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PMAC Guide to Collecting and Maintaining KYC Information

NOTICE

This document is intended only to provide general guidance to Portfolio Management Association of Canada ("PMAC”) members and is not intended to be and should not be construed or relied upon as legal or other professional advice. PMAC assumes no liability by providing this guidance to its members or any other person or entity. The information provided in this guideline may or may not apply in any particular situation. While the best practices set out in this document are intended to present acceptable practices that can be used to comply with regulatory requirements, they are not the only acceptable practices. Users should carefully review the guidance included here to determine applicability.

Introduction

Section 13.2 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant

Obligations (“NI 31-103”) requires registrants, including portfolio managers, to take reasonable steps to

establish the identity of, and conduct due diligence on, their clients under what is referred to as the “Know Your

Client (KYC)” obligation, and to take corresponding steps to keep this information current.

Section 13.3 of NI 31-103 sets out the suitability, or “Know Your Product (KYP)”, obligation which requires

a registrant to take reasonable steps to ensure that, before it makes a recommendation to or accepts an

instruction from a client to buy or sell a security, or makes a purchase or sale of a security for a client’s

managed account, the purchase or sale is suitable for the client.

The KYC and KYP obligations, amongst other regulatory objectives, form the basis for determining whether

trades in securities are suitable for investors and as a practical matter, registrants must consider these

obligations jointly and meet both the KYC and KYP requirements in order to ensure that trades are suitable and

recommended in accordance with securities regulations. Regulators have been increasingly focused on the

adequacy of initial and ongoing KYC collection and investment suitability assessments.1 See Appendix B:

Regulatory Requirements and Publications.

1 For example, in June 2012 the OSC undertook a targeted review (sweep) of over 85 exempt market dealers and portfolio managers to

assess their compliance with their KYC, KYP and suitability obligations under sections 13.2 and 13.3 of NI 31-103.

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Purpose

This guide provides assistance to PMAC Members in fulfilling the KYC requirement in respect of private clients2

and on the processes to consider when gathering, evaluating, retaining and updating KYC information to this

specific client group. Regulators continue to identify significant compliance deficiencies in this area and

accordingly, clear, concise and robust KYC collection practices should be implemented to achieve regulatory

compliance and avoid reputational risk. The practices suggested reflect the current expectations of regulators;

however, we note that the KYC process should ultimately be driven by each firm’s business model, size, scale

and products, amongst other considerations. In developing this guide, PMAC has consulted with its Members,

representatives from the legal community and various securities regulators.

Scope

This guide focuses on the KYC requirements in the context of private clients under securities regulation only.

There are additional client identification requirements established under other regulations that include, but are

not limited to:

Regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)

Foreign Account Tax Compliance Act (FATCA) and other tax regulations

Privacy legislation

Corruption of Foreign Public Officials Act

Special Economic Measures Act

While these client identification requirements are relevant to the overall KYC process, this guide does NOT

address these. PMAC Members should take steps to ensure they understand and comply with these

additional client identification requirements.

2 For the purposes of this guide, "private clients" refer to individuals who are not "permitted clients" under securities laws and that are

generally individuals and families who have a significant financial portfolio and require expertise and access to investments beyond those available to the mass market.

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CONTENTS

1 KYC Best Practices

1.1 Developing Policies and Procedures

1.2 KYC Training and How to Have a Meaningful Discussion

1.3 Documenting KYC Information

1.4 Developing an IPS

1.5 Maintaining and Updating KYC Information

1.6 Developing a KYC Supervision and Oversight Process

2 KYC Unacceptable Practices

APPENDICES Appendix A Guide to Collecting KYC Information Appendix B Helping Clients Understand their Role in KYC Appendix C Regulatory Requirements and Publications Appendix D Developing a KYC Questionnaire

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1 KYC Best Practices

A KYC program that reflects best practices begins with the development of policies and procedures, checklists

and tools for documentation. Adequate policies and procedures that reflect regulatory expectations and address

business risk set the framework for a sound KYC program. Developing checklists and establishing

documentation standards provide tools for portfolio managers to meet the requirements of the firm’s policies and

procedures. In addition, training portfolio managers in conducting meaningful discussions with potential and

existing clients in a consistent manner will be more likely to result in gathering KYC information that is not only

compliant but of a higher quality. For more information, see Appendix A: Guide to Collecting KYC Information.

An Investment Policy Statement (IPS), which records the general investment goals and objectives of a client

and describes the strategies that the portfolio manager should employ to meet these objectives, is key to

evidencing the KYC process. Accordingly, developing and maintaining an IPS represents best practice.

Ensuring proper procedures are in place to update any changes to KYC information and reflect such changes in

the IPS are critical.

Finally, having processes to periodically review, confirm, maintain and update KYC information is essential to

fulfilling the KYC obligation, as is oversight to ensure that it is working as intended.

