CPH Notes Final - Financial Modelling I - PDF

lOMoARcPSD|49739426 CPH Notes Final Financial Modelling I (The University of Western Ontario) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Daanial Porbanderwala (daanial...

lOMoARcPSD|49739426 CPH Notes Final Financial Modelling I (The University of Western Ontario) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 CPH Notes Chapter 1- Standards of Conduct and Ethics =STANDARDS OF CONDUCT AND ETHICS= Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization that oversees the securities industry. Employee standards of conduct-  Employee dealings with clients must be fair, open, and conducted in accordance with just and equitable principles of trade.  Employees must not engage in any business conduct that harms the reputation of the firm, is detrimental to the public interest, or diminishes investor confidence in the integrity of the capital markets. The failure to comply with these standards can lead to fines, suspension or termination of employment, or termination of registration. Ethics and Ethical behavior  Ethics can be defined as a set of values or morals that guide individual behavior.  Morals are the rules and habits of conduct established according to society’s perceived standards of right and wrong. =INTEGRATING ETHICS WITH INDUSTRY RULES= Ethical behavior is integrated into the IIROC rules by ensuring suitability of investment recommendations to clients. 3 main obligations as an Registered Representative (RR), as follows:  Understand your client’s situation before making investment recommendations.  Understand the products you recommend.  Act honestly, in good faith, and in a professional manner. Know Your Client (KYC) Until you know a client’s particular situation, you cannot make suitable investment recommendations for that client. Suitability is based on factors that include a client’s:  current financial situation  investment knowledge  investment objectives  time horizon  risk profile  must also be considered considering concentration and liquidity of securities within the account,  the potential and actual impact of costs on the retail client’s returns  reasonable range of alternative actions available to the advisor at the time the determination is made Discovery Process- gather information, both initially and throughout the client relationship; fact-gathering exercise is one that never stops; you must remain continually aware of the essential facts about your clients. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Know Your Product (KYP)  Set out the obligations of the firm and the registered individual that support the need to determine suitability. Under IIROC 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: (i) assess the relevant aspects of the securities, including the securities’ structure, features, risks, initial and ongoing costs and the impact of those costs, (ii) approve the securities to be made available to clients, and (iii) monitor the securities for significant changes. Duty of Care  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  Fiduciary duty exists in circumstances where one person must place trust in the honest intentions of another person who holds greater authority or expertise.  Disputes in this regard must sometimes be resolved through civil litigation. The courts may decide that a client was owed a fiduciary duty in the circumstances. The decision often depends on the client’s vulnerability and the degree to which he or she relied on the RR’s investment advice and product recommendations. =RULES OF THUMB TO GUIDE THE CONDUCT OF REGISTERED REPRESENTATIVES= 1. Gather as much information as you can about your clients, so you understand their needs, goals, and risk tolerance. 2. Learn about the products you sell to ensure that your recommendations suit each client’s situation. 3. Act in an honest, fair, and trustworthy manner in all dealings with clients, employers, colleagues, and the public. 4. Avoid entering into situations where your interests conflict with those of your clients. 5. Conduct business in a professional manner that reflects well on yourself, your employer, and your profession, and encourage others to do the same. 6. Strive to maintain and improve your professional knowledge and that of others in the profession. 7. Conduct yourself in accordance with applicable securities legislation and industry rules. 8. Hold client information in the strictest confidence. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Chapter 2 – ETHICAL DECISION MAKING =OVERVIEW OF ETHICS=  Ethics are generally defined as a set of values and standards that guide individual behavior Ethics as a concept can be defined more specifically in three ways:  The rules or standards governing the behaviour of a particular group or profession  A set of moral principles or values  The study of the general nature of morals and the moral choices made by individuals Morals are the rules and habits of a society’s conduct that are established according to perceived standards of right and wrong =ETHICS VS RULES=  The regulatory environment in which the securities industry operates consists of the rules and requirements of the provincial securities regulators, any self-regulatory organization (SRO) to whose rules a dealer member and approved persons are subject, and, in some cases, the federal government =THE RELATIONSHIPS BETWEEN VALUES, ETHICS, AND THE LAW= Values  Values are the individual or cultural measures of the worth we place on certain ideas and behaviour. Ethics  Ethics are a set of moral principles that govern our behaviour. Our personal ethical stance is built on our personal values, and the ethics of a society are built on cultural values. Laws  Laws are not synonymous with ethics, but they are commonly contained within and grow out of society’s overall ethical sensibility. =VALUE AWARENESS=  Integrity, trust, honesty, and competency are all values that are prized by professionals in the securities industry Nature of Values values do have several common characteristics:  They are beliefs, not facts.  They are long lasting, not fleeting; however, they are not fixed or unchangeable.  They guide your goals and behaviour on both a personal and corporate level Values Clarification Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  The process of becoming aware of the values that drive your day-to-day decisions and behaviour is called values clarification.  If you fail to develop a conscious understanding of your value system, many of your decisions will be influenced by what psychologists call unconscious drives.  Types of Values: o End Values - values that help define our personal goals, which may be years away - includes a sense of accomplishment, service to people, security, a world at peace, and social recognition, which can be viewed as goals toward which we strive o Means values - actions we take today to achieve our goals are directly influenced by our means values - include ambition, openness, or competence, which can be viewed as actions we take to achieve our goals.  A unified value system is one in which end values and means values mutually reinforce and support each other.  Our goals must be guided by our values, and not the other way around Importance of Values to An Organization  Tone at the top is the ethical climate that a firm tries to strive or achieve  An explicit values statement provides the following benefits: o A sense of common direction for all members and guidelines for their daily behaviour o The social energy that moves an organization into action o A framework for ethical decision-making o A sense of stability and continuity in a rapidly changing environment Importance of Values to Individuals  Clearly defined core values will influence the following aspects of your life: o Your ability to interpret situations, make decisions, and solve problems o Your perception of other people and your ability to relate well to them o Your perception of success o Your perception of ethical behaviour Importance of Values to Society  “me generation” phenomenon- uncertainty and a shift of focus to the individual, who is seen as more important than the group  Ethical Relativism o states that there is no such thing as a universal moral principle that governs our behaviour o Everything is relative, situational, negotiable, and personal. o Each new situation requires us to redefine our values and actions, with each of us having an equal say on what is right or wrong o In the securities industry, ethical relativism has led to many cases where people in a position of power have put their own interests before those of their clients- Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 thus society is currently trying to curb the excesses of individualism and ethical relativism. =ETHICAL DILEMMAS=  An ethical dilemma arises when we are faced with two or more choices and we must make an ethical decision  Every ethical decision falls into one of two categories: o Right-versus-wrong issues o Right-versus-right dilemmas - An ethical dilemma occurs when our central beliefs regarding the right way to act are present in two or more of the possible choices (core values are conflicted) Right VS Wrong Issues  Characteristics o One choice is clearly illegal. o One choice lacks a basis in truth. o The negative consequences of one choice will far outweigh any possible positive results. o One choice does not conform to society’s shared code of fundamental values that define right and wrong Right VS Right Dilemmas Types of Dilemmas 1. Truth Vs Loyalty- the values of honesty or integrity clash with the values of commitment, personal responsibility, or promise keeping 2. Individual Vs Group- the rights and values of the few clash with the rights and values of the many. 3. Short Term Vs Long Term- a conflict arises when immediate needs or desires run counter to future goals or prospects (clash with end values) 4. Justice Vs Mercy- the values of fairness, equity, and righteousness conflict with the values of compassion, empathy, and love An Ethical Decision Making Ethical decision-making is an eight-step process, as follows: 1. Recognize that there is a moral issue.  look at your actions to identify whether a moral issue exists 2. Determine whose moral issue it is.  critical aspect of ethical decision-making is that the one responsible for making the decision accepts accountability for its consequences 3. Gather the facts. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 4. Test for right-versus-wrong issues.  