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 certificate/attestation form.
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 information.
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 parties.
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.
For more information, see CSA Staff Notice 31-336.