1.1 Developing Policies and Procedures

Establish policies and procedures for each of the following:

Collecting KYC information (i.e. at account opening and thereafter);

Documenting KYC information (i.e. checklists, KYC forms and/or questionnaires, as applicable);

Reviewing KYC information (confirming accuracy and currency, etc.); and

Maintaining KYC information (ensuring updates are made as required and that KYC information is

confirmed periodically; ensuring IPS up to date).

1.2 KYC Training and How to Have a Meaningful Discussion

Provide training to portfolio managers to ensure they fully understand the importance of collecting

fulsome, accurate and up-to-date KYC information.

Ensure that training is delivered for new portfolio managers and repeated periodically on an ongoing

basis; document provision of training.

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Conduct in-person meetings3 to fully understand the client and their circumstances and to explain the

investment philosophy, strategies and services of the firm; initial discussion should include a fulsome

discussion of the client's circumstances and investments objectives; outline plans for communication

(i.e. client should understand how frequently they should expect contact by their portfolio manager and

under what circumstances; and conversely, the client should understand when they should initiate

contact with the portfolio manager).

Review the information that the client provides; verify and validate (by reasonably enquiry) and identify

areas of potential omission; a secondary peer or supervisory review may be considered.

Make clients aware that any significant changes in their financial and/or personal information can affect

the suitability of their investment portfolio and should be communicated to their adviser as soon as they

occur so that their portfolio is managed according to the client’s changed circumstances. For more

guidance, see Appendix C: Helping Clients Understand Their Role in KYC.

Consider both a client’s willingness to accept risk and ability to accept risk when assessing a client’s risk

tolerance.4 For more information, see Appendix D: Developing a KYC Questionnaire.

1.3 Documenting KYC Information

All discussions with the client should be documented.

Collect relevant information from the client so as to establish identity. Maintain a record of the valid

identification document (for example, passport or driver's licence number and place of issue). See

Appendix A: Guide to Collecting KYC Information.

Ensure that KYC forms and/or questionnaires, if used, are client-friendly, ensuring terms are clearly

defined but easy to understand, risks are explained and that collection of sufficient minimum KYC

information is provided for. See Appendix D: Developing a KYC Questionnaire.

3 Discussions with clients may take place over a number of meetings. An initial meeting may address information such as the client’s investment objectives and the portfolio manager’s services. A subsequent meeting may address more specific client KYC information. In some cases this may happen in one meeting. 4 A client may be willing to accept risk; however, this does not necessarily mean that a client has the ability to financially withstand a

downturn in the market or other partial or total loss of their investment. Alternatively, a client may have the financial means to absorb losses, but may not be willing to take such a risk.

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Completion of all KYC forms should accord with the information gathered and documented during

discussion(s) that the portfolio manager has with the client. Take reasonable steps to confirm

information provided by the client to the extent possible.

Ensure that KYC forms and/or questionnaires are signed and dated by both the client and portfolio

manager to indicate agreement with the information recorded. The client should receive a signed copy

of the KYC form for their records.

Both the client and portfolio manager should sign and date any changes or updates to KYC information,

whether done as addendums to the original information, or as “fresh” KYC information. Documenting

confirmation that there are no changes, if applicable, should also be included.

KYC forms and/or questionnaires should have sufficient information about the client to allow the

portfolio manager to determine if the client meets the conditions of prospectus exemptions as specified

in NI 45-106 Prospectus and Registration Exemptions.5

Consider provision for storing KYC documentation in both paper and electronic format that is readily

retrievable and/or searchable (with controls consistent with privacy requirements); where applicable,

add procedures to document electronic and phone communications with the client in the firm's client

relationship management system.

Establish procedures and processes for storing documentation and information supplementary to

completion of forms and questionnaires, e.g. copies of the client’s will if one is provided, information on

executors, etc., to both preserve that information and ensure it is in a format that is readily reviewable

with the client at annual (or more frequent) meetings.

Ensure business continuity plans and/or disaster recovery plans address electronic document backup

and recovery of KYC information, and/or, appropriate security protection in the case of paper-only

records.6

1.4 Developing an IPS

PMAC Members may wish to refer to the PMAC Investment Policy Statement as well as the CFA Guide

Elements of an Investment Policy Statement for Individual Investors.7

5 Thresholds used in the KYC form should be consistent with the minimum income and asset thresholds in the accredited investor (AI) or

eligible investor definition contained in NI 45-106. 6 Refer to PMAC Guideline on Preparing a Business Continuity Plan (BCP)

7 http://www.portfoliomanagement.org/wp-content/uploads/2011/05/Revised-IPS-February-2012-FINALdocx.pdf and

http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2010.n12.1

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Develop an IPS with the client that reflects the client’s investment needs and objectives, agreed upon

investment strategy. Note that one IPS may not be valid for all accounts of the client and multiple IPSs

for the client may be required.

