CPH 5 - Client Discovery and Account Opening
Review: If the registrant handling the account is also a member of the investment club, the account automatically becomes a pro account. Furthermore, the RR cannot be the person responsible for authorizing trades for the account, unless it is set up as a discretionary or managed account. In such cases, the account is made subject to the supervision requirements for accounts of that type.
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Most dealer members now provide computerized systems for record keeping; nevertheless, it is essential that the following records be readily at hand:
-NAAF -Portfolio record -Security cross reference -Correspondence
SUPPORTING DOCUMENTS In certain instances, the following additional documents may require client signatures:
Shareholder communication instructions Privacy Agreements
Because margin accounts involve a loan by the dealer member to the client, a financing agreement, called a ___________ _____________, must be completed before the account is approved.
margin agreement
Note that the Quebec Civil Code contains a special status of _______________ for persons under 18
"emancipated minor"
In the case of discretionary accounts, orders should be marked ______ only if the RR has some type of beneficial interest in the account.
"pro"
If a person owns more than a certain percentage of a class of voting or equity shares of an issuer (_______), then that person is generally considered to be an insider.
(usually 10%)
Review Futures accounts also require a separate Futures Account Application Form.
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Review: A Designated Supervisor must review any discretionary order initiated in a discretionary account by an RR prior to the order being entered, unless the RR has been approved as a Portfolio Manager (PM), or the RR is also an executive
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Insiders must report their trades within ______ after the date of the trade.
10 days
Discretionary authority is valid for a maximum term of
12 months.
A control person is a person who generally owns more than _____ of an issuer's equity and therefore has significant influence over that company.
20%
Beneficial owners are the actual individuals who are the trustees, and known beneficiaries and settlors of a trust, or who directly or indirectly own or control ____% or more of a corporation or an entity other than a corporation or trust, such as a partnership.
25%
ANTI-MONEY LAUNDERING PROCEDURES FOR CORPORATE ACCOUNTS If the information cannot be obtained within ___ 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
30
An account for a foreign PEP must be approved by senior management within ____ days of opening and be subject to enhanced ongoing monitoring.
30
Under what circumstances are dealer members allowed to open confidential, nominee or numbered accounts?
Dealer members are allowed to maintain accounts for clients identified only by number, nominee name or other symbol. This is permissible in order for clients to maintain confidentiality. 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.
______rules deal with KYC requirements for corporate accounts.
IIROC
separate ___________ are required for accounts in which the client has differing interests.
NAAFs
Review Determining whether a spouse is subject to regulatory requirements by virtue of their employment, insider status, etc. is one of three important reasons for obtaining information about a client's spouse. The other reasons are concerned with determining the creditworthiness and investment objectives.
Review
Review: Managed accounts may be solicited
Review
A dealer member that publishes written materials containing a security recommendation must disclose ?
its relationship with the issuer within the past 12 months
You must not solicit discretionary authority. If you receive an unsolicited request for a discretionary account, and are qualified to handle such accounts, you must obtain ______________________ before opening the account.
management's approval
In addition to forming the basis for the _________ ______________ between the dealer member and the client, the NAAF is used for three main purposes:
legal relationship • To determine the client's investment objectives and risk tolerance • To judge the client's creditworthiness • To identify any industry regulations that apply to this client or this account
The Leverage Risk Disclosure Statement should include the following words:
Using borrowed money to finance the purchase of securities involves greater risk than using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
Any employee who does not diligently fulfill his or her reporting responsibilities under The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) can potentially face either or both
a prison term of up to five years and a fine of up to $2,000,000
Other than in connection with a bona fide DAP account, any request for payment or receipt of funds to _____________ is a warning flag, and management should be consulted
a third party
For an individual's account, you must retain ? In addition, you must retain a copy of every _____________ sent to clients.
all correspondence about the account's operation. statement
To purchase contrained share companies, companies require purchasers to complete ___________________________, thereby providing a formal statement confirming ____________________________ and _________________
an Ownership Declaration citizenship and residency.
No dealer member or any person acting on its behalf is permitted to exercise discretionary authority over these accounts, unless _________________
approved by IIROC as a PM.
