New CSA Guidance for Exempt Market Dealers on Updating ‘Know-Your-Client’ Information

On January 9, 2014, the Canadian Securities Administrators (CSA) published CSA Staff Notice 31-336 that provides industry guidance on, among other things, when exempt market dealers (EMDs) need to update their ‘know-your-client’ (KYC) information. The CSA states that an EMD should update KYC information at least annually or more frequently if there is a material change in a client’s circumstances.

Canadian securities law requires a registrant to obtain current KYC information about a client’s investment needs and objectives whenever a registrant, such as an EMD,  is required to consider whether a trade is suitable for a client.

What is a material change in a client’s circumstances?

A material change in a client’s circumstances means any information that results in changes to the stated risk tolerance, time horizon or investment objectives of the client or would have a significant impact on the net worth or income of the client.

For an EMD, these can include various triggering events, including, but not limited to, a change in a client’s:

  • investment goals and objectives (e.g., income or growth);
  • risk tolerance;
  • investment time horizon;
  • earnings (positive or negative);
  • life situation (e.g., marriage, death, divorce, health issues); and/or
  • employment status (e.g., change in employment, retirement or loss of employment).

How frequently does an EMD have to update client KYC information?

The frequency of updating a client’s KYC information depends on whether an EMDhas a transactional or ongoing relationship with the client.

A transactional relationship is a relationship where:

  • An EMD’s relationship with a client is limited to a specific private placement transaction and not a series of transactions;
  • Neither the EMD nor a related issuer of the EMD holds, directly or indirectly, client assets or securities;
  • The EMD is not paid a trailer fee or similar ongoing compensation in relation to the client’s ownership of a security; and/or
  • There is no expectation on the part of the client that the EMD will continue to provide services to the client after the completion of the transaction.

If an EMD has a relationship where any one of the above factors are present or is also registered in another category of registration, such as a portfolio manager, the CSA would view the EMD as having an ongoing relationship with the client and accordingly a more frequent duty to update a client’s KYC information.

Cannot update client KYC information to make an unsuitable trade suitable

EMDs should note that it is inappropriate to update or alter the client’s KYC information in an effort to justify the suitability of an investment that is otherwise unsuitable for the client. Specifically, an EMD should not be soliciting the client’s consent to change their KYC information if the purpose of the change is solely to create the appearance of a suitable order.

Best practices for updating client KYC information

EMDs who have an ongoing relationship with a client are encouraged to adopt certain best practices for updating a client’s KYC information which would include:

  • Adopting policies and procedures requiring, when appropriate, periodic suitability reviews of client accounts;
  • Conducting suitability reviews of accounts that may be affected by significant market events; and
  • Conducting suitability reviews of accounts holding securities of an issuer that has undergone a material change in its risk profile.

Get it in writing– signing and dating updated client KYC information

Lastly, although it is not legally required, EMDs should have its dealing representative and his or her clients sign and date any updated client KYC information as a matter of best practices.

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Disclaimer

 This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

 Brian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Exempt Market Dealers Association of Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee. Brian can be reached by phone at 416-860-2955, by e-mail at bkoscak@casselsbrock.com or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at www.briankoscak.com.

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