Legal Test  Front Page Test o Deals with reputation  Mom Test o how comfortable you would feel revealing your decision to the people whose opinions really matter to you 5. Test for right-versus-right paradigms.  Is this a truth vs loyalty dilemma  Is this an individual vs grp dilemma  Is this a short term vs long term dilemma  Is this justice vs mercy dilemma 6. Apply the resolution principles. 4 modes of problem solving  End based ethical thinking o resolution principle demands a cost-benefit analysis to determine who will benefit and who will suffer o look at our actions from the point of view of their consequences for the various parties involved o Eg: Which solution brings the greatest good for the greatest number of people?  Rule based ethical thinking o requires the decision maker to act the way they would want others to act in similar circumstances. o demands that any action taken be turned into a universal principle  Social based ethical thinking o aims to create harmonious relationships within a group o The decision maker should ask how his or her actions affect the cohesiveness and the wellbeing of the group  Personalistic based ethical thinking o requires that you act in a way that is authentic to who you are and that follows the dictates of your conscience 7. Make the decision. 8. Reflect on the process. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Chapter 3- The Canadian Regulatory Framework =GENERAL PRINCIPALS OF SECURITIES REGULATION=  Securities legislation has been passed by each province to regulate the primary and secondary distribution of securities and to protect buyers and sellers of securities  Administrator is term to describe the securities regulatory authority of each province, whether it is a commission, registrar, administrator, or other official  various regulators work together to coordinate and harmonize the regulation of the Canadian capital markets through the Canadian Securities Administrators (CSA).  the Ontario Securities Commission (OSC) has a similar mandate “to protect investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in their integrity.”  the securities acts are based on three broad principles of regulation: 1. Disclosure of facts that investors need to make reasoned investment decisions 2. Registration of securities dealers, advisors, and other stated categories of registration 3. Enforcement of securities laws and administrative policies Disclosure Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  The underlying principle of securities regulation in Canada is full, true, and plain disclosure.  Disclosure is normally made in a prospectus issued by the company and its underwriter and accepted for filing by the administrator of the province or provinces in which the offering will be made  To maintain an exchange listing that allows investors to engage in secondary trading, the issuer must meet the requirements of the applicable act or acts and of any exchange on which the securities are traded (also called continuous disclosure requirements)  Continuous disclosure requirements apply to the following communications: 1. Insider trading reports disclosing trading activities of persons connected to the company (sometimes called insiders or referred to as having a special relationship to the company) 2. The information circular required in a proxy solicitation 3. Regular corporate financial reports, including management’s discussion and analysis 4. Annual information forms 5. Timely disclosure of material changes in the affairs of issuers (i.e., changes that are significant in that they may affect an investor’s decision to buy or sell a particular security) 6. Other shareholder communications  The purpose of continuous disclosure is to ensure that material information is effectively communicated from issuers to the public and investment professionals. (information is readily available to all market participants.) Registration  The administrators are responsible for registering persons and companies that engage either in direct selling of securities to the public or in advising others on buying or selling securities. Thus,  they are able to impose proficiency, integrity, and financial compliance on those that apply for or hold registration.  They also have the power to suspend or cancel an entity’s registration when they consider it to be in the public interest. Investigation and Prosecution  Administrators can suspend, cancel, or revoke registration; levy fines; disgorge monies; order trading in a security to cease; and deny a person the right to trade securities in a province.  They also have authority to compel the attendance of witnesses at a hearing, take evidence under oath, seize documents for examination, freeze funds or securities on deposit with or under the control of any person, and have many of the powers of a court.  acts are prohibited that could result in a misleading appearance of trading in a security or an artificial price for a security  The maximum penalties for offences under the Securities Act (Ontario) are a fine of $5,000,000 and imprisonment for a term of not more than five years less a day. =KEY GOVT PLAYERS INVOLVED IN SECURITIES REGULATION= Regulation of the securities industry in Canada occurs at three levels: federal, provincial, and industry. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Federal  any securities activity that takes place in provincially regulated subsidiaries of the banks is subject to provincial securities regulation  Securities dealers are also subject to the federal Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA), which is enforced by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the federal Personal Information Protection and Electronic Documents Act (PIPEDA).  INTEGRATED MARKET FORCES TEAMS (IMETs)- goal of strengthening the law enforcement community’s ability to detect, investigate, and deter capital markets fraud  JOINT SERIOUS OFFENCES TEAM (JSOT)- elevate efforts to target fraud and other serious misconduct. o JSOT investigates and prosecutes serious violations of the law using provisions of the Securities Act (Ontario) and Criminal Code. Provinces  Each province regulates securities activities within its borders through a securities commission or equivalent, and its own securities legislation.  As a result of the CSA’ efforts, securities markets are now governed by a number of largely harmonized National Instruments (NI) and Multilateral Instruments (MI).  National Instruments that are of particular relevance to dealer members include NI 31- 103 and NI 81-102. The Canadian Securities Administrator  The CSA is an umbrella organization whose objective is to improve, coordinate, and harmonize the regulation of the Canadian capital markets  aims to work collaboratively in the delivery of regulatory programs across Canada through such means as the review of continuous disclosure and prospectus filings.  The mission of the CSA members is threefold: 1. To protect investors from unfair, improper, or fraudulent practices 2. To foster fair and efficient capital markets 3. To reduce risks to the market’s integrity and to investor confidence in the markets (Client Focused Reforms (CFR) initiative is based on the concept that the interests of the client must come first in the client-registrant relationship. CSA Tools and Processes The CSA uses three primary tools in delivering its mandate: the Passport System, the Super Memorandum of Understanding (Super MOU), and various electronic databases PASSPORT SYSTEM  designed to reduce unnecessary duplication in the review of filings made in multiple jurisdictions and is based on the principles of mutual reliance. SUPER MOU  memorandum of understanding about the oversight of the marketplaces  provides for the oversight functions to be based on mutual reliance principles ELECTRONIC DATABASES Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 System for Electronic Document Analysis and Retrieval (SEDAR)  SEDAR is an electronic filing system and a depository for mandatory regulatory filings, including stock exchange filings.  Documents filed on SEDAR are electronically communicated to all CSA members and are available to the public on the SEDAR website. System for Electronic Disclosure by Insiders (SEDI)  SEDI allows insiders to file insider reports with all CSA regulators through a single submission over the internet.  The public can access insider reports soon after they are filed. National Registration Database (NRD)  NRD is a database that allows dealers, underwriters, advisers, and individuals to submit registration applications, changes, renewals, and fees electronically in a single submission to all regulators CTO National Database  The CTO National Database keeps track of cease trade orders (CTOs), which are orders prohibiting trading in a company’s securities.  They are issued by a provincial or territorial securities commission or similar regulatory body against a company for failing to meet disclosure requirements.  A CTO might be issued to a company for failing to file a financial statement on time. It might also be issued as a result of an enforcement action that involves an investigation of wrongdoing International Activities INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO) Objectives  To cooperate in developing, implementing, and promoting adherence to internationally recognized and consistent standards of regulation, oversight, and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and address systemic risks  To enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries  To exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure, and implement appropriate regulation Includes MFDA FINANCIAL STABILITY BOARD (FSB) The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) are members. The FSB’s mandate includes the following objectives:  Assess and address vulnerabilities affecting the financial system.  Promote information exchange among authorities responsible for financial stability. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  Monitor and advise on market developments and their implications for regulatory policy.  Advise on and monitor best practices in meeting regulatory standards.  Undertake joint strategic reviews of the policy development work of the international standard-setting bodies to ensure their work is timely, coordinated, and focused on priorities, and that it addresses gaps.  Set guidelines for and support the establishment of supervisory colleges.  Manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms.  