Chapter 1A Notes - Updated.docx

NOTE: The following notes are intended to supplement (not replace) the required course materials. Know your client and suitability Suitability is based on the client’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance, and the account’s current...

NOTE: The following notes are intended to supplement (not replace) the required course materials. Know your client and suitability Suitability is based on the client’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance, and the account’s current investment portfolio composition and risk level also that the order type, trading strategy and method of financing the trade recommended and/or adopted are also suitable for the client Dealer members must use due diligence to ensure suitability assessments are undergone for each of the prescribed triggers: 1) a trade is accepted, 2) a recommendation is made, 3) securities are transferred or deposited into the account, 4) there is a change of representative on the account, or 5) there is a material change to the KYC information for the account. Know your product Advisor must understand how the product is constructed and how it is likely to perform in various market conditions Some of the best practices dealers should follow when performing new product review: Formal written new product policies and procedures. Formation of a new product committee to review and approve or disapprove a product. The standard of review should be clearly communicated and consistently applied throughout the firm. Product training for registered representatives, as well as a post-approval follow-up and review. Under IDPC Rule section 3301, Product Due Diligence: A Dealer Member must not make securities available to clients unless the Dealer Member has taken reasonable steps to: assess the relevant aspects of the securities, including the securities’ structure, features, risks, initial and ongoing costs and the impact of those costs, approve the securities to be made available to clients, and monitor the securities for significant changes. CIRO also provides guidance to dealer members regarding the due diligence that must be conducted on all securities they make available to clients. This will be discussed in greater detail further on in the course. Best Practices for Distribution of Non-arm’s Length Investment products: Step 1 – Product Due Diligence. Dealer members and their sales representatives must thoroughly understand the non-arm’s length products they intend to distribute. Step 2 – Conflict of Interest assessment. Dealer members must identify any conflicts and assess whether they can be addressed. Step 3 – Suitability assessments must be made in respect of client orders and recommendations. The requirement to provide advice to clients fully, honestly, in good faith, and with the proper skills and knowledge is referred to as duty of care. In general, RRs who provide advice are held to a duty of care rather than a fiduciary duty. The same obligation applies to order-execution-only accounts. A fundamental difference exists between ethical behaviour and compliance with rules. An industry’s rules and regulations set out standards that participants must follow. Code of Ethics and Standard of Care IA has a duty under provincial and territorial securities laws to deal fairly, honestly and in good faith with his or her clients Standard A: Duty of Care Know Your Client - KYC Due Diligence – KYC and KYP Unsolicited Orders – check suitability according to NAAF (if not suitable, either reject the order or ask to update NAAF) Standard B: Trustworthiness, Honesty and Fairness Priority of Client Interests – client’s interests (suitability) come first before the IA’s interests (commission) Protection of Client Assets Complete and Accurate Information – when IA inform client about the investment Disclosure – conflict of interest and investment risk Standard C: Professionalism Client Business – Client Orders – Trades by Registered and Approved Individuals – Investment Advisor (RR), Investment Representative, or portfolio manager – Approved Securities – on the approval list of the investment dealer (i.e. your employer) Personal Business (i.e. IA) – Personal Financial Dealing with Clients – not allowed – Personal Trading Activity – all trading activities have to be done in Pro-Account, usually opened with your employer – Other Personal Endeavours – you should disclose to your employer and seek approval Continuous Education – every year, you have to complete a certain amount of continuous education Standard D: Conduct in accordance with the Securities Acts Compliance with the Securities Acts (e.g. Ontario Securities Act) and SRO Rules (e.g. CIRO rules) – Insider Information – you should not use or tip your client with insider information (i.e. information not generally available to the public) Standard E: Confidentiality Client Information – IA should not disclose client information, including the details of the portfolio Use of Confidential Information – e.g. of a new issue being worked by the corporate finance department