The client should sign and receive a copy of their completed IPS to confirm that it is understood,

complete and accurate.

The IPS should be reviewed following each and every client interaction to ensure it continues to be

appropriate.

Ensure the client approves any changes to the IPS by signing an updated version or indicating that the

existing version remains in effect.

If the portfolio manager becomes aware that there is a material change in a client’s circumstances or

investment needs or objectives, the IPS should be updated immediately.

1.5 Maintaining and Updating KYC Information

The KYC obligation requires a portfolio manager to take reasonable steps to obtain and periodically

update information about their clients.

Meet in person with each client at least annually (and more frequently if possible or necessary) to verify

the accuracy of KYC information; alternatively, if the client prefers, have a telephone discussion with the

client and document the content of the discussion.

Ensure KYC is current and updated to reflect any “trigger events” (i.e. marriage, divorce, birth of a child,

loss of or change in employment, etc.) so that the investment strategy determined by the portfolio

manager remains suitable for the client. If there is a material change in a client’s circumstances or

investment needs or objectives, the KYC and IPS are to be updated immediately.

Inquire periodically, either by telephone or email, or other means, as to changes in the client’s

circumstances; reminders to inform the portfolio managers of changes in circumstances can also be

included in quarterly statements or other firm communications.

Undertake reasonable efforts to determine underlying reasons or causes when changes in a client’s

financial behaviour become apparent; document actions taken and findings.

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Inform clients verbally and in writing (at account opening and remind periodically thereafter) of the

importance of the client notifying the portfolio manager on a timely basis when there is a change in their

circumstances that may impact the investment strategy.

Determine whether any significant market changes necessitate contacting the client.

For elderly or seriously ill clients, gather information regarding appointment of power of attorney and

executors and/or confirm existing information on file.

1.6 Developing a KYC Supervision and Oversight Process

Establish procedures for supervision of the KYC process, including IPS development, to ensure that the

standards reflected in the firm’s policies are met; and establish procedures for escalation of issues and

addressing deficiencies.

Establish review mechanisms to ensure that portfolio managers are appropriately supervised in the

collection and recording of KYC information; an appropriate review mechanism may include sign-off by

a compliance supervisor.

Document or summarize any action items arising from interactions with the client; establish proper

processes to ensure that actions items are undertaken.

Provide sufficient support to portfolio managers and staff in dealing with a client that is uncooperative or

unresponsive to KYC information enquiries; ensure documentation reflects efforts taken, any

information gap (e.g. exception reports), and actions that are required as a result of any such gap.

Establish compliance oversight of client relationship management with respect to KYC requirements.

Consider including a report on KYC compliance in the CCO’s Annual Report to the Board8.

8 Refer to PMAC Guideline on Preparing an Annual CCO Report to the Board.

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2 Unacceptable KYC Practices

As a result of the recent focus on KYC by regulators during audits, the following list has been identified by

regulators as unacceptable KYC practices:

Registrants should not approach the collection of KYC information as a tick-the-box exercise.

Delegating KYC and suitability obligations to other parties (i.e. unregistered individuals such as

administrative assistants or a referrer) is not permitted and is contrary to securities laws9. Although a

registrant may rely on an unregistered individual to assist in incidental administrative tasks related to the

collection of KYC information, it is the registrant’s obligation to “know” the client and the client’s

investment needs and objectives. If an unregistered individual or firm purports to collect KYC

information or explain products to clients, these activities may be considered to be registerable dealing

or advising activities (since these activities may themselves constitute acts in furtherance of a trade).

Processing a trade (other than a liquidating transaction upon a client’s request) if there is any missing or

conflicting KYC information that may affect the registrant’s ability to assess the availability of the

prospectus exemption or the suitability of the investment.

Using outdated KYC information or an outdated KYC form to assess the suitability of a client’s

investment.

Using disclaimer language in a KYC form or other document that purports to limit liability for all losses,

including losses resulting from a breach of the registrant’s obligations under securities law.

9 See NI 31-103 and Companion Policy. Registrants may not delegate their suitability obligations to anyone else, or satisfy the suitability

obligation by simply disclosing the risks involved with a trade.

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Appendix A: Guide to Collecting KYC Information

The following provides guidance on how to collect various types of KYC information.

1. Identity and Reputation

Verify client identity. Verify that the

client is who they purport to be. In doing so, if the client is present, request to view and then photocopy a current and valid original piece of identification; the following types of identification are acceptable

10:

- Birth Certificate - Driver’s License (valid, not

expired) - Proof of Citizenship -

Passport (valid, not expired), Record of Landing, Permanent Resident Card or other similar document

- Old Age Security Card - Certificate of Indian Status - Foreign identification, if

equivalent to an acceptable type of Canadian identification document

Personal information. Obtain the following information (typically collected in a form format):

- Full legal name - Full contact information (i.e. residential

address, phone number(s), email address, etc.)

