1. Duties of Brokerage House --- General
Like your broker, your brokerage house and mutual fund dealer (from now on we’ll call them collectively “your brokerage house” ) owes you numerous duties and obligations, and if these duties and obligations are not carried out, and you consequently lose money, you can claim from your brokerage house (as well as your financial advisor) to recover such investment losses).
The underlying theme of theses rules and regulations is that your brokerage house has to act as a “policeman” and monitor and supervise their employees (your financial advisor’s) activities, to make sure that they do what they are supposed to do i.e. act in your best interest and in good faith. They have to supervise and monitor the activities of your financial advisor, usually daily, but always monthly, to make sure that, amongst other things, your financial advisor has assembled a suitable portfolio in terms of your financial situation, your investment objectives and your risk tolerance levels and continues to monitor your investment portfolio in such a way so as to ensure that at all times, your investment objectives and risk levels are met and maintained, and that the investments recommended for you are suitable both in terms of your investment objectives, risk profile and your financial position.
Most of these duties are set out in their rules and regulations. Your brokerage house has to and must comply with all these regulatory, legislation and industry standards that have been put in place to protect investors like you. We cannot repeat this enough ------ If your brokerage house does not comply with their duties and obligations to monitor your investment account and to supervise your financial advisor’s activities, and you suffer losses caused by your financial advisors wrongdoings, your brokerage house (in addition to your financial advisor) may (depending on the circumstances) be directly liable to you. This means you can recover your losses from BOTH your financial advisor AND your brokerage house.
2. Most Investors Don’t Know This
Ninety seven percent of ALL investors don’t know this. Most investors think that their losses are caused only through their financial advisors’ fault and never through their brokerage houses’ fault. This is not always so, as the following will show.
3. General Discussion on your Brokerage Houses Duties and Obligations to Investors
IRROC by-law 1300, Rule 2500 and MFDA Policy 2 sets out the minimum requirements for retail accounts ongoing supervision at the branch office and head office level. These two organizations policies require, amongst other things, that brokerage houses must continuously monitor and supervise the activities of their clients’ financial advisors to ensure that no statutory, regulatory and in-house rules and regulations, as well as industry standards are breached, and if they are, they must order them stopped immediately and remedied. Your brokerage house must establish their own written policies to document the reviews of your investment account, as well as their supervisory activities and maintain documentary evidence that all this has in fact been done (i.e. what enquiries were made, what replies were received, what actions were taken, and what documents or notes were made by your financial advisor) for seven years. These policies also require brokerage houses to engage in ongoing reviews of sales compliance procedures and practices at their head office and at their branch offices.
Branch office compliance requirements include daily and monthly reviews. A supervisor at the branch ( usually the branch or office manager “the branch manager”) is required to undertake certain activities on a daily and monthly basis for the purpose of assessing compliance with regulatory requirements and the brokerage houses own policies. The branch manager is required to review the previous day’s trades to attempt to detect lack of suitability, excessive trading activity, any conflict of interests between financial advisors and their clients trading activity, inappropriate high risk trading strategies, and quality down grading of client’s holdings amongst other things.
Head office compliance also involves daily and monthly reviews. Under IRROC rules, head office is required to conduct daily reviews of stock trades of transactions of significant values.
Recognizing that branch managers have a conflict of interest in terms of reviewing their own trades, IIROC rules require that head office review all client accounts of producing branch managers.
The supervision, monitoring and other duties and obligations that brokerage houses owe their clients often related to most of the items listed in the Financial Advisors Fault and the Add –on list of this website: i,e, if your financial advisor owes you certain duties and obligations, your brokerage house has a duty to make sure that these duties and obligations are carried out and if they don’t, then both your financial advisor and/or your brokerage house are liable to you for your losses.
From our experience as most investors are not aware of these duties and obligations that brokerage houses owe their clients, we have listed them here to make all investors aware of them. If these duties and obligations are not met, your brokerage house will be responsible for to you for the size and sometimes the increased size, of your investment losses i.e. if your brokerage house’s head office and/or branch manager had timeously fulfilled their duties and obligations to you to check what your financial advisor was doing, they would have spotted and stopped at an early time your financial advisors wrongful activities, before your investment losses mounted up, with the result that you would have lost a lot less than you actually did: i.e. instead of losing say $100,000 (because of your financial advisor’s wrongful actions) you could have lost much less, say $5,000, if your brokerage house had stopped your financial advisor from continuing with his/her wrongful acts.
Your brokerage house has an increased duty and obligation to monitor and supervise the trading activities of your financial advisor, more carefully in turbulent financial times, such as a market collapse or meltdown, because buying and selling during such times of market turmoil especially for conservative investors with low to moderate risk levels, could prove to be risky and dangerous.
To sum up this general section ------- in most cases your brokerage house are just as responsible for your losses as your financial advisor because they didn’t stop your financial advisor doing what he/she was doing wrong, when they should and could have done so, and because of their inaction, you lost more than you normally would have lost.
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4. The supervisory duties of brokerage houses who are members of IRROC (formerly the IDA)
· The brokerage house must properly supervise and monitor the activities of financial advisors in their handling of their clients’ accounts in terms of by-law 1300and Rule 2500 which sets out the minimum standards for retail accounts.
· Branch managers must monitor for suitability, the activities in a client’s account. They must ensure that the clients funds are invested in suitable investments and in accordance with their risk tolerance levels, financial situation, time horizon and other considerations.
· Brokerage houses must ensure that financial advisors comply with their statutory, regulatory, in-house rules and regulations as well as with industry standards and practices.
· Brokerage houses must red-flag any financial advisors activities that are not in accordance with their statutory, regulatory, in-house rules and regulations, as well as industry standards and practices.
· The brokerage house must maintain evidence of supervisory reviews . Evidence of the reviews such as enquiries made, replies received, their findings, actions taken, date of completion etc must be maintained for seven years and on site for one year.
· An on-going review of sales compliance procedures and practices must be undertaken at head offices and at branch offices.
· The brokerage house must supervise the financial advisor to ensure that the financial advisor updates the New Account Application Form “NAAF” where there is a material change in client’s information and such update must be approved.
· Each brokerage house must use due diligence to ensure that the acceptance of any order from a customer is suitable for such customer based on factors including the customer’s financial situation, investment knowledge, investment objectives and risk tolerance. (excluded are on-line brokerages).
· Each brokerage house when recommending to a customer a purchase, sale, exchange or holding of any security, must use due diligence to ensure that the recommendation is suitable for such customer based on factors including the customer’s financial situation, investment knowledge, investment objectives and risk tolerance.