Collaborate with the International Monetary Fund (IMF) to conduct early-warning exercises. =SELF REGULATORY ORGANIZATIONS=  The SROs are responsible for enforcing their members’ conformity with securities legislation  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 INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA (IIROC)  IIROC is responsible for enforcing the rules and regulations regarding sales, business conduct, and financial practices and trading activities of its dealer members and their representatives  it ensures that all individual registrants and dealer members maintain the requirements necessary to justify initial and ongoing registration  IIROC’s compliance and surveillance function includes regulating dealer members, market compliance, and market surveillance.  The compliance function includes regulation of business conduct, financial compliance, and trade review and analysis. IIROC COMPLIANCE AND SURVEILLANCE  IIROC conducts financial compliance reviews and sets minimum requirements to ensure that firms have enough capital for the specific nature and volume of their business. (helps reduce business failure due to excessive leverage and risky business practices)  Canadian Investor Protection Fund (CIPF) protects individual investors in the unlikely event that a firm should go bankrupt.  IIROC also carries out business conduct compliance reviews to ensure that their dealer members have proper supervision procedures in place. o In terms of supervision RRs must follow the Know Your Client (KYC) and suitability rules.  IIROC carries out trading conduct compliance reviews to check trading firms’ trade desk procedures o The reviews assess whether trade desk procedures comply with the Universal Market Integrity Rules (UMIR) and applicable provincial securities law.  IIROC conducts market surveillance and trading review analysis to ensure that trading is carried out in accordance with UMIR and applicable provincial securities law  IIROC is a member of the Intermarket Surveillance Group (ISG), OTHER IIROC INITIATIVES  IIROC offers a whistleblower service to evaluate reports of systemic wrongdoing Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 IIROC AND THE FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)  exchange of information and other cross-border assistance.  In addition to information sharing on compliance- and enforcement-related matters, IIROC and FINRA work together on issues related to firm oversight and examinations. THE MUTUAL FUND DEALERS ASSOCIATION (MFDA)  The MFDA does not regulate the mutual funds themselves; this responsibility remains with the securities commissions.  The Chambre de la sécurité financière (CHAMBRE) is the SRO of the mutual fund and insurance industry in Quebec. o The CHAMBRE is responsible for setting and monitoring continuing education requirements and for enforcing a code of ethics for licensed representatives THE EXCHANGES AND MARKETPLACES IN CANADA  The Canadian exchanges monitor the compliance of listed companies with the terms of the exchange listing agreements and policies  an exchange can deny pre-approval of certain transactions, require corrective disclosure, halt or suspend trading, and, in egregious cases, terminate a company’s listing DESIGNATED STOCK EXCHANGES  Only securities that are listed on a designated exchange are eligible to be held in RRSPs, TFSAs, or other registered accounts  Characteristics o facilitating the trading, clearing, and settlement of these securities; monitoring and enforcing trades executed on its system; and offering transparent pricing information to the public. o It must have acceptable standards for new company listings and for the maintenance of a listing. o It must operate within a regulatory framework that meets acceptable standards in relation to investor protection, disclosure requirements, corporate governance, and market integrity o It must have an experienced management and governance team, a successful track record of operations, and sufficient financial resources to ensure long-term viability. o It must have a range of listings and adequate liquidity for investors to buy and sell securities at reasonable bid-ask spreads. =INVESTOR PROTECTION FUNDS=  investors are not protected from market losses, but rather from losses related to the financial collapse of a dealer member. CANADIAN INVESTOR PROTECTION FUND Under IIROC rules, each dealer member must meet the following obligations:  Promptly pay IIROC its regular and special CIPF assessments Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  Provide CIPF or IIROC with all information required to assess its financial condition or risk of loss  Acknowledge and consent to the exchange of information between IIROC and CIPF, in accordance with any information sharing agreements made by them, in regard to the following matters: o The firm’s operations o Its customers’ affairs o Its partners, directors, officers, shareholders, employees, and agents, or any other persons permitted by law  Permit CIPF to conduct reviews of its operations and fully cooperate with CIPF and its staff and advisers in connection with such reviews  Comply with any actions CIPF may direct IIROC to take, or with any actions IIROC has authorized CIPF to take on its behalf. COMPENSATION FOR CLIENT LOSSES  When a dealer member becomes insolvent, CIPF appoints a trustee in bankruptcy  CIPF is funded by the securities industry through the following means: o Quarterly assessments paid by dealer members based on their gross revenues o Risk premiums based on capital deficiencies o An annual contribution by IIROC of the interest allocated to them in the prior year  The aggregate of all assessments in a calendar year cannot exceed 1% of the aggregate gross revenue of all IIROC dealer members for the previous four quarters. GENERAL ACCOUNTS  Accounts belonging to a single client, including cash, margin, short sale, options, futures, and foreign currency accounts, are combined and treated as one general account.  a client’s proportionate interest in an account held on a joint or shared ownership basis is combined with the client’s general account SEPARATE ACCOUNTS  With regard to registered retirement accounts, all such plans or funds belonging to a single client through the same or a different trustee are combined and aggregated as a single separate account THE MFDA’S INVESTOR PROTECTION CORPORATION  MFDA IPC protects mutual fund investors when an MFDA member goes insolvent Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  provides coverage of $1,000,000 per eligible account for losses related to the insolvency of an MFDA member CANADA DEPOSIT INSURANCE CORPORATION (CDIC)  Eligible deposits include savings accounts, chequing accounts, and term deposits with a term of five years or less in Canadian currency and payable in Canada  deposits are insured by CDIC to a limit of $100,000 per person at each member institution.  client holdings of guaranteed investment certificates (GICs) in dealer member accounts are eligible for insurance coverage under the CDIC Ac o However, the issuing CDIC member financial institution must have a complete record of the name and address of each beneficiary PROVINCIAL INSURANCE FUNDS FOR DEPOSITORS  Deposits in provincially regulated credit unions, caisse populaires, and provincially regulated trust and loan companies are covered under provincial deposit insurance plans =MONEY LAUNDERING AND TERRORIST FINANCING IN THE SECURITIES INDUSTRY= MONEY LAUNDERING  Money laundering is a process in which the proceeds of crime are converted into seemingly legitimate funds through complex transactions  Done by disguising the sources of the funds, changing their form, or moving them to a place where the funds are less likely to attract attention THE THREE STAGES OF MONEY LAUNDERING Placement  involves the physical disposal or deposit of cash proceeds derived from an illegal activity within the legitimate financial system  One of the following methods might be used for this purpose: o Structuring, which involves breaking up large amounts of cash into smaller, less conspicuous sums. The so-called structured deposits are subsequently deposited directly into bank accounts, always in amounts lower than levels at they must report. o Mingling criminal proceeds with deposits from legitimate cash businesses, such as stores, bars, and restaurants. o Bribing the personnel of a bank or other financial institution to accept deposits without reporting them. o Smuggling cash into countries with lax anti-money laundering requirements. o Purchasing a series of monetary instruments, such as certified cheques or money orders, that are then collected and deposited into accounts at another location Layering  Layering involves separating illicit proceeds from their source by creating complex layers of financial transactions.  designed to obscure the audit trail and hide the original source, thereby providing anonymity. Integration Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  Integration involves placing the laundered proceeds back into the economy in such a way that they appear to be normal business funds. MONEY LAUNDERING MECHANISMS INVOLVING THE SECURITIES INDUSTRY  Illicit funds are often laundered through the purchase and sale of liquid securities. o The audit trail of the proceeds of crime can be blurred through several buy-and- sell transactions involving numerous entities, accounts, and types of securities. o A shell company is a business without substance or commercial purpose that is incorporated merely to conceal the true beneficial ownership of business accounts and assets owned  Another money laundering method involves establishing a publicly traded company to serve as a front for a money laundering operation o advantage of using a publicly traded company is the opportunity to profit twice by creating a successful means of laundering criminal funds and by selling shares in the business to unwitting investors o A variation of this scheme is to invest in a private company first, then take the company public with a share purchase offer on the equities market. The earnings from the sale of the shares creates the illusion that the funds are legitimate earnings on securities investments. TERRORISM AND TERRORIST FINANCING Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Chapter 4 – Working With Clients =REGISTRATION REQUIREMENTS OF A REGISTERED REPRESENTATIVE=  To trade in securities or to advise on the purchase or sale of securities in Canada you need to be registered with: o Dealing with reps o Advising reps PROFICIENCY REQUIREMENTS AND CATEGORIES OF REGISTRATION REGISTERED REPRESENTATIVES  permitted to provide advice on the full range of equity and fixed income securities products.  