- Marital status - Information on spouse or partner (if

applicable) - Occupation (detailed description, i.e.

contractor or consultant generally not sufficient)

- Employment status (for example: retired, employed, self-employed, and length of service, if applicable)

- Employer (if applicable) - Business address - Date of birth - Social Insurance Number (SIN) - Citizenship - Name(s) of all children and their dates

of birth Validate. If the client is not present, identification must be provided that has been attested to by a guarantor.

11

Corporate information. Where the client is a

corporation, partnership or trust, the nature of the entity must be established along with the identity of any individual who, is a beneficial owner of, or exercises direct or indirect control or direction over, more than 25% of the voting rights attached to the outstanding voting securities of the corporation, or in the case of a partnership or trust, exercises control over the affairs of the partnership or trust.

Trustee and/or executor information. The client's trustee or named executor should be determined to ensure the registrant can continue to manage and oversee the account upon death of the client

-

Reputational concerns. Make inquiries if you

have cause for concern regarding a client’s reputation. This could include establishing the client's source of wealth or funds. Document all inquiries made and information obtained including third party references if undertaken. Where there are reputational concerns, consult with compliance staff and/or senior management to determine whether the client should be taken on by the firm.

2. Insider Status

1. Definition. The definition of an "insider" includes CEO's, CFO's, and others as outlined in National Instrument 55-104 Insider Reporting Requirements and Exemptions and its

2. Establishing insider status. Take reasonable

steps to establish whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded. “Reasonable steps” include explaining to the client what an

3. Relevant questions and considerations.

Provide explanation to the client so that they understand the questions being asked regarding insiders and the importance of the information being sought. The following questions should be

Insider trading policies. Establish policies to

address issues relating insider trading provisions in securities legislation.

10

For a document to be acceptable it must have a unique identifier number and issued by provincial, territorial or federal government. For example, baptismal certificates issued by a church or employee cards issued by the employer are not acceptable forms of identification. 11

Note: Passport Canada has developed and put in place a new Guarantor Policy which eliminates the use of members of professional or occupational groups. The new Guarantor Policy permits holders of valid Canadian passport to act as guarantors. However, for FINTRAC purposes, a guarantor has to be an individual engaged in one of the following professions in Canada: a dentist, a medical doctor or a chiropractor; a judge, a magistrate or a lawyer; a notary (in Quebec) or a notary public; an optometrist or a pharmacist; an accredited public accountant (APA), a chartered accountant (CA), a certified general accountant (CGA), a certified management accountant (CMA), a public accountant (PA) or a registered public accountant (RPA); a professional engineer (P. Eng., in a province other than Quebec) or engineer (Eng. in Quebec); or a veterinarian.

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companion policy. Clients who have access to material information about certain companies and who can influence the direction of the company must file insider reports. In addition, generally any person or organization that owns or has claims on 10% or more of a company's equity is also considered an insider and must file insider trading reports although there are some important exceptions for

eligible institutional investors.12

insider is and what it means for securities to be publicly traded.

13

asked of the client: o Are you a director or officer of a publicly traded

company? o Are you an owner of 10% or more of the voting

rights (alone or as a part of a group) of a publicly traded company? If the client indicates, "Yes" to either of the above questions, the name of the company should be obtained For firms selling highly concentrated pooled funds, enquire as to whether a client is an insider of the issuer of any securities held by the fund notwithstanding the exemption provided in subsection 13.2(7) of NI 31-103 (i.e. for mutual fund dealers and scholarship plan dealers).

3. Investment needs and objectives 4. Goals and Needs

Establish and prioritize short and long term goals (including short term and long term funding needs).

Conduct routine and periodic assessments of the clients’ goals and needs to determine whether they are being met and properly executed.

Investment goals will vary from client to client (e.g. passing on wealth from generation to generation, philanthropic goals, real estate growth, etc.) as will needs (e.g. short term funding requirements, long term funding requirements, liquidity needs, lifestyle needs, legacy needs etc.).

Assess whether there is a gap between the income required by the client vs. the income the portfolio can and is actually producing (i.e. an expectation gap).

5. Age - Age is a crucial factor in determining the client's

risk profile and in portfolio construction. Age may reasonably influence investment selection that provide for income versus investments that provide capital gains.

- - As a generalization, a “younger” client might have

a higher risk asset allocation tolerance that could result in and withstand larger market value fluctuations over time while an “older” client might prefer more conservative asset mixes and/or capital preservation; however neither of these may necessarily be true for all clients. While age might be a factor in determining the client's investment knowledge or experience, assuming that clients are more knowledgeable based on age (whether younger or older) may not be valid.