· A brokerage house must ensure that the handling of a clients business is within the bounds of ethical conduct, and good business practice consistent with just and equitable principles of trade, and not detrimental to the interests of the securities industry.
5. KYC Obligations
· All new accounts usually evidenced by the KYC form must be approved by the branch manager or same other responsible person (the approval must be recorded) prior to or promptly after the completion of any transaction.
· Before approving the KYC, the form must be checked to ensure that the investment objectives and risk tolerance levels are in keeping with the clients personal and financial circumstances, for example: if a client is retired, of moderate means and little assets, and the client (or the advisor) states in the KYC that the investment objectives are short term, aggressive and the risk profile is 100% high risk, the KYC should be red-flagged.
· In supervising and monitoring the client’s account, due notice must be taken of the financial advisors:
- selection of unsuitable investments;
- wrongful actions;
- improper investments contrary to the client’s investment objectives, risk levels, age, financial situation and other important considerations;
- failure to ensure that the client’s asset allocation was adhered to, and that the account was properly diversified and not over-concentrated in one or two market sectors or industries.
· If problems are found, the financial advisor must be told to immediately rectify the problems.
· To ensure that recommendations made for any account are appropriate for the client and in keeping with his investment objectives, maintaining accurate and current documentation (i.e. KYC updates) will allow the financial advisor and the supervisory staff to ensure that all recommendations made for any account are appropriate for the client and in keeping with the client’s investment objectives.
· At a minimum, a brokerage house must conduct enhanced supervision of trading by financial advisors who have had a history of questionable conduct. Evidence of such conduct can include trading activity that frequently raises questions in account reviews, frequent or serious client complaints, regulatory investigations, frequent account credit problems or failure to take the appropriate remedial action on identified account problems.
· When there is a change of financial advisor, the new financial advisor must verify the account information to ensure that it is current. A brokerage house must have a procedure for recording that the new financial advisor has reviewed the customer’s information and that the appropriate supervisor is satisfied that it has been reviewed and has approved any material changes.
IRROC Rule 2500
6. MINIMUM STANDARDS FOR RETAIL CUSTOMER ACCOUNT SUPERVISION
These duties and obligations are an extract and not fully inclusive, and only relate to the investment perspective of ordinary investors, who are seeking to recover their investment losses caused by their brokerage house’s oversights. For a full review of all duties and obligations refer to Rule 2500 of IIROCs rules.
This rule establishes minimum industry standards for Retail Customer Account supervision by brokerage houses.
These standards represent the minimum requirements necessary to ensure that a brokerage house has in place procedures to properly supervise and review Retail Customer account activity.
· The term “review” in this Rule has been used to mean a preliminary screening to detect items for further investigation or an examination of unusual trading activity or both.
· The supervisory standards in this Rule, relating to Know Your Client and suitability are intended to provide Supervisors with guidelines on how to monitor the handling of these responsibilities by the financial advisor.
Risk-based procedures
· A brokerage house may select accounts for review on the basis of risk-based procedures, taking into account factors such as the size of account, nature of the trading, products traded, volume of activity, commissions generated or Approved Persons advising the customer.
· At a minimum a brokerage house must conduct enhanced supervision of trading by financial advisors who have had a history of questionable conduct. Evidence of such conduct can include trading activity that frequently raises questions in account reviews, frequent or serious client complaints, regulatory investigations, frequent account credit problems or failure to take appropriate remedial action on account problems identified.
· A brokerage house must maintain records of supervisory review for seven years.
Opening New Accounts
· To comply with the Know Your Client rule, each brokerage house must establish procedures to maintain accurate and complete information on each client.
· Accurate completion of the documentation when opening a new account allows both the financial advisor and the supervisory staff to conduct the necessary review to ensure that recommendations made for any account are appropriate for the client and in keeping with his investment objectives
Documentation
A brokerage house must complete an account application for each new customer that conforms to the account information requirements of this Rule.
A Supervisor authorized in the brokerage house’s policies and procedures to do so, must approve a fully completed new account application no later than the business day after the initial trade.
Alternate procedures for securing interim approval are acceptable to prevent undue delays, provided the Supervisor applies prompt final approval following the initial trade. If an account application received after the initial trade is not fully completed, a brokerage house must restrict the account to liquidating trades only until a fully completed application has been approved.
The financial advisor must update the information on the application form where there is a material change in client information. The update must be approved.
A brokerage house must have procedures independent of the financial advisor for verifying material changes to customer information, such as changes of address, financial situation, investment objectives or risk tolerance.
When there is a change of financial advisor, the new financial advisor must verify the account information to ensure it is current. A brokerage house must have a procedure for recording that the new financial advisor has reviewed the customer information and that the appropriate Supervisor is satisfied that it has been reviewed and has approved any material changes.
A brokerage house must have systems or procedures to prevent:
· Trading on margin until the client has entered into a margin agreement.
· Trading in futures contracts or futures contract options, until the client has entered into a futures contract or futures contract options trading agreement.
· Trading in options until the client has entered into an options trading agreement.
Where a business location does not have a Supervisor working in the office, it must have an outside Supervisor assigned to it. A brokerage house’s policies and procedures and the instructions to the outside Supervisor must include provision for periodic visits to the location by the Supervisor as necessary, to ensure that business is being conducted properly at the location.
A Supervisor must have sufficient authority to take effective and timely remedial action where account activity or any other matter under his or her supervision falls or appear to fall outside the bounds of proper conduct, just and equitable principles of trade or good business practice.
7. Supervision of Account Activity - --- Reviews
A brokerage house must have systems and procedures to supervise trading activity in retail accounts. The supervision must provide reasonable assurance that the brokerage house is meeting its regulatory obligations, including those to clients such as suitability and gatekeeper obligations such as preventing market abuses. The following principles should be taken into consideration:
- Reviews may be conducted on a pre-trade or post-trade basis.
- Review procedures must cover all accounts.
- Review procedures must be able to identify patterns of activity that are not apparent by reviewing trades singly. For example, a review of trading over a longer period may raise questions about the overall level of activity even though each trade, looked at singly, appears to be suitable for the client.
- The selection of activity for post-trade review may be done using a risk based approach reasonably designed to detect improper activity. A risk- based approach can be used to determine the period of activity to be reviewed. For example, in some cases it may be appropriate to conduct longer-term reviews of monthly activity; in others they may consider shorter or longer periods.
- All account activity of employees and agents should be subject to review.