be able to solicit orders for or to advise on trades with respect to options, futures contracts, and futures contract options. REGISTRATION REQUIREMENTS FOR REGISTERED REPRESENTATIVES 1. Formal training and proficiencies o CSC o CPH 2. 90-day period of restricted client contact Permitted activities include: o Gathering information from existing or prospective clients on behalf of another RR, assisting clients with inquiries about their accounts, and giving quotes, provided that you do not open any client accounts until you are fully registered. o Contacting the public by sending out introduction letters, inviting the public to seminars, and forwarding non-securities specific information, provided that you comply with certain restrictions. o Creating and researching lists of potential clients for future follow-up work. 3. Six-month period of supervision 4. 30-month requirement 5. Continuing education (CE) 6. Additional proficiency Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 o To deal in futures and futures options, you must complete the DFC and the Futures Licensing Course. o To deal in options trading, you must complete the Derivatives Fundamentals and Options Licensing Course or the Derivatives Fundamentals Course (DFC) and the Options Licensing Course (OLC). PORTFOLIO MANAGERS AND ASSOCIATE PORTFOLIO MANAGERS  Individuals who deal with or provide discretionary portfolio management for managed accounts must be approved as either Portfolio Managers (PMs) or Associate Portfolio Managers (APMs). SALES ASSISTANT  A sales assistant may speak with clients but is not permitted to give advice.  Sales assistants may also take unsolicited orders from clients to buy and sell securities INVESTMENT REPRESENTATIVES AT ORDER EXECUTION ONLY FIRMS  registered to take orders from clients and submit them for execution  IRs in this role must recognize when an order is beyond their authority and pass it on to someone who is appropriately licensed or to a supervisor. RESTRICTIONS ON NON-REGISTERED STAFF Non-registered staff are not permitted to carry out the following tasks and functions: o Open client accounts o Complete KYC information on an account application (other than biographical information) o Provide recommendations or advice on securities o Solicit securities transactions o Assist clients in completing orders for securities transactions IIROC REGISTRATION REVIEWS: THE FIT AND PROPER TEST  Suitability reviews are known as fit and proper test  Suitability reviews are conducted in those jurisdictions where IIROC has been delegated statutory authority for individual registration by a securities commission  IIROC also evaluates termination, regulatory, criminal, civil, or financial disclosures filed on the National Registration Database (NRD) with IIROC  All regulatory filings regarding registered individuals must be completed through the NRD. CONTINUING EDUCATION  As an RR, your CE requirements consist of one or more approved programs every two years  The programs must equal at least 20 hours of a professional development course and at least 10 hours of a compliance course =COMMUNICATION WITH THE PUBLIC= The following communications have been specifically prohibited in many provinces: Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  No registrant is permitted to use the name of another registrant on signs or other advertisements, unless the other registrant gives authorization in writing or is a partner, officer, or agent of the registrant.  Registration certificates cannot be displayed by the registrant or the business location; however, course completion certificates may be displayed.  No registrant is permitted to represent that a securities administrator has approved the investment merits of a security or the financial standing, fitness, or conduct of any registrant. RULES FOR TELEMARKETING AND THE NATIONAL DO NOT CALL LIST  You must subscribe to the National DNCL and consult the rules before making telemarketing calls, except in certain circumstances like you have received consent from the caller CANADA’S ANTI-SPAM LEGISLATION  The Canadian Radio-television and Telecommunications Commission (CRTC) also helps enforce Canada’s Anti-Spam Legislation (CASL), which establishes similar rules for the sending of commercial electronic messages (CEMs).  This legislation requires businesses to obtain either express (opt-in) or implied consent to send CEMs, including emails and certain types of social media messages  all electronic marketing messages must clearly identify the sender RULES FOR MARKETING MATERIALS  The definition of trade under provincial securities legislation specifically includes advertisements or solicitations with respect to a security  IIROC’s rules require that sales materials and oral presentations that dealer members use must present a fair and balanced view of the risks and benefits of products for sale  In addition, communications to the public must not omit any material facts or qualifications if that omission could be construed as misleading ELECTRONIC ADVERTISING AND SOCIAL MEDIA USE Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 =GENERAL REGULATIONS AND GUIDELINES FOR SALES LITERATURE= Dealer members typically provide registrants the following types of material containing information about investments:  Research reports  Updates on company performance or news affecting a company’s business  New product information, such as a description of an instalment receipt or income trust  Notices of availability of prospectuses or preliminary prospectuses for a new issue of securities MUTUAL FUND SALES COMMUNICATIONS A sales communication about a mutual fund must:  contain no untrue or misleading statements.  make no statement that conflicts with information contained in the fund’s prospectus, annual information form (AIF), or Fund Facts document. THE FUND FACTS DOCUMENT If any performance data is included in a sales communication, the communication must adhere to the following rules:  It must contain standard performance data.  It must include all elements of return.  It must reflect data only for the period during which the securities were distributed to the public under the terms of the prospectus. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  It must relate only to funds under common management, or to funds with similar investment objectives, or with an index or average.  It must reflect any material changes to the fund during the performance measurement period.  It must clearly identify the periods for which the performance data is calculated.  It must indicate, where appropriate, how more up-to-date standard performance data may be obtained.  It must contain only ratings or rankings provided by an independent organization, and where ratings or rankings are quoted, standard performance data must also be provided.  It must contain only credit ratings prepared by an independent organization, and only the most recent rating may be used.  If the fund is rated by more than one independent organization, the lowest rating among those calculated must be used.  Performance data may not be used in broadcast advertisements. Disclosure of material changes should reflect how the changes would or could have affected the fund’s performance had they been in effect throughout the performance measurement period. =DEALING WITH CLIENTS= CONFLICTS OF INTEREST  conflict of interest arises in any circumstance where the interests of different parties, such as a client and a registrant, are inconsistent or divergent to each other  Addressing a perceived conflict of interest can be challenging because a third party may perceive a conflict or potential conflict where none exists.  Any existing or potential material conflict that cannot be addressed in a fair, equitable, and transparent manner that is consistent with the client’s best interests must be avoided.  It is not acceptable to rely on disclosure without first addressing the conflict in another way, particularly when the conflict is compensation-related PERSONAL FINANCIAL DEALINGS AND OUTSIDE BUSINESS ACTIVITIES PERSONAL FINANCIAL DEALINGS WITH CLIENTS The following types of activities are considered personal financial dealings with clients, and are thus generally prohibited under IIROC rules:  Accepting any consideration (e.g., cash or valuables) from a person other than the dealer member for any activities conducted on behalf of a client, unless through an approved outside business activity.  Entering into a settlement agreement with a client without the dealer member’s prior written consent.  Paying for client account losses out of personal funds without the dealer member’s prior written consent.  Borrowing from clients or lending to clients unless the client is a Related Person under the Income Tax Act (Canada).  Acting as a power of attorney, trustee, or executor, or otherwise having full or partial control or authority over the financial affairs of a client, unless: The client is a Related Person; or  The authority is exercised in accordance with IIROC rules within a discretionary or managed account Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 OUTSIDE BUSINESS ACTIVITIES The following activities could be outside business activities:  Serving on the board of directors of a company or charitable organization  Starting a company  Providing consulting services  Engaging in a hobby that begins to generate income and requires time and resources  Working seasonally for another company CARRYING ACCOUNTS AT OTHER DEALER MEMBERS  As an RR, you are not permitted to hold (in your own or another name) or to exercise control over accounts at other dealer members, unless you have first obtained the express written permission of your employer  If the securities transactions are being handled by a bank or trust company, it is your responsibility to ensure that such transactions are entered through your own dealer member, unless otherwise approved, and that all transactions are entered as non-client orders. =PRIVACY AND CYBERSECURITY= THE PERSONAL INFORMATION PROTECTION AND ELECTRONIC DOCUMENTS ACT  The Personal Information Protection and Electronic Documents Act (PIPEDA) sets out the rules for the collection, use, or disclosure of personal information in the course of commercial activities in Canada  Can only provide information to 3rd party: o For the purposes of collecting a debt; or o When permitted or required by law. CYBERSECURITY  IIROC also published a Cybersecurity Best Practices Guide and a Cyber Incident Management Planning Guide. o The best practice guide provides a voluntary, risk-based framework to manage cybersecurity risks based on industry standards and best practices Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Chapter 5- Client Discovery and Account Opening  The period, during which you and your client ask questions and get to know each other, is known as client discovery = OPENING ACCOUNTS= THE CARDINAL RULE: KNOW YOUR CLIENT  The KYC rule requires that every dealer member take reasonable steps to learn and remain informed of essential facts relative to every order, account, and client it accepts  You should consider the following variables about your clients to determine whether a proposed trade is suitable: o Age, marital status, and occupation o Income and net worth o Number of dependents o Risk profile o Investment objectives o Investment knowledge and experience o Investment time horizon o The account’s current investment portfolio composition, duration, and risk level  Follow-ups are particularly important when dealing with senior investors OBTAINING INFORMATION AT THE ACCOUNT OPENING STAGE  Document your client’s response to lifestyle questions such as: o When do you plan to retire? o How much money do you need to retire in the fashion you want? o Do you have any other issues or expenses that we should contemplate as you retire? o Do you have children or grandchildren who are dependent on you financially? o Do you have a will and a financial power of attorney?  