6. Occupation

The client's occupation may provide indication as to whether the client can and likely will maintain a stable income, provide a source of funding for retirement (e.g. part of a defined pension plan, occupations that provide employed clients with a stock option plan may influence investment

7. Income - The client's income level will determine their tax

rate; consequently income may reasonably influence investment choices and risk tolerance. A higher income client may have a greater ability to withstand losses but this may not be indicative of a higher risk tolerance. If the client has income needs that exceed the income that the portfolio is generating, there is a risk of erosion of capital; this should be identified to the client (refer to the bullet under “Goals and Needs” above).

-

8. Taxes - Establish whether the client has any relevant

special tax circumstances or if there are tax considerations that should be factored into portfolio construction; tax considerations might reasonably be relevant in all circumstances as minimizing the client's tax exposure plays an important role in the selection of investments..

- Consider whether to consult with the client's tax adviser, if they have one (e.g. to confirm whether the client has any unrealized capital losses). Liquidity

- Determine the client's intermediate liquidity (i.e.

9. Time Horizon - A client's time horizon is the determination of

when the client requires access to his or her investments, for either income and/or capital; reflect whether the client has short term and/or long term (as defined) funding requirements and, to the extent possible, the nature of future cash flow needs that the account is intended to fund. Time horizon is a key consideration when choosing investments and should be explored and discussed at length with clients.

Overall Wealth

- A client's overall wealth (i.e. including assets held outside of the portfolio and/or jointly with others, and including debt obligations such as mortgage(s), line(s) of credit, etc.) will impact risk tolerance and investment goals and needs.

- Establish a picture of the client's overall wealth and an understanding of what percentage (or portion) of the client's wealth is being managed by the firm.

- Determine whether the client anticipates any significant wealth changes or dependency on particular other factors (e.g. spouse or impending inheritance, etc.).

12

See National Instrument 62-103 (Part 4). 13

See s.13.2 of Companion Policy to NI 31-103. “Reporting issuer” has the meaning given to it in securities legislation and “other issuer” means any issuer whose securities are traded in any public market. This includes domestic, foreign, exchange-listed and over-the-counter markets. This definition does not include issuers whose securities have been distributed through a private placement and are not freely tradeable.

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decisions, etc.), and may be a significant determinant in the client's overall wealth.

Consider issues related to self-employment where applicable.

events that are planned for) and plan for unforeseen liquidity events (e.g. medical emergency).

4.Financial circumstances

In collecting information on a client's financial circumstances, the registrant must review and assess the client’s overall financial circumstances, including net worth, income, current investment holdings and employment status.

Assessment of the client's financial circumstances requires consideration of the client's current financial situation and current priorities, along with the client's anticipated financial circumstances given future priorities or periods of transition. As circumstances change and over time, this needs to be reassessed.

4. Relevant information. Obtain the following information and update periodically:

- Total personal income - Total personal and spousal income - Total liquid assets - Total net worth - Debts, mortgages, lines of credit, etc. - Predictability of income - Accredited investor status - Account information (e.g.. type(s) of

account - registered, non-registered) - Other investment accounts - Tax considerations (e.g. installments,

liabilities, etc.) - Any history of personal bankruptcy or

credit issues

5. 6. Personal or professional transitions. 7. Go beyond the information listed above and

establish whether the client is (or plans to be in the near future) experiencing any periods of personal or professional transition.

8.

Personal transitions may include, but are not limited to, family additions (whether child or grandchild), separation or divorce, personal or family health issues or recent bereavement.

Professional transitions may include, but are not limited to, considering a new job or career change, starting a new business, selling a business or approaching retirement.

9. 10. Financial transitions. 11. Discuss any financial transitions that are

contemplated or likely to occur in the near future (such as those described below) and which should factor into an evaluation of the client's overall financial circumstances. - Is the client reconsidering their investment

philosophy? - Is the client actively considering a specific

investment opportunity? - Is the client considering taking on more

debt or concerned with their current debt level?

- Is the client considering developing or reviewing an estate plan?

- Does the client anticipate receiving an inheritance, financial windfall or realizing a significant investment gain or loss in the immediate future?

- Is the client planning philanthropic activities or to leave legacies to family members?

- Where relevant to the time horizon, what are the client's retirement goals?

5. Risk tolerance Understanding your client's risk tolerance is a key part of the KYC process and informs the client’s overall investment profile. Explain the relationship between risk and return; a client’s

understanding of this concept is important so take the time to be reasonably sure that the client grasps this. Understand that the client's risk tolerance may be difficult to articulate and may change over time

14; consider providing tools to facilitate this; consider the impact of how risk tolerance questions are framed. Assess the client's outlook on investing, and, in particular, their understanding

of market and economic conditions and comfort level with market volatility.

6. Other Consider whether it is prudent and appropriate to consult with the client's accountants, lawyers etc., when developing an IPS and portfolio; obtain the appropriate client consents to do so, which may include relevant legal and regulatory considerations and determining name of accountants, lawyers, or other professional service providers.

14

See CFA Institute publication: "What every investor should know...", 2007. Available at: www.cfainstitute.org.