- Reviews must be done on a timely basis, as established in the brokerage house’s policies and procedures. The timing should be reasonably designed to identify as early possible matters requiring supervisory attention.
Two Tier Reviews
In a brokerage house with multiple business locations conducting retail customer account activity, a two tier system of post-trade activity reviews as described in this section is an acceptable structure.
The first level review will normally be conducted by a supervisor at each business location having a resident supervisor.
The second tier review will normally be conducted at the brokerage house’s head office, but may also be done regionally. The second level of supervision is generally not at the same depth as the first level supervision. It should and be reasonably designed to identify serious account problems, including all those listed regarding first level reviews, that may have been missed by the first level supervision, and ensure that first level supervision is being adequately conducted.
Where second level reviews are conducted by personnel or a department responsible only for monitoring activity, the brokerage house should have procedures for referring issues that cannot be resolved with first level supervisors to a higher level supervisor who has the authority to resolve them.
First Tier Daily Reviews
A first tier review examines the previous day’s trading, using means described in the brokerage house’s procedures to attempt to detect the following:
- unsuitable trading;
- undue concentration of securities in a single account or across accounts;
- excessive trade activity;
- trading in restricted securities;
- conflict of interest between registered representative and client trading activity;
- excessive trade transfers, trade cancellations etc. indicating possible unauthorized trading;
- inappropriate/high risk trading strategies;
- quality downgrading of client holdings;
- excessive/improper crosses of securities between clients;
- improper employee training;
- front running;
- violation of any internal trading restrictions;
- manipulative or deceptive trading.
First Tier Monthly Reviews
1. A first tier monthly review should encompass the areas of concern as described above, for daily activity reviews.
2. It may not be possible to review each statement produced. A first tier monthly review starts with the selection, on a basis reasonable designed to detect improper account activity, of retail customer accounts to be reviewed. A brokerage house can meet this obligation by reviewing the activity of all customers charged gross commissions of $1,500 or more for the month.
3. This review should be completed within 21 days of the period covered unless precluded by unusual circumstances.
Second Tier Daily Reviews
Daily reviews should cover the following:
· Trades meeting criteria established in the brokerage house’s policies and procedures. For this purpose, the following meet the requirement:
- stock trades with a value over $5,000 and a price under $5,00 per share;
- stock trades with a value over $20,000 and a price at or over $5,00 per share;
- bond trades over $100,00 value per trade;
· non-client trading;
· client accounts of producing supervisor;
· all client accounts not reviewed by a supervisor;
· trading in restricted accounts;
· trading in suspense accounts
Daily reviews should be completed no later than the business day following the activity unless precluded by unusual circumstances.
Second Tier Monthly Reviews
1. A dealer member must select accounts for second-tier review based on criteria established in its policies and procedures. This requirement can be met using the following criteria:
1. accounts of customers charged more than $3,000 in commission during the month;
· accounts of all customers and non-clients charged more than $1,500 in commission during the month that were not subject to a first level review by the normal first level supervisor, including the customer accounts of producing first-tier supervisors.
2. Monthly reviews should be completed within 21 business days of the period covered unless precluded by unusual circumstances.
8. Option Account Supervision
A. Account Opening and Approval
1. The option trading agreement and option account approval form must be completed, signed and on hand prior to the first trade. This applies to new accounts or existing accounts, approved for other products.
2. The option trading agreement contents must meet or exceed association requirements.
3. All accounts must be approved in writing by the options qualified branch manager or the designated registered options principal (DROP) or the ultimate registered options principal..
4. The option account approval form must indicate any trading restrictions imposed.
B. Daily Reviews
1. Branch officers must review all option daily trading activity for suitability, exercise limits, concentration, commission activity and exposure of uncovered positions.
2. Head office must review on a daily basis all opening option trading activity in excess of ten contracts in any one account. In all options accounts, head office must monitor all trading to ensure that positions or exercise limits are not exceeded.
C. Monthly Reviews.
1. Branch officers must review on monthly basis all option activity based on the same criteria as for regular equity trading activity
2. Head office must review on a monthly basis all option activity based on the same criteria as for regular equity trading activity
D. DROP Responsibilities.
1. All discretionary and managed accounts must be reviewed by the DROP on a daily and monthly basis.
2. The DROP must establish procedures to ensure that clients are notified of impending expiry dates.
3. The DROP must establish procedures ensuring the dissemination of new developments in the trading and regulation of options contracts in a prudent and appropriate manner and the dissemination to all clients of any changes in the firm’s business policies.
4. The DROP must ensure that only registered individuals engage in trading or advising in respect of options. 5. All advertising and market letters to more than 10 clients relating to options must be approved by the DROP.
6. Solicitation of clients to use options programs must have DROP approval.
Option Account Supervision
Extracts from IIROC Rule 2500 as they relate to retail investing
A brokerage house dealing in options or Exchange Traded Commodity, or index warrants must appoint a supervisor ( the Designated Options Supervisor) qualified to supervise options trading to have overall responsibility for the opening of new option accounts and the supervision of account activity. The Designated Options Supervisor must ensure that the brokerage house implements policies and procedures reasonably designed to ensure that all recommendations made for any account are and continue to be appropriate for the customer and in keeping with his or her investment objectives. In addition, a brokerage house should, where the level of options trading activity warrants it, have a qualified supervisor to assist in supervisory activities and to carry out the functions of the Designated Options Supervisor in his or her absence.
Account Opening and Approval
1. The option trading agreement and option account application must be completed and the client’s agreement recorded before the first trade. This applies to new accounts or existing accounts approved for other products.
2. The option trading agreement contents must meet or exceed corporation requirements.
3. The Designated Options Supervisor or another options qualified supervisor must approve all accounts to trade in options and their approval and the date of approval must be recorded.
4. The approving Supervisor must determine whether the risk characteristics of the strategies the customer intends to use are appropriate for the customer and in keeping with his or her investment objectives and risk tolerance. If they are not, the approving supervisor should restrict the account from using inappropriate strategies and note with the option account approval, any trading restrictions imposed. The supervisor must ensure that the registered representative handling the account is aware of any restrictions.
Activity Reviews
1. A brokerage house’s supervisory procedures must include reviews of option trading activity for suitability, exceeding position or exercise limits, concentration, commission activity, and exposure of uncovered positions.
2. A two tier post-trade review system using the following criteria is not mandatory but will be deemed to meet the review requirement;
· Daily first tier review of all option trading activity
· Daily second tier review of opening trading activity in excess of ten contracts in any one account.