Clients may terminate the agreement at any time, but if the dealer member is terminating the agreement, the client must be given _______________.
at least 30 days' notice.
A Designated Supervisor must also review ________________the financial performance of all discretionary accounts.
at least monthly,
Foreign PEP accounts are generally a _________ concern from a money laundering perspective than domestic PEP accounts.
bigger
Client information includes such basic identifying information as the It also includes basic financial information, including the
client's name, address, and marital status. client's total net worth, level of investment knowledge, investment objectives, and risk tolerance
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 _________risk.
currency
DISCRETIONARY ACCOUNTS
discretionary authority has not been solicited, but where the client chooses to give it on a *temporary basis*.
CONTROL PERSONS Under no circumstances should you open such an account or enter into any transactions without
discussing it with senior management and getting their approval.
Both the client and dealer member may withdraw from the discretionary agreement, provided that the request is submitted by notice _______________. The client may terminate the agreement ______________ The dealer may terminate the agreement___________
in writing at any time with 30 days' notice of termination.
PRE-TRADE DISCLOSURE OF CHARGES This disclosure is not required for ____________________ 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.
institutional customers
MANAGED ACCOUNTS
investment decisions are made on a continuing basis by the dealer member or by a third party hired by the dealer member
Delivery against payment (DAP) accounts
involve the purchase of securities and payment on settlement date (Like cash accounts, DAP accounts are subject to the Cash Account Rule.)
Accounts in the high-risk category may include
offshore accounts, all PEP accounts,and all accounts for which a suspicious transaction has been filled
Receipt against payment (RAP) accounts
operate as described above for DAP accounts, except that securities are sold by the client.
clients cannot guarantee accounts of________, unless they are immediate _________________
partners, directors, shareholders, RRs, or other employees family members.
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
Each managed account must be reviewed on a ________________ by ____________________ to ensure that the client's investment objectives are diligently pursued.
quarterly basis a Designated Supervisor
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.)
constrained share companies
shares of companies that are considered culturally or economically important to Canada (broadcasting companies and banks)
Unlike discretionary accounts, managed accounts may be .
solicited
When you have completed, reviewed, and signed the NAAF, it must be approved by
the Designated Supervisor
IIROC prohibits RRs from accepting authorization for discretionary accounts unless certain regulatory requirements are met. Where such accounts are accepted by dealer members, a discretionary agreement must be signed by ________, and the application must be approved by ___________________ . For managed accounts, _______________________ is required.
the client the Designated Supervisor a managed account agreement
Under the PCMLTFA, 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
Anti-money laundering regulations require that dealer members verify _____________and _________________ any person opening a securities account before any transactions
the identity and date of birth of
All discretionary orders for client accounts effected by an executive must be reviewed no later than __________ unless the executive is approved as a PM.
the next day
You do not have to provide a Leverage Risk Disclosure Statement if it has been given to the client within _____________________ or if the purchases are made through a margin account that is operated in accordance with IIROC rules.
the preceding six months,
discretionary order is any order in which the client has not clearly articulated any one of the following information:
the security, the quantity, the price, and the length of time the order is good for (or when the order is entered).
The client margin varies based on
the type of security and its price, and is determined according to a standard formula.
IIROC limits the accounts that may be guaranteed by RRs or other employees to
to those of their immediate families— spouse, parent, sibling, or child
Regarding periodic reviews, FINTRAC guidelines suggest regular intervals of _____ years.
two
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.
A copy of the information on an application must be made available to all persons who are responsible for the supervision of that account. Responsible parties include
yourself, your supervisor and staff in the head office, such as a sales manager or compliance officer.
For corporate accounts, depending on the business relationship already established, the clients may be required to file the following documents for trading authorization
• A copy of the corporate charter and by-laws • A duly certified copy of the by-laws or resolutions under which trading authorization was granted
Under IIROC rules, a suitability review must be conducted whenever:
• A trade is accepted from the client, • A recommendation is made to the client, • Securities are transferred or deposited into the account, • There is a change in the RR or PM responsible for the account, or • There is a material change to the client's life circumstances or objectives that has resulted in revisions to the client's KYC information.
