Canada: CSA Guidance On KYC, KYP And Suitability Obligations For Registrants

On January 9, 2014, the Canadian Securities Administrators (CSA) released CSA Staff Notice 31-306 – Guidance for Portfolio Managers, Exempt Market Dealers and other Registrants on Know-Your-Client, Know-Your-Product and Suitability Obligations (the Notice).  As a result of their compliance oversight reviews, CSA staff concluded that additional guidance in the areas of Know-Your-Client (KYC), Know-Your-Product  (KYP) and suitability obligations was required to assist registrants, such as Portfolio Managers (PMs) and Exempt Market Dealers (EMDs), in meeting their regulatory obligations.  The principal KYC, KYP and suitability obligations are set out in Part 13 of National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).

Given the emphasis that the CSA has recently placed on KYC, KYP and suitability obligations, registrants can expect future CSA compliance reviews to continue to focus on those obligations.  Indeed, in the Notice the CSA states that KYC, KYP and suitability obligations are among the most fundamental obligations owed by registrants to their clients and that registrants are expected to comply not only with the letter of the securities law requirements, but also with the spirit of those requirements.  All registrants should have robust policies and procedures in place with respect to KYC, KYP and suitability obligations and proper records should be maintained so that compliance with these obligations can be verified (e.g., so that product due diligence can be evidenced).

This legal update highlights selected points raised in the Notice but, given the importance of the topic, it is recommended that registrants review the entire Notice in detail.

The KYC obligation

Registrants are required to take reasonable steps to establish the identity of a client and to ensure that they have sufficient information to meet their suitability obligations. Thus, registrants should ensure that they have sufficient information with respect to a client's (i) investment needs and objectives; (ii) financial circumstances; and (iii) risk tolerance.  The extent of KYC information a registrant must collect will depend on the (i) client's circumstances; (ii) type of security being sold; (iii) client's relationship to the registrant; and (iv) registrant's business model.

KYC tips for registrants based on guidance provided in the Notice:

  • KYC collection should be viewed by registrants as more than a "tick the box" exercise; registrants should engage in a meaningful dialogue with the clients and explain why KYC information is required.  A pure "form based" approach to collecting KYC information is not sufficient to fulfill a registrant's obligations.
  • KYC obligations cannot be delegated to an unregistered individual (such as an administrative assistant or a referrer).  While an unregistered individual may assist in incidental administrative tasks related to the collection of KYC information, the registrant has the obligation to "know" the client.
  • Whereas an issuer of a security (e.g., a hedge fund) can rely on a factual representation by a purchaser that it is an accredited investor (AI) provided the issuer has no reasonable grounds to believe the representation is false, a registrant's obligation to determine whether (and how) a client satisfies the AI definition will generally be higher.  Factual representations, such as a representation in a subscription agreement that the client is an AI, will generally not, by themselves, be sufficient for a registrant to satisfy its KYC obligation.  Registrants should obtain a break-down of financial and net assets of the client and, where there is a reasonable doubt about the accuracy of information provided by a client, make further inquiries of the client.
  • Similarly, if a registrant is relying on subsections 13.2(6) and 13.3(4) of NI 31-103, which allow a "permitted client" to waive certain KYC and suitability requirements, the registrant must collect adequate information to determine that the client is a "permitted client." It is not sufficient to simply rely on the client's initialing or checking off the box in a permitted client certificate.
  • The CSA suggests that a PM with discretionary trading authority or an EMD with an ongoing relationship with a client should update the client's KYC information at least annually, if there is a significant change in a client's life circumstances or a significant change in market conditions.  On the other hand, if an EMD does not hold a client's assets, receive a trailer fee with respect to a client's ownership of a security or act for a client in a series of transactions then KYC information need not be updated until the next time the EMD recommends a product to the client.
  • Although not required by NI 31-103, the CSA recommends that both the registrant and the client sign and date both the KYC information collected by the registrant and any subsequent updates to the KYC information so as to help demonstrate the registrant's compliance with securities law requirements.

The KYP obligation

NI 31-103 requires registered individuals to understand the structure, features and risks of each product they recommend to clients. As part of their product due diligence, registrants should review and assess the information contained within the offering memorandum (OM) or other documentation provided by the issuer. If the information is not sufficient to allow the registrant to conduct a meaningful KYP assessment of the issuer and the product, the registrant must conduct further diligence on the issuer and the product or not deal with the product.

KYP tips for registrants based on guidance provided in the Notice:

  • The fact that a product is on a firm's approved product list does not mean that it will be suitable for all clients and that no review of the product is necessary by a registered individual.
  • While a registrant may rely on a third-party report with respect to a product as part of its due diligence process, the existence of a third-party report does not relieve a registrant from its obligation to conduct its own know-the-product and suitability analysis.
  • If the same individuals form the management of both the registrant and the issuer then the registrant should determine whether the resulting conflict of interest can be adequately managed through disclosure or control.
  • When categorizing products sold on a prospectus-exempt basis, registrants should consider liquidity risks, valuation risks and conflict of interest risks.

The suitability obligation

Registrants are expected to perform a meaningful suitability assessment before recommending a product to a client and to appropriately document that assessment. The suitability assessment should be more than a "tick the box" exercise and should involve a meaningful dialogue with the client to obtain a solid understanding of the client's investment needs and objectives, and to explain how a proposed investment is suitable for the client in light of the client's investment needs and objectives.

Suitability tips for registrants based on guidance provided in the Notice:

  • All relevant KYC information should be considered (including investment objectives, time horizon and risk tolerance) when assessing the suitability of an investment.
  • Each trade should be independently reviewed to ensure it is suitable for the client.
  • Client-directed trade instructions (i.e., where the client instructs a registrant to proceed with a trade notwithstanding the registrant's opinion that the trade is not suitable for the client) are not meant to be an alternative to assessing suitability and, therefore, a registrant should not actively promote a security and then rely on boilerplate language to claim the trade was client directed.  Client-directed trade instructions should not be buried at the end of a KYC form.
  • Most CSA staff consider investments (either individually or taken together with prior investments) in securities of a single issuer or a group of related issuers that represent more than 10% of the investor's net financial assets as potentially raising suitability concerns.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions