the basic asset allocation components of safety, income, and growth. In consultation with the sales representative, the client should work to express investment objectives in percentages of these components. The table below shows sample portfolio structures where the investment objectives are compatible with the client’s risk profile: Investor Risk Profile Suitable Investment Objectives No risk 100% capital preservation Moderate risk 20% capital preservation, 50% income, 30% growth Substantial risk 10% capital preservation, 20% income, 70% growth Objectives can vary from account to account for the same client. For example, a client might indicate growth for a non-registered account and safety of income for an RRSP account. REFUSAL TO SUPPLY KYC INFORMATION Occasionally, a client will refuse to supply some or all of the required KYC information. The sales representative should first inform such clients that the collection of this information is a legal requirement that neither the client nor the dealer can waive. Possibly with your assistance, they should also inform the client that supplying the information is in their best interest in that it will allow the sales representative to provide suitable advice and match the right mutual funds to the client’s needs and objectives. The client should be assured that the information will remain confidential. Some professional judgment may be required concerning KYC information. For example, a client may refuse to supply some non-mandatory information but be willing to provide all other information necessary to allow for an informed assessment and investment recommendation. In such a case, the sales representative may wish to open the account and accept the client’s order, whether it was solicited or not. Your sales representatives should be trained to consult with you in such cases. If the client refuses to provide mandatory information, the account cannot be opened, and the order must be refused. The sales representative should never make this decision alone. They should be counselled to discuss such situations with you immediately. As BCO, it will likely be your duty to inform the client of this decision. KYC EXTENSIONS AND SPECIAL DOCUMENTATION The investment experience and knowledge of all persons who have trading authority for an account should be obtained, along with KYC information for anyone with a financial interest in the account. These may include joint account holders, beneficiaries of spousal accounts, or trust accounts for children. (In the latter situation, you may not be able to complete the KYC forms online.) DID YOU KNOW? For spousal RRSPs, the contributing spouse had no financial interest in the account, so the KYC information is required for the beneficiary spouse only. With a spousal trust, if the contributor has trading authority over the account, his or her investment experience and knowledge should be obtained, as well as the KYC information of the owner (the annuitant) of the account. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 11 For specific types of clients, special documentation is required. Again, professional judgment should be used in determining whether sufficient KYC information has been obtained. MFDA rules require that KYC information be updated whenever a sales representative or other employee of the dealer becomes aware of a material change in the client’s circumstances. Material changes include, but are by no means limited to, changes to the client’s risk profile, investment time horizon, investment objectives, or a material change in assets or income. A client signature or other method to confirm the client’s identity should be acquired to provide evidence of any change in the client’s name, address, or banking information. The sales representative is also expected to maintain evidence of client instructions regarding any material changes in their information, and all such changes must be approved by you as BCO. At least annually, the dealer must request, in writing, that each client notify the dealer of any change in their circumstances. There is no obligation to follow up on such a request if the client fails to answer, but it is a good practice to do so. In addition, before opening any account, information required for compliance with anti-money laundering rules and other applicable laws and regulations must be collected, including that related to tax status and reporting. Your dealer should have processes and procedures in place to ensure compliance with these requirements. ACCOUNT TYPES It is essential to determine which type of account is appropriate for the client based not only on the suitability of the investments but also on the account‘s purpose. Some accounts are designed for specific purposes. Outlined below are the broad categories and a brief explanation of each. NON-REGISTERED ACCOUNTS These accounts are not registered for tax-deferral or tax-free plans, and revenues generated by the investments held in them are fully taxed each year. The tax levied depends on the type of revenue. Interest, dividends, and capital gains distributed by a mutual fund are each taxed differently. Interest is taxed as regular income; dividends are allowed a dividend tax credit; and only 50% of capital gains are taxable. Your sales representatives must be aware of the impact of taxes on these accounts. REGISTERED ACCOUNTS These accounts are registered in an individual’s name with the CRA as tax-deferral plans. This category includes RRSPs, registered education savings plans, and RRIFs, among others. Rules and regulations