Account information consists of the following components:
• Account type • Beneficial ownership • Currency • Payment/delivery procedures • Special instructions
The following rules apply to discretionary accounts:
• All discretionary orders must be marked as such at the time of entry. • Only persons who have been approved by IIROC to do so may effect trades for a customer in a discretionary account. • If the securities of a dealer member or its affiliates are publicly traded, no discretionary account may hold those securities. • 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.
The foreign PEP category includes the following persons:
• Any person who holds, or has held, an office or position in, or on behalf of, a foreign state • That person's spouse, common-law partner, child, mother, father, brother, or sister • The spouse's or common-law partner's mother or father
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
The following examples of a material change should trigger an update to a client's NAAF:
• Change of account name • A change of the client's address out of your jurisdiction • New marital or employment status • Another person taking a financial interest in or gaining control over the account • New trading authorization • A major change in financial circumstances • New investment objectives or risk factors • An amendment to any item in the regulatory section (i.e., insider status)
There are three general categories of information required on the NAAF, as follows:
• Client information • Account information • Registrant information
Because a power of attorney can be abused, dealer members should develop practices to address risks associated with them. 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 o against other signed documents received to determine authenticity.
For corporate AT documents, such documentation is usually required for the following purposes:
• It ensures that the corporation has the authority to open the type of account requested (e.g., cash or margin). • It ensures that any restrictions on the types of securities that have been authorized for investment are respected. • It guarantees that the persons entering orders do so with proper authority.
Information regarding marital status serves three purposes:
• It helps to determine the credit-worthiness 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).
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.
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
Persons who have inside information may not engage in the following activities:
• Purchase or sell securities of the issuer about which they have inside information. • Pass the inside information along to someone else. • Induce someone else to trade in the issuer's securities.
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
The NAAF must include the following items noted below:
• The client's identity, including his or her full name, address, citizenship, and social insurance number • Personal information, such as the client's marital status, number of dependents, and employment • Personal financial information, including the client's income, net worth, and liquidity • The client's investment objectives, risk tolerance, and level of knowledge about investing • Information about the client's relationship with any publicly traded companies (i.e., insider status)
client signature area must clearly state the following facts, which, in signing, the client acknowledges:
• The type or types of accounts being opened. • Receipt of, and agreement with, the terms and conditions of any relevant agreements. • Receipt of any required disclosure documents.
The Relationship Disclosure Document must include a description of, or information relating, to the following aspects of the account:
• The types of products and services the firm offers. • The account relationship to which the client has consented. • The process the firm uses to assess the client's KYC information and investment suitability. • When account suitability will be routinely reviewed. • Whether suitability will be reviewed in other situations, including market fluctuations. • Material firm and adviser conflicts of interest. • A statement that future material conflict of interest situations, where not resolved, will be disclosed to the client as they arise. • All fees and charges associated with operating, transacting, and holding investments in the account. • Complaint handling procedures. Clients must also be provided with IIROC's brochure entitled An Investor's Guide to Making a Complaint. • The reporting the client will receive, including when account statements and trade confirmations will be sent and a description of the firm's obligations to provide performance information, including whether or not percentage return information will be sent.
Furthermore, minors are subject to the following restrictions:
• They cannot exercise their right to vote if they own voting shares. • They do not have the capacity to designate beneficiaries with respect to RRSP accounts. • They cannot make RRSP contributions if they have not earned income and filed taxes in the previous year.
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
The KYC rule requires that every dealer member use due diligence for the following purposes:
• To learn the essential facts relative to every client and to every order or account accepted • To ensure that the acceptance of any order for any account is within the bounds of good business practice • To ensure that recommendations made or accepted for any account are suitable and in keeping with the client's investment objectives.
Anti-money laundering procedures must be established on the basis of the risk that particular types of clients may be involved in money laundering. For example, firm policies must impose the following requirements:
• Use extra due diligence with clients from bank secrecy jurisdictions or countries with high levels of corruption. • Provide extra information and documentation about corporations and trusts, particularly private offshore entities. • Pay particularly close attention to the following clients: Clients who deal with cash businesses Clients or their close associates who are in a prominent position of public trust Clients who have had suspicious transactions filled in their accounts