Monthly Reviews
Accounts must be selected for monthly first and second-tier reviews of account using criteria reasonably designed to detect improper activity. For accounts that trade in equities and fixed income products as well as options, it may be appropriate to use the criteria described in the section dealing with second-tier monthly reviews.. For accounts in which the trading is more concentrated in options, the criteria should take into account the risk related to the type of strategies being used.
Other Options Policies and Procedures
A brokerage house’s policies and procedures must include, where applicable:
1. The Designated Options Supervisor’s involvement in the approval and daily and monthly reviews of any discretionary managed accounts trading in options. The Designated Options Supervisor need not conduct such reviews but should be aware of the use of options in discretionary or managed accounts and exercise heightened care to ensure that it is conducted and supervised properly.
2. Procedures to ensure clients are notified of impending expiry dates.
3. Procedures to ensure the dissemination of information on new developments in the trading and regulation of options in a prudent and appropriate manner: and the dissemination to all clients of any changes in a firm’s business policy.
4. Procedures for notifying clients of significant changes in options contracts in which they have open positions resulting from changes to the underlying security.
5. Procedures to ensure that only qualified financial advisor or investment representatives, engage in trading in or advising on options, and that they do so only after the corporation has been notified as required in Rule 18.
6. Procedures to review and approve advertising and sales literature relating to options.
9. Futures and Futures Options Accounts Supervision
A brokerage house dealing in futures contracts and futures contract options must designate a supervisor qualified to supervise futures contract and futures contract options trading ( the Designated Futures Supervisor) to have overall responsibility for the opening of new futures and futures options accounts and the supervision of account activity. The Designated Futures Supervisor must ensure that the brokerage house implements policies and procedures reasonably designed to ensure that all recommendations made for any account are and continue to be appropriate for the client and in keeping with his or her objectives.
Account Opening and Approval
1. The futures trading agreement or letter of undertaking under Rule 1800.2(b) and futures account application must be completed, and the client’s agreement recorded before the first trade. This applies to new accounts or existing accounts approved for other products …….. ………………
2. The Designated Futures Supervisor or another futures qualified supervisor must approve all accounts and their approval and the date of approval must be recorded before any trading.
3. The supervisor approving the opening of a hedging account must ensure that the brokerage house has reliable evidence establishing acceptability of a client as a hedger. Such evidence can take the form of a hedge letter or statement supported by verification procedures.
4. The approving supervisor must determine whether the risk characteristics of a futures contracts or a futures contract options and strategies that the customer intends to use are appropriate for the customer and in keeping with his or her investment objectives and risk tolerance. If they are not, the approving supervisor should restrict the account from using inappropriate contracts or strategies and record with the futures account approval any trading restrictions imposed.
5. A brokerage house’s futures account application or futures account agreement must include, other than for a hedging account, a risk limit for futures trading indicating the maximum account of cumulative loss the client can afford to sustain. The maximum loss can be stated on a lifetime basis or on an annual basis. If the loss limit is stated on a annual basis, the dealer member must have a procedure to update it annually and the Designated Futures Supervisor or a supervisor qualified to supervise futures must review and approve the updated loss limit and ensure that it takes into account any previously accumulated losses.
Supervision.
A brokerage house’s supervisory procedures must be reasonably designed to detect improper activity such as the following:
· excessive day trading resulting in trading large numbers of contracts;
· trading while under margin;
· trading without approval of the account; trading beyond margin or credit limits;
· cumulative losses exceeding risk limits;
· unsuitable trading;
· inappropriate trading strategies;
· position and exercise limits;
· front running;
· conflicts of interest;
· excessive commission activity;
· speculative trading in hedge accounts;
· exposure to delivery through holding contracts into delivery month;
· excessive risk or loss to account guarantors.
Other Futures Policies and Procedures
A brokerage house’s policies and procedures must include where applicable:
1. The Designated Futures Supervisor should approve any use of discretionary authority in a futures account.
2. A monthly review of the financial performance of each discretionary account by the Designated Futures Supervisor or a Supervisor qualified in futures contracts acting under the Designated Futures Supervisor supervision.
3. Procedures to ensure that positions with pending delivery months are handled properly.
4. Procedures to ensure the dissemination of information on new developments in the trading and regulation of futures contracts, such as changes in minimum margin requirements, in a prudent and appropriate manner, and the dissemination to all clients of any changes in a firm’s business policy.
5. Procedures to ensure that only qualified financial advisors engage in trading in or advising on futures contracts or futures contracts options and that they do so only after the corporation has been notified as required in Rule 18
6. Procedures to review and approve sales literature or advertising relating to futures.
10. Discretionary Account Supervision
1. Discretionary client account reviews must include all discretionary accounts handled by brokers etc.
2. Persons conducting reviews must have adequate “Know Your Client” information, readily available in each discretionary account.
3. The brokerage must identify in its books and records discretionary accounts to ensure that proper supervision can occur.
4. All orders initiated for client accounts by producing branch managers and partners, directors and officers must be reviewed no later than the next day by head office.
5. In addition to any other account provision requirements, the designated supervisor (of the brokerage house) must review at least monthly the financial performance of each discretionary account other than a managed account, including a review to determine whether any person permitted to effect any discretionary trades should continue to do so.
Hereunder follow extracts from IIROC Rule 2500 as they relate to retail investors
Discretionary Account Supervision
Account Approval
1. The Designated Supervisor under Rule 1300.4(a) must approve any request for discretion.
2. The brokerage house and client must enter into a discretionary account agreement that includes any restrictions to the trading authorization. The supervisor designated under Rule 1300.4(a) must approve the agreement.
3. The dealer member must identify discretionary accounts in its books and records in a manner that ensures that the dealer member can properly supervise them.
A supervisor must approve any discretionary order for a discretionary account handled by a financial advisor prior to the order being entered unless:
· The financial advisor is qualified to provide discretionary management services and the dealer member has notified the corporation that he or she provides those services, or
· The financial advisor is also an approved executive.
A discretionary account may not hold any publicly traded securities of the brokerage house or its affiliates.
Account supervision
The supervisor designated under the Rule 1300.4(a) must review discretionary orders entered by an executive no later than next day unless the executive is also a financial advisor qualified to provide discretionary management services and the brokerage house has notified the corporation the he or she provides those services.
10. Managed Accounts
1. Brokerage houses must ensure that the client signs a managed account agreement. The documentation must indicate the client’s investment objectives.