governing registered accounts are constantly changing, and detailed coverage is beyond the scope of this manual. However, sales representatives must be aware of the fact that there are tax consequences related to the flow of monies and securities in and out of these accounts. TAX-FREE SAVINGS ACCOUNTS Tax-free savings accounts (TFSAs) are also registered with the CRA, but they are not tax deferred. Clients can save or invest after-tax income in a TFSA without being taxed on the income earned. Any unused contribution room is carried forward from previous years. When opening an account for more than one holder, the personal information of all clients (typically, the applicant and the co-applicant) must be obtained. For a joint mutual fund account, all owners must state identical time frames, investment objectives, and risk profile levels because a single recommendation must meet all of their needs. However, the personal information and investment knowledge portions often differ. © CANADIAN SECURITIES INSTITUTE 4 12 BRANCH COMPLIANCE OFFICER’S COURSE All joint accounts should be registered in the names of all joint account holders. The joint applicants must all sign the account opening form, and KYC information should be obtained from each applicant. If the mutual fund account opening forms indicate that the account is in joint tenancy, trading instructions, including redemption requests, may be accepted from any one joint holder unless the joint holders have indicated otherwise in writing. Policies may vary from one mutual fund dealer to another in this regard. DID YOU KNOW? In Quebec, if the mutual fund account opening request indicates a joint account, authorization is required from all account holders before any transactions can occur, unless a valid proxy has been given to one of the account co-holders. CORPORATIONS For corporate accounts, you should obtain a certified copy of the corporate trading resolution confirming who has trading authority for the corporation. This document also indicates whether any restrictions prohibit the corporation from purchasing mutual funds in general or any particular types of mutual funds. If the corporate charter and by- laws contain this information, a certified copy of such is acceptable. The trading resolution should be kept in the client file. Trading resolutions often authorize persons who hold specified titles to act on behalf of the corporation, in which case an incumbency certificate will be required. In Quebec, the corporate trading resolution must be renewed annually. The KYC information obtained for opening a corporate account relates to the corporation, not to the persons authorized to act. PARTNERSHIPS All partners must sign and approve KYC information unless a certified partnership resolution is provided confirming which partners or employees of the partnership have trading authority. A partnership trading resolution form should be attached to the application and included in the file. ESTATES AND TRUSTS You should obtain a notarial copy of the letter of probate or administration or the trust deed and include it in the file. Many dealers and managers waive this requirement if the value of the account is modest. In such cases, the dealers and managers may require the person giving the instructions on behalf of the estate or trust to sign an indemnity in favour of the dealer and manager to protect them in the event of a dispute. MINORS’ ACCOUNTS The account set-up for trusts for minor children (i.e., children under the age of 18 or 19, depending on the province or territory) varies among mutual fund dealers. Some dealers do not accept accounts for minors because they can repudiate their contracts when they come of age, including mutual fund orders. Because mutual funds may fluctuate in value, it could be a problem for the dealer if the minor repudiates a contract involving the purchase of units of a mutual fund that has subsequently declined in value. This is why in-trust accounts are required at some mutual fund dealers. Another method of dealing with minor accounts is to require a parent’s guarantee on the account. In such cases, if the minor repudiates the purchase, the dealer can demand that the parent cover any shortfall. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 13 If your firm accepts accounts for minor children, it is strongly suggested that they be opened in the name of a parent or guardian and held in trust for the child. Policies, however, vary from one mutual fund dealer to another in this regard. EXAMPLE An account is opened for John Doe (parent/guardian) in trust for Jane Doe (child). Your sales representative should obtain KYC information for both the parent and the child, at least to the extent possible and applicable. For example, investment objectives and risk profiles should be determined for the account, not just the parent. All purchase and redemption orders for the account should then be placed by the parent or else confirmed by the parent verbally or in writing. No formal trust deed is required for these types of accounts, which are often referred to as informal trust accounts. INVESTMENT CLUBS If you are opening an account in the name of an investment club, you should make sure that the club has been properly structured so that it meets the definition of an investment club as defined by securities regulation. Status as such makes it exempt from registration under securities legislation. If an investment club wishes to establish an account with your dealer, you should contact your compliance department. You should also