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Appendix B: Regulatory Requirements and Publications The following publications address the KYC requirement by setting out the applicable rules and/or guidance with

respect to meeting the KYC obligation.

National Instruments and CSA Staff Notices

1. NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and Companion

Policy to NI 31-103 (May 1, 2014 Unofficial Consolidation)

2. CSA Staff Notice 31-336 Guidance for Portfolio Managers, Exempt Market Dealers and Other

Registrants on the Know-Your-Client, Know-Your-Product and Suitability Obligations (January 9, 2014)

3. CSA Staff Notice 31-334 CSA Review of Relationship Disclosure Practices (July 18, 2013)

4. CSA Staff Notice 33-315 Suitability Obligations and Know Your Product (September 4, 2009)

OSC Staff Notices, Messages and Decisions

1. OSC Staff Notice 33-740 - Report on the results of the 2012 targeted review of portfolio managers and

exempt market dealers to assess compliance with the know-your-client, know-your-product and

suitability obligations (May 31, 2013)

2. OSC Staff Notice 33-742 2013 OSC Annual Summary Report for Dealers, Advisers and Investment

Fund Managers (November 7, 2013)

3. OSC Staff Notice 33-738 2012 OSC Annual Summary Report for Dealers, Advisers and Investment

Fund Managers (November 22, 2012)

4. OSC Message to all Chief Compliance Officers and Ultimate Designated Persons of Registered Firms

Re: Concerns about inadequate compliance systems and Chief Compliance Officers not adequately

performing responsibilities (May 25, 2012)

5. OSC Message to all Chief Compliance Officers and Ultimate Designated Persons of Registered Firms

Re: Concerns about inadequate compliance systems and Chief Compliance Officers not adequately

performing responsibilities (May 25, 2012)

OSC Staff Notice 33-735 Sale of Exempt Securities to Non-Accredited Investors (May 13, 2011)

6. Trapeze Settlement (Ontario) (April 19, 2012)

NOTE: Publications by IIROC and the MFDA have been included here for information purposes as the CSA has

indicated that selected requirements and guidance for KYC, KYP, and suitability requirements for dealer

members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers

Association of Canada (MFDA) may provide helpful guidance to registrants in their determination of how to meet

their KYC, KYP, and suitability obligations under securities law. However, these requirements are not

applicable to registrants who are not members of an SRO.

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Investment Industry Regulatory Organization of Canada (IIROC) Rules and Notices

IIROC Notice 12-0109 Rules Notice – Guidance Note – Dealer Member Rules – Know your client and

suitability (March 26, 2012)

IIROC Notice 12-0108 Client Relationship Model - Guidance

IIROC Rule 1300 Supervision of Accounts

IIROC Rule 2500 Minimum Standards for Retail Customer Account Supervision

Mutual Fund Dealers Association of Canada (MFDA) Rules and Other Publications

MFDA Bulletin #0611-C – Improving the Know your Client Process - Discussion Paper on the Use

of Investor Questionnaires (July 21, 2014)

KYC Information Sheet for Dealers (October 2, 2013)

Section 2.2.1 of MFDA Rules

MFDA Rule 2.2.4 Updating Client Information

MFDA Policy No. 2 Minimum Standards for Account Supervision

MFDA Staff Notice 0069 Suitability

NOTE: The above sources may not be all of the information currently available on this topic. Members are encouraged to consult the websites of Canadian securities regulators for any relevant publications subsequent to the date of this guide.

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Appendix C: Helping Clients Understand Their Role in KYC

Portfolio managers should endeavour to ensure that clients understand the importance of providing accurate

KYC information and the role that the client plays in ensuring they have a suitable portfolio of investments. At

the initial meeting(s), and periodically throughout the relationship, portfolio managers should emphasize to

clients that it is essential to the proper management of the client’s account and for the client’s protection, that

the portfolio manager base advice and services on accurate and up-to-date information about the client.

Framing the client’s relationship with a portfolio manager as a “partnership” with both parties working together to

achieve the client's financial goals, might resonate with the client. Portfolio managers should consider various

ways in which to express this that might be effective. Both clients and portfolio managers have responsibilities

in making the relationship a successful partnership; open and honest communication is essential.

Although not specific to KYC, regulators have outlined various responsibilities clients have when working with

portfolio managers. Portfolio managers may consider using the following list of client responsibilities to explain

to clients how they might effectively participate in the partnership15

:

Be prepared for each meeting. Treat each meeting with your portfolio manager like a business

meeting. Take some time before the meeting to review your investments and jot down what you want to

discuss. Bring all relevant information, such as recent account statements and tax assessment forms.

Ask questions and take notes. Make sure you understand the investments your portfolio manager

recommends and how they fit with your plan. If you do not understand something, ask for clarification.

Take notes of conversations you have with your portfolio manager and what you agree to.