2. In a managed account the brokerage cannot without the written consent of the client:
· Invest in an issuer, in which the responsible person is an officer or director. No such investment can be made unless such office or directorship had been disclosed to the client.
· Invest in a security which is being bought or sold from a responsible person’s account to a managed account.
· Make a loan to a responsible person or to an associate.
· A brokerage house that has managed accounts for futures contracts managed accounts must establish and maintain an acceptable system, to supervise the activities of those responsible for the management of such accounts. The system must be reasonably designed to achieve compliance with the rules and forms of the brokerage house.
In addition to any other account supervision requirements, a review by the designated supervisor of the brokerage house with respect to each managed account, must be conducted at least quarterly to ensure that the investment objectives of the client are being diligently pursued and that the managed account, or the futures contract managed account is being conducted in accordance with the rules.
12. Know Your Product (KYP)
The Canadian Securities Administrators:
· Expect brokerage houses to have a process for reviewing and approving new products and existing products whose structure or features have significantly changed. However if a product is on the firm’s “approved list”, it does not mean that it will be suitable for all clients. Individual registrants (i.e. financial advisors and brokerage houses) must still determine suitability of each proposed transaction for each client.
· KYP applies to all investment products whether or not they are sold under a prospectus. The extent of the product review process will depend on the structure and features of the product. For example: complex investment products including those that are novel (and not transparent in structure) may require a more extensive review than more straight forward products. Products that are sold under a prospectus exemption may require a more extensive review because of the limited disclosure available about them.
Product Review Process
The firm’s (i.e. brokerage houses) product review process should include procedures for identifying, reviewing and approving ( or rejecting) new products and for monitoring existing products for significant changes to those products
Registered firms must have the appropriate skills and experience to perform their own analysis of all products that they recommend to clients. They cannot recommend a product based solely on:
· Information from issuers, or other third parties, including related parties, about the suitability or risk profile;
· Similarities with other products; or
· Recommendations made by other market participants to their clients.
13. Ontario Securities Commission (OSC)
Duties and Obligations of Supervision by firms not members of IIROC or the MFDA
National instrument N1-103 dealing with registration requirements and exemptions came into force on September 28, 2009. One of its parts was that existing Investment Counsel Firms at that time , become registered in the advisor category of Portfolio Manager. Their representatives could be registered as advising representative or associates advising representatives of the firm. There is also a requirement for every firm to have a registered Ultimate Designated Person or Chief Compliance Officer
In terms of section 11.1, a registered firm must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to
a) provide reasonable assurance that the firm and each individual acting on its behalf complies with securities legislation, and
b) ………….
One of a firms’( and representatives) duty to clients is to act fairly, honestly and in good faith.(section 2.1 of OSC Rule 31-505)
Suitability
Part 13.3 states
1. A registrant must 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.
2. If a client instructs a registrant to buy sell or hold a security and in the registrants reasonable opinion following the instruction would not be suitable for the client, the registrant must inform the client of the registrant’s opinion and must not buy or sell the security unless the client instructs the registrant to proceed nonetheless.
3. This section does not apply if the client is a registered firm, a Canadian financial institution or a Schedule lll Bank
4. This section does not apply to a registrant in respect of a permitted client if:
(a) the permitted client has waived, in writing, the requirements under this section, and
(b) the registrant does not act as an advisor in respect of a managed account of the permitted client
Conflicts of interest
13.4 Identifying and responding to conflicts of interest
1. A registered firm must take reasonable steps to identify existing material conflicts of interest, and material conflicts of interest that the registered firm in its reasonable opinion would expect to arise, between the firm, including each individual acting on the firm’s behalf, and a client,
2. A registered firm must respond to an existing or potential conflict of interest identified under subsection (1).
3. If a reasonable investor would expect to be informed of a conflict of interest identified under subsection(1), the registered firm must disclose, in a timely manner, the nature and extent of the conflict of interest to the client whose interest conflicts with the interest identified.
4. This section does not apply to an investment fund manager, in respect of an investment fund that is subject to National Instrument 81-107 Independent Review Committee for Investment Funds
13.5 Restrictions on certain managed account transactions
1. In this section, “responsible person” means, for a registered adviser:
(a) the adviser,
(b) a partner, director or officer of the adviser, and
(c) each of the following who has access to, or participates in formulating, an investment decision made on behalf of a client of the adviser or advice to be given to a client of the adviser:
(i) an employee or agent of the adviser,
(ii) and affiliate of the adviser
(iii) partner, director, officer, employee or agent of an affiliate to the adviser.
2. A registered adviser must not knowingly cause an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to do any of the following:
(a) purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless:
(i) this fact is disclosed to the client, and
(ii) the written consent of the client to the purchase is obtained before the purchase.
(b) purchase or sell a security from or to the investment portfolio of any of the following:
(i) a responsible person
(ii) an associate of a responsible person,
(iii) an investment fund for which a responsible person acts as an adviser.
(c ) provide a guarantee or loan to a responsible person or an associate of a responsible person.
13.6 Disclosure when recommending related or connected securities
A registered firm must not make a recommendation in any medium of communication to buy, sell or hold a security issued by the registered firm, a security of a related issuer or during the security’s distribution, a security of a connected issuer of the registered firm, unless any of the following apply:
(a) the firm discloses, in the same medium of communication, the nature and extent of the relationship or connection between the firm and the issuer;
(b) the recommendation is in respect of a security of a mutual fund, a scholarship plan, an educational plan or an educational trust that is an affiliate of the registered firm and the names of the registered firm and the fund, plan or trust, as the case may be, are sufficiently similar to indicate that they are affiliated.
14. IRROC Sales Literature
IIROC rules provide that all advertising and sales literature be approved by the brokerage house. Such advertising and sales literature must meet regulatory standards, which require among other things:
· The material be true and not false and misleading;
· There be no unjustified promise of specific results;
· There be no unrepresented statistics to suggest unwarranted conclusions;
· The material may not contain opinions or forecasts not clearly labelled as such; and
· The material must fairly present the potential risk to the client.
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15. The supervisory duties of brokerage houses (i.e. Mutual Fund Dealers) who are members of the Mutual Fund Dealers Association (MFDA)
Mutual Funds ---- General
The brokerage house must ensure that the financial advisor must at least annually in writing request each client to notify the financial advisor if the KYC information previously provided to the financial advisor, or the clients circumstances, have materially changed. The date of such request and the date upon which any such client information is received and recorded or amended must be retained.
· A limited trading authorization can be given for the express purpose of facilitating trade execution. This must be in writing and must be approved by the compliance officer or branch manager.
