Financial Institution KYC Quiz PDF

QUESTION ANSWER That's correct! At a minimum, a client's KYC information must include five components: (i) their financial and personal circumstances, (ii) their investment knowledge, (iii) their risk profile, (iv) their investment time frame or horizon, and (v) their investment objectives. What...

QUESTION ANSWER That's correct! At a minimum, a client's KYC information must include five components: (i) their financial and personal circumstances, (ii) their investment knowledge, (iii) their risk profile, (iv) their investment time frame or horizon, and (v) their investment objectives. What should a registered sales representative do when a client of an affiliated financial institution refuses to provide the information necessary to fulfil the Know Your Client obligation? That's correct! Under MFDA Rule 2.2.1, sales representatives must apply due diligence to learn the essential facts about each client. They must not open an account or process an order for a client without obtaining the required KYC information. If the client refuses to supply the information, the representative must refuse to do business with them. Registered sales representatives should also follow this rule. Why do some dealers refuse to open mutual fund accounts for minors? That's correct! Minors can legally purchase mutual funds, but they cannot be contractually bound and can therefore revoke the contract at any time before reaching the age of majority. In such a case, the dealer would need to refund the full initial amount of the investment, even if the fund's units had dropped in value. A client indicates that she has a high risk profile and substantial investment knowledge. However, she has invested only in guaranteed investment certificates over the past 20 years. How should the registered sales representative respond to this information? That's correct! Information on the KYC form should reflect the client's true situation. In this case, the sales representative should correct the inconsistencies in the form in consultation with the client, and the form should be resubmitted to the BCO. A client refuses to provide her social insurance number when requested for her Know Your Client information. What should the registered sales representative do? That's correct! A SIN is required for all registered accounts; without one, the account cannot be registered with the CRA for tax purposes. Requesting the SIN is a legal requirement, and the sales representative must make a reasonable effort to obtain it. However, the order may be executed and the account opened even if the SIN is not obtained. If the client refuses to supply it, the sales representative should indicate the fact in writing on the account form. Which client's profile would a branch compliance officer consider to be of the least concern in terms of suitability? That's incorrect. The correct answer is: B. Rita has a low risk profile, holds GICs, Canada Savings Bonds, and a balanced fund, and has a high net worth. Of the four accounts, Rita's is the one that should raise the least concern. Tomas has not enough net worth for his risk profile, Subir's assets are too risky assets for his medium risk profile, and Jaelen's investments are too conservative investments for his high risk profile. That's correct! The client and the registered sales representative should define acceptable risks together. For example, the client's attitude toward risk will be a major factor in determining the proportion of conservative and aggressive investments. Although growth-oriented investments may appear suitable according to the other criteria, some clients are emotionally ill-equipped to deal with risk of loss and should therefore be counselled away from equity mutual funds and other riskier investments. For this client, the lowest risk within each asset allocation class would be the most appropriate. Which items do not require the branch compliance officer's initials or signature? That's correct! The BCOs must initial or sign all trades that are reviewed for suitability, all new account openings, and all trades for new registered sales representatives. Redemption requests do not need to be signed or initialed. A client enters your branch, opens an account, and places an unsolicited order to buy a growth fund. When you look at the impact of the fund on her account, you see that it would bring the growth portion of her portfolio to 60%. She has indicated in her KYC form that her objective is 10% safety, 50% income, and 40% growth. As branch compliance officer, what action would you recommend to your registered sales representative? That's incorrect. The correct answer is: B. Refuse the order because it will result in an excessive portfolio weighting in growth securities. If, as in this case, a trade is unsuitable and unreasonable according to a client's KYC information, it should not be executed. Peter and Marie want to open a joint mutual fund account. Marie has a high-paying executive position, and Peter is a stay-at-home parent with no income. What are the Know Your Client requirements for the account? That's correct! The personal information of all clients must be obtained. For a joint mutual fund account, a single recommendation must meet the needs of all owners of the account (typically, an applicant and a co-applicant). Therefore, they must have an identical time frame, identical investment objectives, and an identical risk profile. Their