discuss the structure and rules of the club with authorized members to ensure that it is an investment club under the legal definition. A trading resolution form authorizing one or more persons to trade on behalf of the investment club should be obtained. A copy should be retained in the file and the original forwarded to the head office. (Again, policies vary from one mutual fund dealer to another.) DID YOU KNOW? Investment clubs are defined as private mutual funds in some securities acts and, as such, are exempt from registration. For example, under the British Columbia Securities Act, an investment club must fulfil the following criteria to qualify as a private mutual fund: It must have no more than 50 shareholders. It must never have issued public debt. It must not pay any member of the club for investment, management, or administration advice (except normal brokerage fees). All members must make pro rata contributions to finance its operations. SCHOOL BOARDS, PUBLIC UTILITIES, LODGES, SOCIETIES, AND HOUSES OF WORSHIP A trading resolution stating authorization for one or more individuals to transact on behalf of the institution should be obtained. A copy should be retained at the branch and the original forwarded to the head office. (You may wish to check your mutual fund dealer’s specific policy.) © CANADIAN SECURITIES INSTITUTE 4 14 BRANCH COMPLIANCE OFFICER’S COURSE ACCOUNT PROTECTION Clients of mutual fund dealers that are members of the new SRO (or the former MFDA) are protected against the insolvency of their mutual fund dealers. Before January 1, 2023, mutual fund investors were protected from the insolvency of mutual fund dealer member firms through the MFDA Investor Protection Corporation (MFDA IPC). The MFDA IPC objective was to return assets to clients or compensate clients if their assets became unavailable when a member firm had become insolvent. The MFDA IPC provided coverage of $1,000,000 per eligible account. As of January 1, 2023, the Canadian Investor Protection Fund (CIPF) and the MFDA IPC were amalgamated to form a new investor protection fund under the CIPF designation. The rules and coverage that apply to the new investor protection fund are the same as before the amalgamation. The main difference is that the CIPF now maintains two segregated funds. The fund designated as the Investment Dealer Fund provides protection to customers of the new SRO members duly registered in the category of “mutual fund dealer”. The fund designated as the Mutual Fund Dealer Fund provides protection to customers of the new SRO members duly registered under the category of “mutual fund dealer”. Note that CIPF protection is not available to customers for mutual fund dealer accounts located in Quebec, which has its own compensation fund. For further details, refer to the CIPF website at https://www.cipf.ca/. ANTI-MONEY LAUNDERING AND ANTI-TERRORIST REQUIREMENTS Before opening any account, anti-money laundering and anti-terrorist financing (AML/ATF) requirements must be considered and met. Every mutual fund dealer must have processes and procedures in place for this purpose, and they must provide appropriate training to sales representatives. The AML/ATF processes generally focus on verifying the identity of every person authorized to provide instructions for the account or who has a beneficial interest in it. There also are procedures for the following activities: Freezing accounts of individuals and organizations that appear on a list published by The Office of the Superintendent of Financial Institutions (OSFI) Reporting suspicious transactions and attempted transactions Client identification requirements that apply in special circumstances Cash transactions or a series of transactions on any given day of $10,000 or more for account holders should be reported to the regional compliance officer or the dealer’s head office (or both). Recent amendments to the AML/ATF requirements specify that all aspects of the relationship with the client must be continually examined and monitored. The account application or KYC form should capture the following information for all new client accounts: The purpose and intent of the account (i.e., investment, savings, or income) Detailed employment information, including title and occupation The source of the funds used to establish the account The purpose and intent of the account must also be continually maintained, and any changes to the client relationship or with respect to the identity of the client or beneficial owner must be reflected in an updated KYC form. The AML/ATF requirements also specify that dealers must have a risk ranking for clients and that clients with a higher risk ranking must be monitored more frequently. For example, certain cash-intensive occupations such as car © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 15 dealerships and casinos may require greater ongoing scrutiny. As the BCO, it is your responsibility to ensure that you review client accounts and the sales representatives you supervise with your dealer’s risk ranking in mind. Furthermore, as part of the KYC process, sales representatives must identify politically exposed foreign persons – that is, persons who perform important public functions for a state. Included in this category are heads of state or government, judicial and military officials, senior executives of state-owned corporations, and important political party officials. The preceding discussion addresses minimum requirements. The dealer may require clients to provide any additional information it considers relevant. The