· A limited trading authorization does not in any way give general discretionary trading authority to the financial advisor.
· Brokerage houses are required to obtain complete KYC information in opening an account and before trading on behalf of clients.
· Brokerage houses must ensure completeness of KYC information prior to opening or trading in an account and where and account has been opened without first obtaining such KYC information, the account should be restricted from trading except, to allow for redemptions.
· Members should have controls in place to prevent or detect inconsistencies in KYC information for example: a client with a ”speculative” investment objective should not also have “low” risk tolerance.
· When approving new accounts, KYC amendments or performing branch examinations, brokerage houses’ supervisory staff should be alert for situations where financial advisors had a significant number of client’s accounts with the same or very similar KYC information.
· Brokerage houses should ensure that clients are asked in writing annually if their KYC information has changed.
· Brokerage houses must ensure that for joint accounts certain KYC information such as age and investment knowledge should be collected for each individual account holder. Annual income and net worth can be collected for each individual or on a combined basis as long as it is clear which method has been used. Investment objectives, time horizon and risk tolerance should relate to the account and should not be collected separately for each individual account holder.
16. When is a suitability assessment required?
MFDA rules require that a suitability review be performed for each order accepted or recommend for any account of a client. This means that the suitability assessment must be performed for trades that are recommended by the financial advisor as well as for orders proposed by the client. The brokerage house and financial advisors should conduct a suitability analysis and confirm or amend KYC information as appropriate within a reasonable time but no later than the time of the first trade in the following circumstances:
· Where a client transfers in or a client transfers securities into an existing account at a brokerage house;
· Where a brokerage house or financial advisor becomes aware of a material change in a client’s KYC information;
· With respect only to financial advisors, where a client of the brokerage house is re-assigned from one financial advisor to another. (Note: this only applies to brokerage houses that assign accounts to financial advisors).
17. Minimum Standards of Supervision
Compliance Officer Responsibilities
A compliance officer shall be responsible for monitoring adherence by the member i.e. the mutual fund dealer of the rules of the Mutual Fund Dealers Association of Canada.
18. The responsibility of each branch manager is:-
1. To ensure that the business conducted on behalf of the dealership by a broker is in compliance with the legislation
2. Supervise the opening of new accounts and trading activity at the branch office
19. Client communications
No client communication shall be
a) untrue or misleading or use an image such as a photograph sketch, logo or graph which conveys a misleading impression;
b) make unwarranted or exaggerated claims or conclusions or fail to identify the material assumptions made in arriving at those conclusions;
c) contravene any applicable legislation or laws;
d) be inconsistent or confusing with any information provided by the financial advisor in any notice, statement, confirmation, report, disclosure or other information either acquired or permitted to be given to the client in terms of the by-laws, rule, policies or forms.
20. Rates of Return
Any client communication containing or referring to a rate of return regarding a particular account or group of accounts must be based on an annualized rate of return and must explain the methodology used to calculate such rate of return in sufficient detail and clarity to reasonably allow the client to understand the basis of the rate of return and, where an account has been opened for less than 12 months, the rate of return shown must be the total rate of return since account opening.
21. Use of Performance Data
There are guidelines that address the use of performance data in sales communications, but the overall principle is that any use of this data should not be misleading.
If performance data is included in a sales communication, it must:
· contain standard performance data;
· include all elements of return;
· not reflect any data for a time period prior to the time the securities were distributed to the public under the terms of the prospectus;
· only relate to funds under common management, or to funds with similar investment objectives, or with an index or average;
· reflect any material changes to the fund during the performance measurement period. These changes might include changes in the fund’s management, investment objectives, whether it continues to meet the definition of a money fund market fund, changes in ownership of the fund, or changes in fees and other changes related to the fund. The disclosure should reflect how the changes could have affected the fund’s performance had the changes been in effect throughout the performance measurement period;
· clearly identify the time periods for which the performance data is calculated;
· indicate where appropriate, how more up-to-date standard performance data may be obtained;
· contain only ratings or rankings provided by an independent organization, and where ratings or rankings are quoted, standard performance data must also be provided;
· contain only credit ratings of the mutual fund’s portfolio prepared by an independent organization, and only the most recent ratings may be used. If the fund is rated by more than one independent organization, the lowest rating among those calculated must be used; and
· performance data may not be used in broadcast advertisements.
Warnings on Performance Data
Sales communications that include performance data must also contain certain warnings to users of the communication. The warnings must advise that:
· mutual funds are not guaranteed;
· performance data represents past performance and is not necessarily indicative of future performance;
· indicated rates of return do not take into account sales, redemptions, distribution or optional charges or income taxes payable;
· commissions, fees and expenses may be deducted; and
· investors should read the prospectus before investing
22. Opening New Accounts
1. The New Account Application Form (NAAF or KYC form) information must be approved in writing by the branch manager prior to the initial trade or promptly thereafter. (in any event no later than one business day after the day of the initial trade).
2. The registered salesperson or brokerage house must update the form documenting KYC information whenever they become aware of material changes in client information and the broker must be supervised to ensure that, on an annual basis the broker requests the client in writing to notify them if the KYC information previously provided or if the clients circumstances have materially changed,.
3. When there is a change in a registered salesperson, the new registered salesperson must verify the information on the NAAF or any separate KYC form to ensure that it is current and record the date of such verification of the form/s.
4. The brokerage house must ensure that any new NAAFs must be prepared and completed for all new clients, including existing clients of the registered salesperson transferred to the broker in question.
23. Branch Office Account Supervision
Each branch manager must undertake certain activities within the branch for purposes of assessing compliance with the member’s policies and procedures and regulatory requirements. These activities should be designed to identify failures to adhere to required policies and procedures, and provide a means of revealing and addressing undesirable account activity.
24. Daily Activity
1. All new account applications must be reviewed and approved by no later than the next business day after the account is opened.
2. The branch manager (or alternate) must review the previous days trading for unusual trading activities using any convenient means. This review should include at a minimum all trades in exempt securities (excluding guaranteed investment certificates)
where permitted by securities law, and a sample of:
· initial trades
· trades in exempt securities
· leverage trades in open accounts
· trades over $1000 in moderate-high or high risk investments
· trades in accounts operating under a power of attorney for family members of the broker
· other trades and redemptions over $5,000.
· leverage trades
· trades in speculative or volatile funds;- trades in accounts operating under limited trading authorizations.
3. The branch manager(or alternate) is responsible for following up on unusual trades identified by the head office.
4. In addition to transactional activity, branch managers must also keep themselves informed as to other client-related compliance matters such as complaints.