Require in-person meetings with your clients to fill out the account application. This step helps to ensure that all investor information on the account application is accurate and up to date.  Encourage the client to bring a trusted family member or friend to meetings.  Require frequent updates of new account information, such as on an annual basis. This stage helps to determine whether particular investments are appropriate CLIENT IDENTIFICATION REQUIREMENTS: ANTI-MONEY LAUNDERING  Red flags are warning signals of possible improper activities that, after being reported, can provide an appropriate basis for further actions. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  The client discovery process and ongoing client interactions are of critical importance, not only to the KYC obligation, but also to the prevention of illegal activities. ACCOUNT OPENING RED FLAGS  A red flag should raise suspicion that there is a reasonable chance a transaction is related to a money laundering offence or terrorist financing activity.  Any of the following client activities or behaviours may raise red flags during the account opening process: o Reluctance to provide adequate information or supporting documentation o Documentation that appears to be altered or counterfeit, or if all of the documents have recent issue dates o Documents that are photocopies, facsimile images, or other electronic reproductions, even when certified as true copies by an attorney acting on the client’s behalf o Attempts to open accounts in other people’s names o Supplying information that seems vague or even potentially untrue o Providing an address that is out of the local service area o Providing a post office box, general delivery, or other type of mail drop address, when a street address is the norm for that area o Providing a phone number where the client cannot be reached o Making inquiries that suggest a desire to avoid reporting o Reluctance to complete or supply required documentation o Inquisitiveness about compliance and anti-money laundering procedures o Attempts to use aliases or open accounts in different names GENERAL ANTI-MONEY LAUNDERING DUE DILIGENCE  Certain clients in a prominent position of public trust, their immediate family members, and their close associates are referred to as politically exposed persons (PEPs).  The foreign PEP category includes the following persons: o Any person who holds, or has held, an office or position in, or on behalf of, a foreign state o That person’s spouse, common-law partner, child, mother, father, brother, or sister o The spouse’s or common-law partner’s mother or father  Anti-money laundering regulations require that dealer members verify the identity and date of birth of any person opening a securities account o This information must be established before any transactions, other than an initial deposit, are conducted.  IIROC’s client identification requirements refer to the overall client profile, including KYC and suitability obligations o There are no specified documents needed by Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). o There is no expectation to repeat the client identity verification process, unless there is some doubt as to the client’s identity or the validity of documents previously viewed. ACCOUNT UPDATES AND REVIEWS Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  Your dealer member’s compliance regime should include procedures to ensure that any accounts considered higher risk for money laundering are reviewed regularly to assess whether there have been any significant changes to a client’s profile.  any unusual activity that indicates possible money laundering activity should result in an update to the client’s documentation  For an individual’s account, you must retain new account applications, confirmations of purchase or sale, guarantees, trade authorizations, powers of attorney, joint account agreements, and all correspondence about the account’s operation. ANTI-MONEY LAUNDERING PROCEDURES FOR CORPORATE ACCOUNTS  when opening an account for a private corporation, trust, or similar entity, you must gather specific information about both the entity and the beneficial owners behind the entity  Beneficial owners of a trust are the trustees and known beneficiaries and settlors of the trust.  Beneficial owners of a corporation or an entity other than a corporation or trust, such as a partnership, are individuals who own or control 25% or more of the entity, either directly or indirectly  if the information cannot be obtained within 30 days of the account’s opening, your firm must restrict the account to liquidating trades and transferring assets out until the information has been obtained. ANTI-MONEY LAUNDERING PROCEDURES FOR NON-RESIDENT ACCOUNTS  Non-resident individual accounts have additional identity verification requirements than those set out for resident individual accounts.  Dealer members must also be familiar with the registration requirements of the countries in which they intend to conduct business (should also determine these requirements before any business is solicited in other countries)  When opening accounts for a personal holding company or personal investment corporation, you must determine whether the account is being set up by, or for the benefit of, a PEP. ANTI-MONEY LAUNDERING PROCEDURES FOR INSTITUTIONAL ACCOUNTS  These accounts are characterized as being opened and operated for customers who are usually financially sophisticated and often purchase and sell securities in significant volumes  dealer members may actually have little or no direct contact with the underlying beneficiaries of their institutional clients. Instead, they deal solely through intermediaries  dealer members dealing with institutional accounts must have supervisory reviews that are designed to detect transactions that raise suspicion of money laundering or terrorist financing activity.  dealer members are exempt from identity and verification requirements for certain types of Canadian institutions and intermediaries that are, themselves, subject to the regulations. (foreign institutions and intermediaries are not exempt.) PERSONAL IDENTITY DOCUMENTS  Identity verification requirements set by the PCMLTFA apply regardless of the method used to open the account. Therefore, you must still review the original copies of personal identification documents when opening an account to verify the account holder’s identity. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  Photocopies, scanned copies, or other reproductions are not acceptable for verification purposes. = THE ACCOUNT APPLICATION=  It must include the following items noted below: o The client’s identity, including his or her full name, address, citizenship, and social insurance number o Personal information, such as the client’s marital status, number of dependents, and employment o Personal financial information, including the client’s income, net worth, and liquidity o The client’s investment objectives, risk profile, and level of knowledge about investing o Information about the client’s relationship with any publicly traded companies (i.e., insider status)  In addition to completing the account application, you should maintain the notes you took during the client discovery process, as well as any other documentation completed  the account application is used for four main purposes, as follows: o To establish the identity of the client o To collect sufficient information to meet suitability obligations, such as the client’s investment objectives o To judge the client’s creditworthiness o To determine whether the client is an insider of a reporting issuer or other publicly traded company  In addition to completing an account application for all new clients, you should update existing account applications regularly and whenever a significant change occurs in a client’s circumstances  Any significant change in circumstances could affect the client’s investment objectives, creditworthiness, or risk profile. = COMPLETING THE ACCOUNT APPLICATION= There are three general categories of information required on the account application, as follows: o Client information o Account information o Registrant information CLIENT INFORMATION  includes such basic identifying information as the client’s name, address, and marital status.  It also includes basic financial information, including the client’s total net worth, level of investment knowledge, investment objectives, and risk profile. CLIENT NAME  open an account in the correct legal name of the client and not in an abbreviated form Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 CONFIDENTIAL, NOMINEE, OR NUMBERED ACCOUNTS  Dealer members are allowed to maintain accounts for clients identified only by number, nominee name, or other symbol.  