personal information and investment knowledge, however, may differ. Which action is necessary on the part of a branch compliance officer to comply with internal control procedures? That's incorrect. The correct answer is: B. Initial all randomly selected order forms as evidence that they have been reviewed. Reviewing a sampling of orders chosen randomly will reduce the likelihood of processing an unsuitable or unreasonable trade. There is no required percentage of trades to be reviewed. Documented evidence of the accounts and trades reviewed should be retained in accordance with the dealer's internal requirements. The BCO's signature is used as evidence of account reviews. A client indicated on his Know Your Client and account opening forms that he a German citizen and that his occupation is that of a federal court judge. How should the client be identified on the form? That's correct! As part of the KYC process, registered sales representatives must identify politically exposed foreign persons, a category that applies those who perform important public functions for a foreign state. Included in this category are heads of state or government, high-level judicial and military officials, senior executives of state-owned corporations, and important political party officials. A client objects to providing the mandatory Know Your Client information out of concern for his privacy. How should the branch compliance officer deal with the client's concern? That's correct! Occasionally, a client will refuse to supply some or all of the KYC information needed. Your sales representatives should first inform such clients that collection of the information is a legal requirement that neither the client nor the dealer can waive. They should also inform the client, possibly with your assistance, that supplying the information is in their best interest in that it will allow the registered sales representative to provide suitable advice and recommendations. The client should be reassured that the information will remain confidential. If they still refuse to provide the information, the BCO must refuse to open the account. While discussing her desire to make a leveraged trade with her registered sales representative, a client mentions that she recently lost her job. What should the representative do before any trade takes place? That's incorrect. The correct answer is: A. Update the Know Your Client information to reflect the change in employment status. Whenever a material change in a client's circumstances comes to the attention of a registered sales representative or any other employee of the dealer, the client's KYC information must be updated. For an existing client, the account must be re-approved by the BCO. What material change in a client's circumstances can be recorded in the client's file without requiring the branch compliance officer's review and possible re-approval of a client's account? That's correct! A material change may include a change of address or marital status, a change to employment status, or a new registered sales representative taking over the account. A change to the address of the branch is not material as it is not related to the client's personal or financial situation. Chapter 5 What offering document must always be provided when a client purchases a mutual fund? That's correct! A document containing the mutual fund's current fund facts must always be given to clients before or at the time a fund purchase is accepted. Other disclosure documents can be provided at the client's request, including the simplified prospectus, the annual or semi-annual financial statements, the management report of fund performance, and the annual information form. What information must be disclosed to retail clients when they are opening a securities or mutual fund account? That's correct! The disclosure document for a new securities or mutual fund account must state that the value of a mutual fund's units will fluctuate. Which individual or company fits the definition of a retail client? That's correct! A retail client is a non-registrant individual with a net worth of less than \$5,000,000 or a non-registrant individual or company with total assets or annual revenues of less than \$10,000,000. A client asks the registered sales representative about guarantees on her mutual fund investments. What must the registered sales representative say? That's correct! Mutual funds do not qualify for CDIC, AMF, or CUDIC guarantees, and, unless otherwise advised, an affiliated financial institution (of which the mutual fund dealer is a subsidiary) does not guarantee in any way the mutual fund securities sold by the mutual fund dealer. What information must be included in the client relationship disclosure document? That's correct! The client relationship disclosure document is intended to provide all the information a reasonable client would consider important about his or her relationship with the mutual fund dealer and the registered sales representative. Which factor would make a referral arrangement unacceptable? That's correct! Referral arrangements must be in writing, and written disclosure of referral arrangements must be made to clients. Any fees or other compensation paid as part of the referral arrangement must be recorded on the mutual fund dealer's books and records. A referral from an outside party that requires a fee payment is not acceptable. When is it optional to provide the fund facts document