25. Head Office Account Supervision
A two tier structure is required to adequately supervise client account activity. While the head office or regional area of supervision by its nature cannot be in the same depth as branch level supervision, it should cover the same elements. Head Office reviews should be focused on unusual activity or reviews that cannot be taken out at the branch level.
Daily Reviews
1. In addition to the trading review and criteria for branch managers, head office must conduct daily reviews of account activity which should include criteria to detect the following:
- lack of suitability.
- excessive trading or switching between funds indicating possible unauthorized trading or lack of suitability.
- excessive switches between no load funds and deferred sales charges or front load funds
- excessive switches between deferred sales charges funds and front load funds.
- excessive forced settlements
- quality downgrading of client holdings
2. There must be closer supervision of trading by registered salespersons that have had a history of questionable conduct.
3. Daily reviews should be completed within one business day unless precluded by unusual circumstances.
4. Daily reviews should be conducted of client’s accounts of producing branch managers.
In addition to the trading review criteria for branch managers, head office must conduct daily reviews of account activity based upon appropriate criteria This review should include at a minimum all:
· trades greater than $5,000 for exempt securities, moderate-high or high-risk investments or leveraged trades in open accounts;
· trades greater than $10,000 for other investments ( excluding money market mutual funds);
· redemptions greater than $10,000.
· Redemptions should be reviewed to identify possible outside business activity where money maybe leaving the mutual fund dealership for potentially inappropriate or unauthorized purposes , potential churning where the money is being parked or held pending re-investment, to assess the impact or appropriateness of redemption charges where applicable and to assess suitability in terms of the redemptions impact on the composition of the remaining portfolio.
· Dealers should establish a process to identify trends or patterns that maybe of concern. These reviews should include criteria to detect excessive trading or switching between funds indicating possible unauthorized trading, lack of suitability or churning.
· Branch and head office supervisors should be alert to transactions that indicate trends or patterns of concern including;
- redemptions made within three months of a purchase
- redemptions with redemption charges
- switches with switch fees; and
- DSC redemptions followed by DSC purchases within three months.
· Head office should also implement procedures to identify or detect trends or patterns of concern which would ,include at a minimum reviewing:
- accounts generating commissions greater than $1,500 within the month
- frequent trading reports where there are greater than five trades per month in any one client account
- Assets Under Administration (AUA) reports on a quarterly basis and comparing current AUA to AUA at the same time the prior year; and
- commission reports on a quarterly basis for the previous twelve month period and comparing them to the same period of the prior year.
· After taking into consideration market fluctuations, a significant increase in commissions or AUA may indicate concerns of churning or leveraging strategies and a significant decrease may indicate potential inappropriate outside business activity.
Unsolicited unsuitable trades and unsuitable portfolios
· Where a client has requested a trade on an unsolicited basis that in the view of the broker or dealer is unsuitable, the dealer or broker must advise the client of this fact before executing such a transaction. The dealer must maintain a record of the advice given and the client’s authorization to proceed.
26. Clients Statements Reviews
1. A sample of client account statements must be reviewed as frequently as they are required to be produced according to MFDA Rule 5.2.1 and such review should encompass areas of concern as discussed in the daily activity review. MFDA Rule 5.3.1 relates to the delivery of each account statement and states ( inter alia) that each member shall send an account statement to each client in accordance with the following minimum standards:
· once every 12 months to a client name account
· once a month for nominee name accounts of clients where there is an entry during the month and a cash balance or security position; and
· quarterly for nominee name accounts where no entry has occurred in the account and there is a cash balance or security position at the end of the quarter.
2. Reviews should be completed within 21 days of the period covered by the statement unless precluded by unusual circumstances.
3. Evidence of all reviews should be kept including dates of completion, actions and responses and must be maintained for at least seven years and on-site for one year.
27. Suitability Guidelines for Mutual Funds
The Mutual Fund Dealers Association on April 14, 2008 issued a “ Member Regulation Notice ---------- Suitability Guidelines”. These suitability guidelines, in our opinion are obligations that your brokerage house owes you and has to carry out in monitoring and supervising the activities of your financial advisor.
Some of these suitability guidelines are as follows:
28. Account Opening Procedures and Know Your Client (KYC) Information.
Your brokerage house must ensure that the following procedures are carried out by the branch manager or your brokerage house:
· Policies for financial advisors on how to collect and record KYC information when opening a new account, including definitions or explanations of the terms used, guidance on how to use the information in assessing suitability and the fact that KYC information should be collected per account.
· Policies and procedures to restrict trading in accounts where KYC information is missing or incomplete.
· Policies and procedures to identify leverage in accounts.
· Policies and procedures to evidence delivery of required disclosures with respect to conflicts of interest, referrals arrangements, dual occupations, the client complaint information form, leveraging risk disclosure and other disclosure requirements contained in provincial securities legislation, including the obligation to deliver a prospectus.
29. Approval of New Accounts
· Policies and procedures for the criteria to be used when approving new accounts including review for completeness as well as reasonableness and consistency in KYC information.
· Policies and procedures to review and approve all new accounts no later than one business day after the initial transaction date.
30. Changes to KYC Information
· Policies and procedures requiring the approval of the KYC changes by a qualified individual in a timely manner.
· Policies and procedures requiring that new accounts and KYC changes for client accounts of producing branch managers, are subject to review by a qualified individual.
31. Transfers-out
· Policies and procedures for processing a transfer request for nominee name accounts, including a time frame for processing.
· Policies and procedures to ensure clients accounts of former financial advisors are properly serviced on a continuous basis.
32. Limited Trading Authorization
· Policies and procedures for accepting and documenting evidence of client instructions.
· Procedures to ensure that in situations where notes of client discussions are kept in a financial advisors files ( either paper files or an electronic contact management system) records are readily retrievable for supervisors and regulators and a copy is maintained by the brokerage house even after a financial advisor resigns or is terminated.
33. Trading Practices
· Policies and procedures to prevent trading in products where the financial advisor is not proficient, and supplying details of proficiency requirements to trade in securities other than in mutual funds.
· Policies and procedures to ensure financial advisors provide adequate disclosures to clients for commission rebates.
34. Churning
· Policies and procedures prohibiting churning or excessive trading.
· Policies regarding DSC and similar transactions including stating that these types of transactions should only be executed in limited instances and if there is a valid documented reason for the trade.
· Policies and procedures to ensure that financial advisors provide adequate disclosure to clients when executing DSC to DSC or similar transactions.