Be informed. Read documents that you receive about investments you are considering. Learn as much

as you can about the investment world through courses, books, newspapers, websites and other media.

Stay on top of your investments. Review your transaction confirmations and account statements as

soon as you get them. Make sure they reflect what you discussed and contact your portfolio manager

right away if there are any problems.

Keep your portfolio manager up to date. Tell your portfolio manager when your personal or financial

circumstances change. Major life events such as marriage, the birth of a child, divorce or the death of

your spouse, loss of job or other significant change can have an impact on your financial well-being.

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See CSA Guide to Working with a Financial Advisor, available at: http://www.osc.gov.on.ca/documents/en/Investors/res_working-with-

adviser_en.pdf.

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Appendix D: Developing a KYC Questionnaire

A well designed KYC questionnaire can be an effective tool in the KYC process; however it should not be relied

upon as the full extent of KYC documentation to meet a registrant’s KYC obligation. The following discussion

and sample questions are meant to assist PMAC Members who use a KYC questionnaire or plan to do so in the

future.

Subject areas that might be suitable for inclusion in a KYC questionnaire are:

1. Financial circumstances;

2. Client’s knowledge / experience;

3. Investment objectives;

4. Investment time horizon; and

5. Risk tolerance

An effective questionnaire should engage the client in the KYC process and support and enhance the initial

discussion with the portfolio manager. Questionnaires should be tailored to meet the profile of the client that the

registrant firm services and reflect the firm's overall investment approach and strategies offered. Evaluate if

there is a gap between what the client states verbally and how they provide answers to complete the

questionnaire, particularly with respect to risk tolerance. A questionnaire should provide for a balanced

assessment but still be concise enough to be completed in a reasonable amount of time. The output from the

questionnaire should enable the portfolio manager to categorize the client into one of various investor

profiles/risk categories.

Note: For joint accounts/family accounts, complete a separate questionnaire for each client person then

address any differences that might indicate inconsistent expectations and objectives.

SAMPLE QUESTIONS The following topics and sample questions are intended to provide a starting point ONLY in developing a Know-

Your-Client (KYC) Questionnaire for private clients. This is not an exhaustive list of possible KYC questions nor

is all possible answer options reflected here. Questions and answer options should be carefully considered and

framed so that the responses can inform the client’s investor profile and investment advice provided to the

client.

1 FINANCIAL CIRCUMSTANCES

How would you describe your employment situation? o Stable and secure o Stable and not expecting any changes in near future

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o Stable but may change in the future o Somewhat unstable o Unemployed but actively looking

What is your current annual family income including income from all sources (i.e. salary, commissions,

investment income and other sources of income)? o Under $100,000 o $100K - $300K o $300K - $500K o Over $500K

What is your estimated net worth (includes real estate, assets, investments etc. but subtract anything

that you owe, such as mortgage, loans and any other debt).16

o Under $100,000 o $100K - $300K o $300K - $500K o $500K to $1M o Over $1M

How would you describe your overall financial situation?

o Little savings and significant debt o Little savings and some debt o Some savings and some debt o Moderate savings and low debt o Little to no debt and financially secure

2 CLIENT’S KNOWLEDGE / EXPERIENCE Investors with a high level of investment knowledge may have a better understanding of the relative risks of various types of investments and understand the fluctuations in returns. Investors with little to no knowledge of investments and financial markets will likely have lower tolerance of fluctuations in returns and a lower tolerance for risk.

How long have you been investing? o <5 years o 5-10 years o 10 to 15 years o >15 years

I would describe my knowledge of investments as:

o None o Limited o Basic knowledge o Good o Extensive

How would you rate your understanding of the investment market?

o Limited o Low o Moderate o High

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These types of questions should have sufficient information about the client to allow the portfolio manager to determine if the client meets

the conditions of prospectus exemptions as specified in NI 45-106 Prospectus and Registration Exemptions. Thresholds used in the KYC form should be consistent with the minimum income and asset thresholds in the accredited investor (AI) or eligible investor definition contained in NI 45-106.

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What types of investment products have you previously invested in? Are you comfortable with the

volatility associated with this/these type(s) of investment(s)?

