The Canadian Securities Administrators released a staff notice yesterday to provide guidance
to portfolio managers, exempt market dealers and other registrants
on best practices in regards to know-your-client (KYC),
know-your-product (KYP) and suitability obligations. Of
particular interest, the notice also provides examples of
practices deemed unacceptable to regulators.
The guidance follows a
CSA targeted review in 2012 that found various issues with
registrants' compliance with applicable
obligations. Specifically in respect of KYC obligations,
the notice provides guidance on such things as (i) how often
registrants should update KYC information; (ii) the signing
and dating of KYC information by clients and registrants;
(iii) the processes registrants should follow to determine
whether investors are accredited investors; and (iv) how
registrants should collect and document KYC information.
Of particular interest, the notice states that factual
representations, such as a representation in a subscription
agreement, that the client is an accredited investor will generally
not be sufficient on their own for a registrant to satisfy
KYC obligations. Further, a registrant relying on
a permitted client waiver of its KYC and suitability
requirements must also collect adequate information to determine
that the client is a permitted client, rather than only
relying on a client checking off the relevant box on the
Meanwhile, while clients and registrants are not expressly
required to sign and date KYC information, the
CSA recommend that registrants enact policies and procedures
to ensure that both the client and the registrant review the
relevant KYC information and that the client signs and
dates the information, including any amendments to the
In respect of KYP, the guidance sets out (i) the key areas
to consider in assessing KYP; (ii) additional areas to
consider when dealing with prospectus-exempt securities; and
(iii) reliance on third-party analyses and reports. As for
suitability obligations, the notice provides guidance in
respect of how registrants should demonstrate compliance with the
suitability assessment and how client-directed trade instructions
may be appropriately used.
More specifically, the CSA state that registrants must be
particularly mindful to undertake appropriate due diligence in the
sale of prospectus exempt securities, including a review and
assessment of information contained within offering documents
or other documentation prepared by the issuer or other third
The notice also sets out the regulators' expectations
that registrants comply with not only the letter, but the
spirit of the applicable requirements as well. According to
the CSA, while the best practices set out in the notice are
intended to provide guidance on the acceptable methods registrants
can use to satisfy their obligations, other methods may also be
used so long as the alternative methods adequately demonstrate
satisfaction of the applicable obligations.
In Ontario Securities Commission v. Tiffin, the Ontario Court of Justice clarified the limits of the definition of "securities" under s.1(1) of the Securities Act, as it relates to promissory notes. The defendant in the case was charged with trading in securities without being registered and while prohibited, and without filing a prospectus.
The OSC has issued a press release advising stakeholders that Ontario securities law may apply to any use of distributed ledger technologies, such as blockchain, as part of financial products or service offerings.
The use of electronic signatures is becoming increasingly commonplace in commercial transactions, as individuals and businesses capitalize on the administrative efficiency afforded by today’s digital world.
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