opening of a new account is not complete until the sales representative has received all necessary documentation. The first line of defence against a client’s claim for compensation is proper account documentation. As BCO, you must document your process for resolving issues related to outstanding account documentation. The process should include the time frame within which a sales representative must respond to your queries and the method you use to track sales representatives who consistently have outstanding or incomplete account documentation. You should never accept a client account without complete and accurate account documentation. FOREIGN ACCOUNT TAX COMPLIANCE ACT The Foreign Account Tax Compliance Act (FATCA) is designed to detect and discourage offshore tax evasion by U.S. citizens. It requires that dealers have processes in place for the following purposes: To identify U.S. account holders To report certain information about such account holders annually to the CRA To withhold tax on payments to U.S. taxpayers As part of the KYC process, sales representative must also document clients who have any of the following ties to the U.S.: U.S. citizenship or permanent residence (i.e., a green card) A U.S. birthplace A U.S. residence address or correspondence address A U.S. telephone number Standing instructions to transfer funds to an account maintained in the U.S. A power of attorney or signatory authority granted to a person with a U.S. address An “in care of” or “hold mail” address in the U.S. As BCO, you are responsible for ensuring that your sales representatives are familiar with all reporting requirements from both a tax and a securities regulatory perspective. POWERS OF ATTORNEY Clients who wish to designate trading authority for an account to another person must provide written trading authorization. Typically, the person authorized is a spouse or friend. Written trading authorization allows the holder to purchase, redeem, and switch orders on behalf of the client. The new SRO prohibits sales representatives, officers, and directors of a mutual fund dealer from accepting a general power of attorney or similar authorization from a client in their favour. Sales representatives are not allowed © CANADIAN SECURITIES INSTITUTE 4 16 BRANCH COMPLIANCE OFFICER’S COURSE to be named as attorney when accepting a power of attorney on behalf of a mutual fund client. If they were named as attorney, they would be engaged in the prohibited practice of discretionary trading. DID YOU KNOW? A discretionary trade is defined as any purchase or sale where the sales representative determines the timing or price of the sale or purchase. As a general rule, a sales representative may not act pursuant to an appointment under a power of attorney or similar document on behalf of a client. (See MFDA Rule 2.31(a) for more details). The only exception occurs when the sales representative is appointed to act on behalf of his or her parent, spouse, or child. In such instances, the salesperson’s role is limited to that of representative of the person who has given power of attorney. A different sales representative must act on behalf of the dealer in giving advice, providing recommendations, and accepting trade instructions. For example, a sales representative whose mother has appointed him as her power of attorney cannot accept a mutual fund order on behalf of the dealer for his mother’s account; another sales representative must accept the order. The new SRO has also approved the use of limited trading authorizations (LTA) in some circumstances. These authorizations permit a representative to accept verbal instructions from a client and transmit the instructions to a mutual fund company or manager. The sales representative exercises no discretion with regard to client instructions under the LTA; he or she simply forwards them to the mutual fund company or manager for execution. (Refer to MFDA Bulletin 0073-P for details.) This allows a client to give instructions by telephone to a mutual fund salesperson who, in turn, can forward it to the mutual fund company. The LTA protects the mutual fund company if the client later denies giving the sales representative instructions. The representative and the dealer must maintain documented evidence of client instructions when accepting them under an LTA. You should also be on the alert for so-called financial advisors representing clients with a trading authorization or a power of attorney who are being remunerated by the client. Usually, such an advisor should be registered with the securities regulator as an advising representative of a portfolio manager. Anyone acting in that capacity should be questioned tactfully, yet directly, about their financial relationship with the client to confirm whether they are registered with a securities commission. If the person is a registered advisor, the sales representative does not need to obtain KYC or other information about the client; this is the advisor’s obligation. Notify your regional compliance officer if you suspect that a non-registered individual is receiving compensation for providing advice. DID YOU KNOW? There are some exemptions under National Instrument 31-103 or as a result of a relief order. For example, lawyers and accountants may be exempt from registration in certain circumstances when providing advice on securities in the normal course of their professional activities and the advice is incidental to their professional activities. INTERNAL CONTROL SYSTEMS AND PROCEDURES Only after all of the required KYC information has been obtained and the account opening form has been completed and approved by the BCO can an order be completed. The client should identify the purchase options. Lump-sum purchases require cash, a cheque, or a debit to a bank account. For periodic purchase plans (called pre-authorized purchase plans at some institutions), the payment frequency and starting date must be specified. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 17 Once the client and the sales representative have signed a completed account opening form, you must initial or sign the form. Your signature as BCO means that the application has been reviewed for completeness and accuracy and that the investor has been accepted as a client. It also attests to the fact that the regulatory requirement that a qualified and registered sales representative has completed the form has been satisfied. The signature is only required for the initial account opening form, and not for every purchase, redemption, or switch (i.e., a transfer between funds within the same family of funds). Special supervision requirements apply to the opening of new accounts and trades undertaken by new sales representatives under MFDA Policy No. 1. Branch compliance officers must be aware of these additional requirements. On subsequent transactions, the KYC information in the client’s file should be reviewed and, if necessary, updated. Reviewing the information on subsequent transactions allows the client and the sales representative to examine the impact of the proposed transaction on the client’s overall portfolio as it then stands. For example, a trade that appears unsuitable (such as a relatively high-risk or particularly volatile mutual fund) might be suitable within the context of a client’s portfolio mix. Accordingly, you should review subsequent orders to ensure that your sales representatives are complying with the KYC and suitability requirements. The KYC information should be readily accessible to you when you review trades for suitability. Reviewing trades without referring to this information is pointless. You should initial all trades you reviewed for suitability as evidence of supervision. Ideally, all orders should be reviewed, but if that is not feasible, you should implement a sampling process. For example, if you assume that the number of errors is relatively small and that they occur randomly, a review of 10% of the orders, selected randomly, reduces the probability of processing an unsuitable or unreasonable order. Trades with certain characteristics could be reviewed more frequently, for example, leveraged purchases, orders for aggressive growth and sector mutual funds, and orders over a threshold amount such as $25,000 (or lower for sales representatives compensated on a commission basis). Reviews can be carried out manually or electronically. The mutual fund dealer may have internal requirements for trade reviews and client account sampling and may provide the BCO with certain exception reports or client account review requirements. All trades made by new sales representatives must be reviewed by the BCO under MFDA Policy No. 1, and the BCO must have evidence of ongoing meaningful reviews, not just of an initial trade. Documented evidence of the accounts and trades reviewed should be retained in accordance with the dealer’s internal requirements. A standard filing system should be implemented for client files. For example, a file folder should be maintained for every client with the signed branch copy of the KYC file inside it (if it is not already part of the order form), and all client files should be in alphabetical or other order. Records of all discussions between sales representatives and clients should be maintained. Encourage your sales representatives to keep a diary of all client discussions and maintain it in the client file. The entry should indicate the topics discussed and possible topics for future action. You should review a certain percentage of files periodically to ensure that they are being accurately maintained. Make sure that all old KYC files are also maintained. Hard-copy evidence that includes the client’s signature is essential in the case of a dispute, investigation by a regulator, or a legal claim. The general retention period for records is seven years (five in Quebec). UPDATING CLIENT INFORMATION Client information should be periodically updated. The new SRO rules require that an enquiry be made of all clients at least annually. (In Quebec, the review must take place at least once every 12 to 24 months.) A client’s financial circumstances, personal circumstances, risk profile, time horizon, investment knowledge, tax bracket, or financial objectives may change, with implications for current and future portfolio allocations. © CANADIAN SECURITIES INSTITUTE 4 18 BRANCH COMPLIANCE OFFICER’S COURSE In addition, all hold mail requests must be authorized by the client in writing and should be controlled and reviewed regularly by the BCO. Hold mail should never be permitted to occur over a prolonged period (i.e., for more than six months). Accordingly, you should implement a policy with your sales representatives for the periodic review of KYC information and account status. As noted previously, the KYC information must be updated whenever a material change in the client’s circumstances comes to the attention of the sales representative or any other employee of the dealer. Material changes in an existing account require the completion of updated KYC information and for the account to be re- approved by the BCO. All