The dealer member must keep, at its principal office in Canada, sufficient identification in writing to establish the beneficial owner of the account or the party or parties financially responsible for the account. HOME ADDRESS  You should obtain both a residence address and a business address. At least one of these must be a permanent address, and not a post office box or other such temporary address. The  If it is not possible to obtain a permanent address, you should proceed with caution o it may be an indication that the prospective client is trying to circumvent industry rules or avoid making a payment it may be an indication that the prospective client is trying to circumvent industry rules or avoid making a payment MAIL CONFIRMATIONS  A client may ask that mail confirmations be mailed to an address other than the one given as the home address  therefore make sure that the client’s home address is real and valid and that the mailing address is not false or a mailbox. CONTACT NUMBER(S)  It is a good idea to gather as much information as possible so that the client can be contacted if circumstances require immediate communication  If the client is a new acquaintance, residence and business numbers should be verified. SOCIAL INSURANCE NUMBER  social insurance number is required for tax reporting  If a client claims not to have one or refuses to disclose it, you should consult your branch supervisor or the new accounts department. DATE OF BIRTH  The client’s birth date, rather than age, is required.  The date of birth is essential for registered accounts, such as registered retirement savings plans and income funds (RRSPs and RRIFs), to prevent serious consequences regarding deregistration  Dealer members are required to take reasonable steps to obtain from the client the name and contact information of a trusted contact person, and written consent to contact that person under certain circumstances  You should also ask your clients whether they have provided a power of attorney granting authority over their accounts, under certain circumstances, to a trusted friend or family member. OPENING ACCOUNTS IN THE NAME OF MINORS  You should avoid opening accounts in the name of minors because contracts made by minors may be repudiated within a reasonable time after reaching the age of majority  Furthermore, minors are subject to the following restrictions: o They cannot exercise their right to vote if they own voting shares. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 o They do not have the capacity to designate beneficiaries with respect to RRSP accounts. o They cannot make RRSP contributions if they have not earned income and filed taxes in the previous year  Quebec Civil Code contains a special status of emancipated minor for persons under 18 who, by marriage or court order, are emancipated to perform certain acts, including securities trading, as if they had attained the age of majority. o Emancipated minors may have their contractual obligations reduced if a court determines them to be excessive—i.e., not strictly necessary as a prudent course of investment action CITIZENSHIP  Only Canadian citizens resident in Canada can purchase certain percentages or numbers of shares of companies that are considered culturally or economically important to Canada (constrained share companies,)  In many instances, these companies require purchasers to complete an Ownership Declaration, thereby providing a formal statement confirming citizenship and residency (examples include broadcasting companies and banks) EMPLOYMENT Employment information is required for three reasons:  To help establish the client’s creditworthiness  To establish whether any regulatory issues apply to this account, such the requirement to report insider status  To evaluate the client’s ability to withstand losses, and, thus, whether specific investment objectives are warranted MARITAL STATUS Information regarding marital status serves three purposes:  It helps to determine the creditworthiness of the client.  It ensures that investment objectives and risk factors are determined relative to the client’s overall circumstances.  It helps to determine whether the spouse is subject to any regulatory requirements by virtue of his or her employment (i.e., insider status). FINANCIAL INFORMATION  Financial information is fundamental in judging a client’s creditworthiness if credit is to be extended.  Financial information includes total net worth and annual income.  Total net worth is the sum of all assets (liquid and fixed) less all liabilities (secured and unsecured) o Fixed assets typically include real estate and business assets o Liquid assets include assets that can readily be turned into cash, even if they are invested in registered or non-registered accounts.  Dealer members are required to know their clients and to monitor account activity for unusual transactions, actual or attempted o Therefore, as the RR, you must have a good understanding of the source of your clients’ overall net worth and any significant changes to that figure. INVESTMENT OBJECTIVES AND RISK PROFILE  Your initial discussion with the client must include a review of the client’s investment objectives to determine what plans the client has for his or her money Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 o You can then determine the percentages of funds allocated to safety, income, and growth.  Risk tolerance is the willingness to accept risk, whereas risk capacity is the ability to endure loss.  you should always evaluate whether a client’s requested investment objective and risk profile makes sense in the context of their overall statement of facts. ACCOUNT INFORMATION Account information consists of the following components:  Account type  Beneficial ownership  Currency  Payment/delivery procedures  Special instructions ACCOUNT TYPES  many accounts are mutually exclusive or have limits regarding certain types of activity. CASH ACCOUNTS  Cash accounts require the client to deposit payment in full for each purchased transaction.  For sales, the securities must be in the account or must be delivered to the account by the settlement date of the sale transaction  Dealer members do not provide financing to clients who operate cash accounts MARGIN ACCOUNTS  Margin accounts require only partial payment for purchases  The dealer member lends the client the unpaid portion of the market value of the securities at prevailing interest rates.  The client must make an initial deposit of a specified portion of the value of the securities purchased, which is called the client margin.  The client margin varies based on the type of security and its price, and is determined according to a standard formula.  Because margin accounts involve a loan by the dealer member to the client, a financing agreement, called a margin agreement, must be completed before the account is approved  Margin accounts are also used for short sales of securities o The dealer member borrows the securities and delivers them to the purchaser. The client must leave the proceeds of the sales in the margin account and make an additional margin deposit in case the value of the securities rises. o The client then purchases the securities when the client chooses or when the securities can no longer be borrowed, whichever comes first DELIVERY AGAINST PAYMENT  Delivery against payment (DAP) accounts involve the purchase of securities and payment on settlement date.  The dealer member delivers the securities to the purchaser, or the purchaser’s settlement agent, who then pays for the securities in full. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  The client (or agent) then has possession of the securities, at which point they do not show in the client’s account.  The proposed settlement arrangements in a DAP account must meet the dealer member’s criteria in order for the account to be approved. The client must pay in full before the securities are delivered by the dealer member RECEIPT AGAINST PAYMENT  Receipt against payment (RAP) accounts, operate as described above for DAP accounts, except that securities are sold by the client.  The dealer member receives the securities from the client (or agent) and pays the client (or agent) in full. DAP and RAP transactions are the norm for institutional accounts. They are often combined in one account, which is usually known as a cash-on-delivery account. REGISTERED ACCOUNTS  This category includes RRSPs, RRIFs, registered education savings plans (RESPs), tax- free savings accounts (TFSAs), and various locked-in accounts PRO ACCOUNTS  all employees of a dealer member or a related company and any of their family members living under the same roof are considered to be non-clients  a non-client is a pro account INVESTMENT CLUB ACCOUNTS  When setting up an investment club account, a specific document, called an Investment Club Agreement, must accompany the standard application  This agreement must contain the names, addresses, and signatures of all of the individual members of the investment club  one or more of the members of the club must be authorized to give trading and administrative instructions on the club’s behalf  the RR cannot be the person responsible for authorizing trades for the account, unless it is set up as a discretionary or managed account DISCRETIONARY ACCOUNTS  A discretionary account is one where discretionary authority has not been solicited, but where the client chooses to give it on a temporary basis.  as an RR, you cannot exercise discretionary authority over a client account unless the account is maintained with your employer  Discretionary authority is valid for a maximum term of 12 months.  Both the client and the dealer member must sign a discretionary account agreement, which includes any restrictions to the trading authorization  As well, the dealer member must develop and distribute to all approved persons the internal policies and procedures under which discretionary accounts are to be handled. The following rules apply to discretionary accounts: o All discretionary orders must be marked as such at the time of entry. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 o Only persons who have been approved by IIROC to do so may effect trades for a customer in a discretionary account. o If the securities of a dealer member or its affiliates are publicly traded, no discretionary account may hold those securities. o Registered Representatives who are approved to deal with discretionary accounts must have at least two years of experience in any product that is to be traded on a discretionary basis.  A Designated Supervisor must also review, at least monthly, the financial performance of all discretionary accounts  Both the client and dealer member may withdraw from the discretionary agreement, provided that the request is submitted by notice in writing  Termination becomes effective when the dealer member receives the notice, except with respect to transactions that were entered into before the notice was received.  