to a client purchasing a mutual fund? That's correct! If the client has already received a copy of the current fund facts document for a prior purchase of the same mutual fund, it is not necessary to provide it for a subsequent purchase. Which statement in a client communication is in conflict with the registered sales representative's disclosure requirements? That's correct! When discussing mutual funds with clients, the sales representative must disclose the fact that past performance is not a guarantee of future performance. It is correct to communicate that leverage increases risk, investments are not guaranteed, and net assets value fluctuate. Four months ago, Li contributed \$2,500 in mutual fund units to her registered retirement savings plan. After receiving written disclosure of the risks of leverage from the mutual fund sales representative, she contributed \$500 in cash and borrowed the remaining \$2,000 from the financial institution. Five days before the contribution deadline, she wants to contribute the same amount. Again, she has only \$500 in cash and has been approved to borrow the remaining \$2,000. What is the representative's obligation regarding leverage disclosure? That's correct! There is no need to provide leverage disclosure and receive acknowledgement if you have done so within six-months before the leveraged purchase. There is no minimum amount of loan where the document is required, nor is there an exception based on the purpose and place of investment. Raoul recently inherited \$9,000, which he plans to invest in a growth fund with a net asset value per unit of \$11.30. He wants to buy 1,500 units of the fund at total cost of \$16,950. He plans to borrow \$7,950 to help finance the purchase. What effect does the leverage have on the transaction? That's incorrect. The correct answer is: A. It puts Raoul at risk of a theoretical loss of more than his equity of \$9,000. Because he is borrowing to help fund the purchase, Raoul is risking more than if he had only invested his inheritance of \$9,000. He is risking the entire \$9,000 plus the \$7,950 he has to repay regardless of whether the investment is successful. Chapter -- 6 ------------ - The first step in the investment management process is to identify objectives and goals. - Sales representatives should refer to a mutual fund's fund facts and prospectus to determine its risk ranking. - Sales representative can sell both proprietary and third-party funds. - How to determine suitability: +-----------------------------------+-----------------------------------+ | Objective and Goal | How much money for short and long | | | term and what is the objective | +===================================+===================================+ | Risk capacity | Annual income, assets and | | | liabilities and income stability | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | | - | +-----------------------------------+-----------------------------------+ - Whereas suitability has a quantitative aspect (in that it can be tied to asset allocation models), reasonability is more qualitative and subjective. - Acceptable = the trade that can be executed with warning to the client - Unacceptable = the trade that can not be executed - Discount brokers are exempt from checking suitability by the securities regulators, and they can book unsuitable trades. - **[Solicited orders]** are always suitable because they initiated by the sales representative and are consistent with KYC. - **[First,]** confirm to mutual fund dealer asset allocation model. - **[Second,]** align with client's stated KYC information. - **Unsolicited orders** are initiated by the client. These orders may be unsuitable, but they must still be reasonable; otherwise, they are unacceptable. - If you are truly uncomfortable refuse the order or refer to discount broker - Remember, unacceptable trades cannot be done, even with an undertaking signed by the client. **[Case Study]** You are the branch compliance officer of the Lakehead branch of the Confederation Bank. Jim, one of your sales representatives, walks into your office to discuss the case of Wanda Ho, a 65-year-old retiree who is a client of the branch. You listen patiently as Jim outlines the facts. He indicates that he opened an account for Wanda a year ago. She listed her income at that time as \$55,000 per year, her net worth as \$225,000, her risk profile as low, and her investment objectives as 50% safety and 50% income. She invested \$125,000 in a combination of money market and bond mutual funds. In a meeting with Jim today, Wanda complained, "I earned a miserable 3.5% on my portfolio with you over the past year. According to the latest mutual fund performance survey, the average stock mutual fund earned 13% over the past 12 months. I could have earned nearly 10% more on my portfolio if I had been holding stock funds. That's nearly a \$13,000 difference! I want you to sell my money market and income funds and invest in aggressive growth funds." Jim refused to process the order. Wanda disagreed and insisted on escalating the issue to the BCO, so Jim has come to you for help. +-----------------------+-----------------------+-----------------------+ | | | That's incorrect. | | | | | | | | The correct answer | | | | is: | | | | | | | | D. Suitable and | | | | reasonable. | | | | | | | | The current portfolio | | | | seems to be suitable | | | | and reasonable for a | | | | retired 65-old client | | | | with