3 INVESTMENT OBJECTIVES

What are your main investment objectives? o Wealth preservation o Stable income with modest fluctuations o Security with fairly steady growth o Growth and accepting of fluctuations o A combination of income and growth

What is the intent of your portfolio?

o To generate income for today o To generate income at a later date (i.e. retirement) o To provide for my dependents (I do not anticipate using these funds) o To fund a large purchase in the future

What is the primary goal of your portfolio?

o Growth with no fluctuations o Balance of growth and security o Growth potential with some fluctuations in returns o Potential long-term growth

Which of the following best describes your current investment goals?

o You don’t want to lose money but want some opportunity for modest growth o You want growth, but are concerned with the possibility of loss o You expect your money to grow over the long term and accept some risk o You want maximum growth and are comfortable with a higher level of risk

Which statement most clearly describes your investment objectives?

o I’m willing to accept a lower, more predictable return because security and regular income are the priorities for my investment

o I require regular income from my investment and a relatively consistent rate of return o I have a need for income, but I’m also interested in some growth o I want a combination of modest income and long-term growth o My priority is primarily long-term growth o My priority is aggressive growth over the long-term

4 INVESTMENT TIME HORIZON Determining the client’s investment time horizon will impact the type of investments that may be suitable for the client. It is important that any time horizon periods used in a questionnaire are properly defined and understood by the client. Short term time horizons are typically less than 5 years in the future. Investors with short time horizons generally have a greater need for liquidity and lower risk tolerance because they have less time to recover from any performance shortfalls. Intermediate term goals are 5 to 10 years and long term goals are generally more than 10 to 15 years in the future. The client’s age is one indication of the client’s time horizon but not a determinative indication. The client’s investment time horizon should generally be determined by considering when the client will need to access some or all of their money (i.e. for retirement, child’s college education, home purchase, etc.).

When are you planning to retire? o In less than 5 years

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o In 5 to 10 years o In 11 to 20 years o In more than 20 years o I am currently retired

How long do you plan to remain invested in your portfolio before you begin withdrawing a substantial

portion of the portfolio? o Less than 1 year o 1-5 years o 5-10 years o More than 10 years

Once you begin withdrawing money from the portfolio, you anticipate spending all of the funds within:

o Less than 1 year o 1-5 years o 5-10 years o More than 10 years

Which of the following best reflects your investment time horizon? [Edit as appropriate to your firm]

Short-Term Time Horizon. If you have less than 5 years to begin spending your savings, you probably cannot afford a big loss. Be sure to match the risk level of your investments to your time horizon. If you have other sources of income, you may have more flexibility. The additional income sources may enable you to leave your savings invested until they regain their value.

Intermediate-Term Time Horizon. With 5 to 10 years to invest, you have time to take advantage of the stock market, but you may want to limit your overall risk. A major setback could still affect the amount you'll have at retirement. A balanced approach to investing may be appropriate.

Long-Term Time Horizon. If you have over 10 to 15 years to invest your savings, you have time to take advantage of the potentially higher long-term returns. Long-term investors do not have to react to short-term market movements, and they do not have to sell if the markets are down temporarily.

5 RISK TOLERANCE Risk tolerance describes the degree of a risk a client is willing to assume to achieve their investment objectives. These types of questions should be designed with the goal of understanding the client's tolerance for financial risk, understanding of financial markets and how they may react during certain investment market and economic conditions. This information helps provide an overall understanding of the client's investment profile and helps the portfolio manager to determine the types of investment products that may be appropriate to achieving the client's investment objectives. An investor's ability to tolerate risk will be an important factor in building a portfolio of investments that meets the investor's personal investing profile. NOTE: Consider both the client’s willingness to accept risk and ability to accept risk when assessing the client’s risk tolerance.

Investing involves a trade-off between risk and return. Historically, investments with higher returns have

been associated with greater risk, i.e. chance for loss. However, in some circumstances more traditionally cautious investments that should have a lower chance for loss, also have yielded lower returns. Based on this description of investments characteristics, which of the following statements best describes your attitude to risk?

o I am willing to accept minimal amount of capital loss o I am willing to accept moderate capital loss o I am willing to accept high capital loss

How would you react if your investments were to decline in value by [10%, 20%, 30% etc.] over a one-

year period? ** Consider using a portfolio volatility matrix or expressing %s in $ values.

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Given the fluctuations of any investment portfolio, how long would you be willing to wait for your

investments to regain any lost value?

In an effort to grow your wealth, can you afford to lose any money over the next two years?

How do you feel about investment losses? For many investors, the possibility of losing money is a primary concern.

You have made an investment of $100,000 and its value falls by 20% to $80,000. Assuming you still

have 10 years until you begin withdrawals, how would you react? o I would not change my portfolio. o I would wait at least one year before changing to options that are more stable. o I would wait at least three months before changing to options that are more stable. o I would immediately change to options that are more stable.

What is your willingness to risk shorter-term losses for the prospect of higher longer-term returns?

o very willing o willing o unwilling o very unwilling

What is your willingness to experience volatility to generate higher returns?

o very willing o willing o unwilling o very unwilling

I prefer a portfolio allocation that is designed to grow steadily and avoid sharp ups and downs,

even if it results in a lower long-run rate of return. Agree / disagree?

Have you ever borrowed money to make an investment other than your own home (for example: an investment property; holiday home; share portfolio; margin loan; etc)?

Which investment option has less risk? o Guaranteed Investment Certificate (GIC) o Government of Canada bonds o Canadian Corporate bonds o Canadian equities o Global equities o Emerging market equities