· Policies and procedures to prohibit the movement of money between funds in the same fund family executed as redemptions and repurchases, rather than a switch, generating a commission higher than a typical switch fee.
· Policies and procedures to prohibit the redemption and subsequent repurchase of the same fund, generating a commission on the transaction.
35. Leverage
· Policies and procedures to require leveraging recommendations to be balanced and to disclose both potential benefits and risks, and where projections are used, to be based on realistic assumptions, and illustrate both potential gains and losses. (See later for a fuller discussion on leveraging)
All these policies must be communicated to your financial advisor, and the branch manager must ensure that these policies are carried out
36. General Regulations and Guidelines for Sales Literature
All sales literature and advertising material must be approved by the brokerage house that will consequently be liable for any inaccuracies. The brokerage house issuing such material must ensure that such material meets regulatory standards, which require amongst other things that:
· The material must be true and not false and misleading;
· There can be no unjustified promise of specific results;
· There are no unrepresented statistics to suggest unwarranted conclusions;
· The material may not contain opinions or forecasts not clearly labelled as such;
· The material must fairly contain the potential risks to the client;
· It must not omit a fact which is necessary to keep the communication from being misleading;
· It must not include any statement that conflicts with information contained in the preliminary, final or final simplified prospectus or the preliminary or final annual information form of the mutual fund. It must not lack explanations, qualifications or limitations or other statements necessary or appropriate to make such statement not misleading;
· It should not contain representations about past or future investment performance. These would be regarded as misleading if they----- portray past income, gain or growth of assets that are not justified ----- contain representations about security of capital or expenses that are not justified----- contain representations about future gain or income which are not justified----- indicate that past investment performance is a predicator of future gains or income.
The following guidelines should be followed to avoid misleading statements:
· statements are misleading if they lack explanations, qualifications, limitations or other statements necessary or appropriate to make such statement not misleading; and
· representations about past or future investment performance will be misleading if they:
- portray past income, gain or growth of assets that are not justified;
- contain representations about security of capital or expenses that are not justified;
- contain representations about future gains or income which are not justified; and
- indicate that past investment performance is a predator of future gains or income.
Statements about the characteristics or attributes are misleading if they:
· Address only benefits connected with service or methods of operation and do not give equal prominence to risks and limitations;
· Make exaggerated or unsubstantiated claims about management skills or techniques, characteristics of the fund or an investment security issued by such fund, services offered by the fund or its manager or the effect of government supervision;
· Make unwarranted or incompletely explained comparisons to other investment vehicles or indexes;
Sales communications may make comparisons among funds or between funds and indicators such as the consumer price index, stock, bond or other indexes averages or any guaranteed investment certificate, or other certificate of deposit, real estate or any other investment of any kind. However these comparisons must:
· Include all facts which would materially alter the conclusions a reader would draw from the comparison;
· Present data from the same time period for each item being compared;
· Clearly explain any factors necessary to make the comparison fair and not misleading.
In the case of a comparison with a benchmark;
· the benchmark must have existed and have been widely recognized and available during the period for which the comparison is made; or
· the benchmark didn’t exist for all or part of the period, but a reconstruction or calculation of what the benchmark would have been during that period had it existed, calculated on a basis consistent with its current basis of calculation, is widely recognized and available.
Sales communications must state:
· That any rate of return or table illustrating the potential effect of a compound rate of return is used only for the purpose of illustrating the effect of the compound growth rate, and is not intended to reflect future values of the mutual fund or future returns of investments in the mutual fund.
· Make sure that any mutual fund referred to as a money fund, cash fund or money market fund satisfies the definition of such fund, and intends to continue to satisfy the definitions.
· Ensure that any fund referred to as a “ no-load fund” properly qualifies as such.
37. Leveraging (continued)
Mutual Fund dealers should ensure that their salespeople provide the following information to investors (clients) to whom leveraging recommendations are made, and to investors ( clients) who the salesperson otherwise knows is investing with borrowed funds.
· Clients must be presented with a balanced presentation of available options and the risks associated with the use of leverage must be clearly disclosed. Many issues arise because of an investors failure to fully understand the key considerations before borrowing money to invest such as: (and your financial advisor should have told you this)
· That the strategy should only be used by individuals who are comfortable with the general risks associated with leveraging.
· The value of the leveraged portfolio may fall below the value of the loan.
· There is a magnification of the investment risk where a leveraged strategy is used.
· Even where returns on leveraged investments are positive, interest costs may exceed the returns received.
· Whether the investment returns are positive or negative, you must still pay back the loan plus the agreed interest which may cause hardship.
· You may be forced to realize losses as a result of the terms of secured loans i.e. margin calls.
· Any loans secured against your home can put your equity interest in the home at risk.
· If you are relying on investment returns to cover borrowing costs and the investment falls in value, you could default on the loan.
· A lenders assessment of your ability to repay an RRSP loan may be based on the presumption that you will use the tax refund to pay back the loan.
· A leverage strategy is not necessarily suitable simply because it is being used to take advantage of a tax deduction; there is specific tax legislation governing the deductibility of interest and, if the conditions are not complied with, it may lead to a reassessment.
38. Investment Counsels
· Investment Counsels have to provide their clients, competent, unbiased, no self interest and continuous advice regarding the sound management of their investments. They have to devote their time primarily to the performance of this function. Neither the firm or any principal or employee should directly or indirectly engage in any activity which may jeopardise the firm’s ability to render unbiased investment advice.
· The investment counsel must have demonstrated investment ability and integrity.
· The client must consent to any assignment of their contract with the investment counsel, to a third party.
· Compensation for service should consist only of direct charges to clients for services rendered. Compensation should never be contingent on the number or value of transactions made by the investment counsel.
· There can be no sharing of fees between the investment counsel and another person without full disclosure to the client.
· The Investment Council Association of Canada by implication on their website’s home pages, states that member firms manage investments for clients on the basis of providing safe and professional management of clients assets in keeping with clients specific need and objectives.
All the above duties in terms of notice N 1-103, have now to be monitored and supervised
Many investment counsellors are members of the Chartered Financial Analysts (CFA) Institute, Their Code of Ethics and Standards of Professional Conduct as it relates to an asset manager states that they have the following responsibilities to their clients:
· To act in a professional and ethical manner at all times
· To act for the benefit of their clients.
· To act with independence and objectivity.
· To act with skill, competence and diligence.
· To communicate with clients in a timely and accurate manner.
· To uphold the rules governing capital markets.
Please see disclaimer
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