annual revenues | | | | of \$55,000 and a net | | | | worth of \$225,000. | | | | Equity mutual funds | | | | are not suitable for | | | | her objective of 50% | | | | safety and 50% | | | | income. | +-----------------------+-----------------------+-----------------------+ | | What is Jim's option | That's correct! | | | regarding Wanda's | | | | request to redeem her | If a redemption would | | | current funds and | result in a remaining | | | purchase aggressive | asset allocation that | | | growth funds? | is both unsuitable | | | | and unreasonable, the | | | | request must be | | | | refused. In this | | | | situation the | | | | client's choice is to | | | | change the remaining | | | | asset allocation, | | | | withdraw the request, | | | | or close the account. | | | | The redemption order | | | | would result in a | | | | 100% cash allocation | | | | and effectively close | | | | the mutual fund | | | | account's position. | | | | Because the purchase | | | | order is unsuitable, | | | | the representative | | | | must refuse it. | +-----------------------+-----------------------+-----------------------+ | | What conclusion can | That's correct! | | | you draw regarding | | | | Wanda's request to | A sales | | | redeem her current | representative must | | | funds to purchase an | use good judgement to | | | aggressive growth | ensure that a | | | fund? | client's mutual fund | | | | purchase is both | | | | suitable and | | | | reasonable in light | | | | of that client's | | | | needs and objectives. | | | | Sales representatives | | | | must also have a | | | | thorough knowledge of | | | | mutual fund products | | | | so they can match | | | | them to their | | | | clients' investment | | | | needs and objectives. | | | | If a trade is | | | | unsuitable and | | | | unreasonable for a | | | | client, it should be | | | | refused. | +-----------------------+-----------------------+-----------------------+ | | When assessing | That's correct! | | | leverage suitability | | | | for a client, what is | Investment knowledge, | | | the least relevant | risk profile, and age | | | aspect of the | are all basic | | | client's Know Your | requirements of KYC | | | Client information? | data in terms of | | | | assessing leverage | | | | suitability. Marital | | | | status is not a | | | | concern. | +-----------------------+-----------------------+-----------------------+ | | Which individual or | That's correct! | | | entity has no | | | | suitability | Discount brokers have | | | obligation with | no suitability | | | regard to customers? | obligation. A client | | | | who insists on | | | | placing an | | | | unacceptable order | | | | can be referred to a | | | | discount broker. | +-----------------------+-----------------------+-----------------------+ | | Ms. Ng is interested | That's correct! | | | in using a line of | | | | credit to purchase | The client should | | | securities, including | fully understand that | | | mutual funds. What | a leveraged purchase | | | should the sales | of mutual funds | | | representative tell | involves greater risk | | | her regarding her use | than a purchase using | | | of leverage? | cash resources, | | | | meaning it is not a | | | | safe way to increase | | | | one's return. In | | | | contrast to a cash | | | | purchase, where the | | | | percentage gain or | | | | loss on a fund equals | | | | the percentage gain | | | | or loss in the value | | | | of a fund's units, | | | | the purchase of | | | | mutual funds with | | | | borrowed money | | | | magnifies the loss or | | | | gain on the amount | | | | invested. All clients | | | | must have written | | | | evidence of the | | | | client's | | | | acknowledgement that | | | | they received a | | | | warning regarding | | | | leverage. The client | | | | must understand that | | | | the borrowed funds | | | | must be repaid with | | | | interest regardless | | | | of the performance of | | | | the investment. | +-----------------------+-----------------------+-----------------------+ | | Ahmad is a | That's incorrect. | | | 36-year-old investor | | | | with little | The correct answer | | | investment knowledge, | is: | | | a conservative risk | | | | profile, and a short | B. Have the branch | | | time horizon. On the | compliance officer | | | recommendation of his | advise Ahmad that his | | | brother-in-law, | order is refused. | | | Abdul, Ahmad has met | | | | with a mutual fund | If a trade is | | | representative to | unsuitable and | | | transfer 70% of his | unreasonable for a | | | portfolio to an | client, it should be | | | equity mutual fund. | refused. Based on | | | What should the sales | Ahmad's client | | | representative do in | profile, the purchase | | | this situation? | of 70% of his | | | | portfolio would be an | | | | inappropriate trade, | | | | therefore, the sales | | | | representative must | | | | refuse the order. The | | | | BCO, not the sales | | | | representative, | | | | should inform the | | | | client that the order | | | | was refused. | +-----------------------+-----------------------+-----------------------+ Chapter 7 -- Mutual Fund Performance Evaluation ----------------------------------------------- - Calculate value of mutual funds - "No load" means no commission on purchase or redemption, however penalty of 2% can be imposed if redemption made within 90 days of the purchase. - Taxation of Mutual Fund income - Performance of Mutual Fund