The dealer member must give the client 30 days’ notice of termination. MANAGED ACCOUNTS  A managed account is an account in which investment decisions are made on a continuing basis by the dealer member or by a third party hired by the dealer member  Managed accounts grant discretionary authority on an ongoing basis; in other words, it is a permanent, rather than a temporary, arrangement  IIROC permits sub-advisors to manage these accounts provided that there is a written sub-advisor agreement with the dealer member in place  In order for the dealer member to approve a managed account, the client must sign a managed account agreement, and the dealer member’s Designated Supervisor must accept it  Furthermore, the client must be provided with a copy of the dealer member’s procedures to ensure the fair allocation of investment opportunities among managed accounts.  managed accounts may be solicited.  Each managed account must be reviewed on a quarterly basis by a Designated Supervisor to ensure that the client’s investment objectives are diligently pursued.  Reviews may be conducted on an aggregate basis, where decisions are made centrally and applied across a number of accounts  As with discretionary accounts, both the clients and dealer member may terminate managed account agreements, as long as the request is submitted in writing  To terminate the client must give the dealer member at least a 30 day notice  Managed accounts of partners, directors, officers, and employees or agents of a dealer member are exempt from the client priority rule, where the account is centrally managed with other client accounts and it participates equally with client accounts when investment decisions are implemented BENEFICIAL OWNERSHIP  Obtaining ownership information on offshore accounts can often be difficult. Such accounts might be “veiled” by an offshore jurisdiction’s secrecy laws or unavailable because no multijurisdictional legal assistance agreements exist. o In such cases, regulators have begun to apply the KYC rule in its narrowest sense to obtain relevant beneficial ownership information on offshore brokerage accounts CURRENCY Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  You should check with your operations or credit department to determine in which currencies accounts may be operated at your firm  You must verify that your clients are aware that, in addition to the usual investment risk, an investment denominated in a foreign currency also carries currency risk  Adverse currency fluctuations may not only reduce an investment return but may even result in a loss. PAYMENT AND DELIVERY  When a security is purchased, payment can be taken directly from the client’s account if there is sufficient cash or margin available  Otherwise, the client may deposit sufficient cash to his or her account to pay for the security. These payments must be made within the specified settlement period.  with a bona fide DAP account, any request for payment or receipt of funds to a third party is a warning flag, and management should be consulted o Such a request may indicate that a party other than the client has an interest in the account. REGISTRANT INFORMATION LICENSING  may have existing clients who have moved, or are in the process of moving, to another Canadian jurisdiction. o In both cases, you must bring the matter to the attention of the sales supervisor to determine whether orders from this client can still be accepted SOURCE OF THE CLIENT  It is important to know how the client came to you and your firm for several reasons  If a client does approach you to open an account, you should inquire to determine the reason. DIRECT OR INDIRECT INTEREST  As an RR, you must limit such participation to those situations where the other party or parties are direct family members  In such cases, you should fully disclose your interest on the account application  In the case of discretionary accounts, orders should be marked “pro” only if the RR has some type of beneficial interest in the account. REGULATORY SECTION Regulatory issues of particular importance in the account opening process are those related to company ownership and undisclosed interest, trading authorization, and power of attorney, among others INSIDERS AND CONTROL PERSONS  If a person owns more than a certain percentage of a class of voting or equity shares of an issuer (usually 10%), then that person is generally considered to be an insider  A control person is a person who generally owns more than 20% of an issuer’s equity and therefore has significant influence over that company Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 INSIDERS  Insiders are likely to be board members or part of the company’s management, and are also likely to possess inside information from time to time  Persons who have inside information may not engage in the following activities: o Purchase or sell securities of the issuer about which they have inside information. o Pass the inside information along to someone else. o Induce someone else to trade in the issuer’s securities  Insiders may trade when they are not in possession of inside information, but they must file reports with the securities commissions detailing their trading  Insiders must report their trades within 10 days after the date of the trade  if you become aware of inside information through a client, you must not use it for your own personal gain, nor should you pass the information on to anyone else CONTROL PERSONS  the status of a potential control person must be established before that person trades in the securities of the company in question.  Control persons typically may not sell their company’s securities, unless they file a prospectus or other disclosure documents with the securities commission and stock exchange where the securities trade.  Purchases by control persons must be carefully scrutinized to ensure they do not constitute a take-over bid. TRADING AUTHORIZATION AND POWER OF ATTORNEY  There is often a standard trading authority form to accommodate one person appointing another person to act on their behalf  such authority is usually limited to the entering of orders.  A general power of attorney is typically required if the authority delegated is broader. Signatures for all authorized individuals are required POWER OF ATTORNEY The following processes can be implemented to reduce such risks:  Identify accounts where a power of attorney is added or changed and where subsequent activity does not align with the investor’s stated financial objectives and profile. For example, look for evidence of unusual cheques written out of the account within a given time frame, or a concentration of cheques to a single third-party payee.  Require that copies of all confirmations and account statements be sent to both the account holder and the power of attorney.  Check the investor’s signature against other signed documents received to determine authenticity BANKING INFORMATION  Used to check banking information if there are concerns about a new client being a credit risk. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 DISCLOSURES RELATIONSHIP DISCLOSURE  Dealer members must provide all retail clients with a Relationship Disclosure Document that outlines the account relationship and services to be provided to the client DISCLOSING CONFLICTS OF INTEREST  A dealer member must provide disclosure to clients who may be impacted a particular material conflict of interest at the time of account opening or in a timely manner if the conflict is identified at a later point in time  must disclose the following matters: o The nature and extent of the conflict in question o The impact and risk it may pose to the client o The way in which it has been or will be addressed  The disclosure should not be generic, incomplete, or misleading, and it should not be obscured behind excessive details or minuscule font PRE-TRADE DISCLOSURE OF CHARGES  it must disclose the charges the client will be required to pay  In the case of a purchase to which deferred sales charges apply, it must disclose that the client may be required to pay a deferred sales charge on the subsequent resale.  It must also disclose whether the firm will receive trailing commissions in respect of the security.  This disclosure is not required for institutional customers  It is also not required with clients for whom the dealer member purchases or sells securities only as directed by an RR acting for the client DISCLOSURE WHEN ACTING AS A PRINCIPAL  Communications include circulars, pamphlets, letters, telegrams, or advertisements.  Such statements do not prevent a firm that acts as a principal from subsequently acting as an agent in the trading of such a security  If a firm does not disclose its principal status, the client who either bought or sold the security may rescind the contract (In the case of a purchase, the security must still be in the client’s possession.)  A dealer member that publishes written materials containing a security recommendation must disclose its relationship with the issuer  The firm, along with its officers and directors, must also disclose whether they will receive any fees as a result of that recommendation DISCLOSURE RELATING TO PRODUCTS Initial public offerings (IPOs)  Investors in newly issued securities must be given a prospectus Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  The prospectus provides a detailed description of the securities offered and of the issuing corporation, including its history, operations, and audited financial statements Mutual funds  Purchasers must receive a Fund Facts document prior to purchase.  Some issuers provide one document that covers their entire family of funds.  