changes must be fully discussed with the client. Material changes include, but are by no means limited to, changes to the client’s risk profile, investment time horizon, investment objectives, or a change in assets or income. A client signature or other method to confirm the client’s identity should be required as evidence of any change in the client’s name, address, or banking information. The new SRO rules require that the dealer must make a written request to each client at least once a year asking them to notify the dealer (or the sales representative) of any material changes in the KYC information. As indicated in the Internal Control Systems and Procedures section, systematically reviewing a certain percentage of files periodically is a good business practice. Many mutual fund dealers offer an annual update to the client’s statement of affairs; however, given the fluctuating nature of mutual fund values, you may want to consider a more frequent approach. You should also update the KYC information if you suspect that the information provided by the client has changed. Make sure that all old KYC files and relevant documentation are maintained. Hard copy evidence is essential in the case of a dispute, a legal claim, or a regulatory review. Although it is not required, it is a good business practice to require both the sales representative and the client to sign the updated KYC form. If an account is closed, remember that a hard copy record that includes the client’s signature is to be retained for seven years (five years in Quebec). CLIENT TRANSFERS Branch compliance officers should make sure that mutual fund representatives under their supervision understand the branch’s requirements with respect to the transfer-in and transfer-out of accounts. In general, transfers out (when a client moves their account from the mutual fund dealer) must be undertaken in an orderly, reasonable, and timely manner that does not abuse, harm, or disadvantage the client. Mutual fund representatives receiving a transfer-out request should forward the request to the BCO immediately. When undertaking a transfer-in (when a client moves assets to the mutual fund dealer), the sales representative should use the appropriate form (i.e., T2033). They should verify that the client has indicated “in-cash” or “in-kind” (transfer assets as they are) and submit the form to the BCO and the dealer’s operations group to be processed. © CANADIAN SECURITIES INSTITUTE  CHAPTER 4 ACCOUNT OPENING 4 19 SUMMARY Now that you have completed this chapter, you should be able to meet the following learning objectives: 1. Describe the relationship between the client and the sales representative. Sales representatives have an ethical and professional obligation to know their clients so that they can match mutual funds to their clients’ needs and objectives. 2. Outline the steps sales representatives must follow when opening an account for a client. The first step is to obtain the client’s personal data: « Full legal name, permanent address, mailing address, SIN, and date of birth. The next step is to enforce the KYC requirements: « Personal & financial circumstances, personal data, annual income, personal net worth, portfolio value, employer & occupation, and investment knowledge. 3. Identify the various types of accounts and the documentation required for each. Types of accounts include joint accounts, corporations, estates and trusts, TFSAs, partnerships, minor’s accounts, investment clubs, and school boards, public utilities, lodges, societies, & houses of worship. Documentation varies from one type of account to another. 4. Ensure compliance with the KYC requirements. Sales representatives must that the following KYC requirements have been met: « Sufficient KYC information has been obtained for all accounts. « The KYC information is updated whenever a sales representative or other employee of the dealer becomes aware of a material change in the client’s circumstances. « Evidence is maintained regarding any material changes in client information. « The KYC information and material changes are approved by the BCO. The BCO must ensure that other rules and regulations regarding AML/ATF, politically exposed foreign persons, and FATCA have been considered and met by the sales representative and that proper documentation has been provided. 5. Set up internal branch control systems to ensure that KYC information is properly obtained and periodically updated. The completed account opening form must be reviewed, approved, and signed by the BCO. Trades with certain characteristics should be reviewed frequently. A standard filing system should be implemented for client files. BCOs should initiate procedures for performing periodic checks for the suitability and reasonableness of trades. The KYC information and account status must be periodically reviewed. 6. Ensure understanding of account transfers-in and transfers-out requirements. Transfers-out (when client elects to move their account from the mutual fund dealer) must be undertaken in an orderly, reasonable, and timely manner that does not abuse, harm, or disadvantage the client. When undertaking a client transfer-in (when clients are electing to move assets to the mutual fund dealer), mutual fund representatives should use Form T2033 and make sure the client has indicated “in-cash” or “in-kind.” BCOs should ensure that mutual fund representatives understand that accounts transferred in and transferred out are submitted promptly to the BCO and operations group for processing. © CANADIAN SECURITIES INSTITUTE