The prospectus for a mutual fund must also be available to investors upon request. Strip bonds and strip coupons All first-time buyers of strip bonds and strip coupons must be given an information document outlining the special investment characteristics of these securities, including:  Price volatility  Income tax consequences  Extent of a secondary market  Custodial arrangements of strip bonds and coupons The above disclosures must be made before entering the first trade Insurance products  generic disclosure document is required Derivatives Disclosure documents are required for each type of derivative, and are usually given to the client when an options or futures account is opened LEVERAGE DISCLOSURE IIROC rules in this regard require that clients receive a Leverage Risk Disclosure Statement in the following circumstances:  At the time a new retail account is opened  When you make a recommendation to purchase securities with borrowed funds  When you become aware that the client intends to purchase securities with borrowed funds You do not have to provide such a statement if it has been given to the client within the preceding six months, or if the purchases are made through a margin account that is operated in accordance with IIROC rules. ADDITIONAL DOCUMENTATION FOR SPECIAL CIRCUMSTANCES If you or your dealer member engages in certain activities or business structures, you must provide clients with additional documents that disclose the following facts:  Real or perceived conflicts of interest  That the firm is in a relationship as an introducing broker with a carrying broker  That the firm shares premises with a financial services entity  That the RR is an agent rather than an employee  Referral arrangements, including referral fees, that may be paid GENERAL DOCUMENTS MARGIN AGREEMENT Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  This agreement defines the terms of the account, such as the rules for the extension of credit and the right to sell securities or close out the account if proper settlement is not made.  Where no margin agreement is on file, the account is treated as a cash account. CASH AGREEMENT  A cash agreement is required to document the client’s agreement to do business within industry rules applicable to cash accounts GUARANTEE FORM  A guarantee form is required when an account is guaranteed by a person other than the account holder  IIROC limits the accounts that may be guaranteed by RRs or other employees to those of their immediate families—spouse, parent, sibling, or child.  Furthermore, no general guarantee of accounts is acceptable that does not name the accounts, nor is commingling of a group of accounts acceptable unless supported by proper documentation o Documentation must establish the common identity and liability of the accounts in question.  Where a dealer member is using a guarantee for margin purposes at year end, the guarantee must be confirmed to the external auditors in writing by the guarantor TRADING AUTHORIZATION DOCUMENTS Trading authorization has specific documentation requirements for the following types of accounts:  Individual accounts  Joint accounts with the right of survivorship  Corporations, partnerships, and trusts  Estate accounts  Accounts with discretionary authority AUTHORIZATION FOR AN INDIVIDUAL’S ACCOUNT  When more than one person is a beneficial owner, or when more than one person has authority to place orders in an individual’s account, proper legal documentation must be obtained.  Full authorization allows for the withdrawal of funds and securities.  One type of limited authorization allows no withdrawals AUTHORIZATION FOR A JOINT ACCOUNT WITH RIGHT OF SURVIVORSHIP  This type of account provides that, at the death of either of the joint owners, the entire interest in the account becomes that of the survivor  The estate of the deceased has no further interest.  When an account with trading authorization is opened, you should make sure that all parties receive copies of confirmations, unless a written directive to the contrary is received from the beneficial owner or owners. AUTHORIZATION FOR A CORPORATION, PARTNERSHIP, OR TRUST  The legal documentation must state whether full or limited authority has been granted, and it must identify who has authority to enter orders Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  For partnership accounts, you should obtain authorization that has been duly approved by all partners.  For corporate accounts, depending on the business relationship already established, the clients may be required to file the following documents: o A copy of the corporate charter and by-laws o A duly certified copy of the by-laws or resolutions under which trading authorization was granted AUTHORIZATION FOR AN ESTATE ACCOUNT  Upon the death of a client, no instructions should be carried out on behalf of any joint tenant or legal representative of the client until proper documentation has been obtained  This documentation may include a certified or notarized copy of the deceased’s will.  It may also include the original or probated and a certified or notarized copy of a court certificate naming an executor or administrator. SEPARATE ACCOUNT APPLICATIONS AND SUPPORTING DOCUMENTS Shareholder communication instructions  Under securities legislation, you must have clients determine whether they wish to receive proxy-related and other security-holder materials Privacy  All clients must acknowledge that they have read and understood the firm’s privacy statement, which sets out how the firm may use personal information. SEPARATE ACCOUNT APPLICATIONS  A single account application can cover all cash and margin accounts for one client if the objectives for all accounts are the same  However, separate account applications are required for accounts in which the client has differing interests. o For example, if a client has a personal account, a joint account with a spouse, and an account for a personal holding company, different applications are required for each account o The same principle covers supporting documents, such as margin agreements and guarantees.  Provided that the risk profile and objectives are the same for both accounts, one account application can be used for a cash and RRSP account or a cash and RRIF account. o Futures accounts also require a separate Futures Account Application Form  Some dealer members provide new and prospective clients with an all-purpose document package. o The package includes both an account application and an area for clients to sign the agreements relevant to the types of accounts being opened, such as margin and options agreements  You may provide clients with the required disclosure documents and the terms and conditions of the various types of agreements in separate forms or in a brochure  the client signature area must clearly state the following facts, which, in signing, the client acknowledges: o The type or types of accounts being opened. Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 o Receipt of, and agreement with, the terms and conditions of any relevant agreements. o Receipt of any required disclosure documents  The client cannot simply check a tick box requesting an options account and then, once in a place, sign an agreement that does not further specify the type of account being opened. There are two methods to ensure a proper client signature:  Have the client sign the form twice: once for the general form, and once upon accepting the terms of the agreement and acknowledging receipt of the disclosure statements.  Provide alternative spaces for one client signature depending on the type of account or accounts being opened; for example: One place for a client opening only a cash account  Another for a client opening a margin account  A third for a client opening a margin and options account ELECTRONIC DELIVERY AND SIGNATURES According to the legislation, the document or information in electronic form must meet the following requirements:  It must be accessible by the other party for subsequent reference.  It must be capable of being retained by the other person.  It must be organized in the same or substantially the same way as the specific non- electronic form.  The electronic signature must be reliable for identifying the person.  The association of the electronic signature with the relevant electronic document must be reliable =CLIENT RECORDS= Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 Chapter 5 - Product Due Diligence, Recommendations, and Advice Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426 =SUITABILITY OF INVESTMENTS AND INVESTMENT STRATEGIES=  At this next stage, you must match your client’s needs to the risk-return attributes of the stocks, bonds, mutual funds, or other products being considered for purchase TRANSACTION CONSIDERATIONS  The intent is to provide added protection in situations where the risk profile of the client and the account portfolio diverge over time  Where an advisor receives an unsolicited order that is unsuitable for a client’s objectives, risk profile, and other particular circumstances  it is not sufficient to simply mark the order as unsolicited. The advisor must take appropriate measures to deal with the unsuitable order. RULES REGARDING RECOMMENDATIONS  Before executing a trade, you must give a balanced presentation to the client, disclosing all relevant information, both positive and negative, about the securities under discussion In making a recommendation, you must give no assurance or guarantees in the following regard:  The future market price of a security.  Future payments of dividends or interest.  The client’s ability to sell a security at a stated price, other than in the case of a retractable or callable security.  The listing of a security on an exchange at a future date. SUITABILITY CONSIDERATIONS FOR INSTITUTIONAL ACCOUNTS IIROC defines an institutional client as follows: 1. Acceptable counterparties 2. Acceptable institutions 3. Regulated entities 4. Registrants (other than an individual registrant) under securities law 5. A non-individual with total securities under administration or management exceeding $10 million  all individuals are considered retail clients, regardless of net worth, securities under management, and sophistication  Where a dealer member has reasonable grounds to conclude that an institutional client is capable of making an independent investment decision and independently evaluating the investment risk, then its suitability obligation is fulfilled for that transaction. o Dealer members do not have a suitability obligation to institutional clients who are also permitted clients, PRODUCT DUE DILIGENCE KNOW YOUR PRODUCT Downloaded by Daanial Porbanderwala ([email protected])  lOMoARcPSD|49739426  before recommending the purchase of any investment product to a client, you must first understand how it is constructed and how it is likely to perform in various market conditions o This companion obligation of KYC is often referred to as the KYP obligation  Your clients have a rightful expectation that you know what you are selling and a right to know what they are agreeing to purchase. o Without this knowledge, you can neither assess suitability nor explain the product’s features and risks. o And if you are unable to explain the product, the client, arguably, will not be able to properly instruct you to exe