Guidance on Know-your-client and Suitability Determination

21-0244
Type: Rules Notice> Approval/Implementation
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We are publishing final guidance (the Guidance) to assist Dealer Members in understanding and complying with IIROC’s know-your-client and suitability determination requirements (Appendix A). The Guidance will be effective on December 31, 2021.

We published a draft of the Guidance (Proposed Guidance) for comment on June 21, 2021 in Notice 21-0111 – Client Focused Reforms – Proposed Guidance on Know-your-client and Suitability Setermination (Notice 21-0111). We refer you to that Notice for additional background information.

We received 10 comment letters in response to Notice 21-0111. A summary of the comments and our responses is available in Appendix C. In response to the comments we received, we made certain revisions reflected in the Guidance. Appendix B is a blackline of the Guidance showing the changes made to the Proposed Guidance.

The Guidance replaces Notice 12-0109Know your client and suitability – Guidance.

Attachments

Appendix A - GN-3400-21-004 – Know-your-client and suitability determination for retail clients 

Appendix B - Blackline comparison of the Guidance marked to show changes made from the previously published draft

Appendix C - Summary of comments received and our responses

 


Appendix C - Comments Received in Response to Notice 21-0111 – Rules Notice – Request for Comments – Client Focused Reforms – Proposed Guidance on Know-your-client and Suitability Determination

On June 21, 2021, we issued Notice 21-0111 requesting comments on our proposed “Know-your-client and suitability determination for retail clients” guidance (the Guidance).

IIROC received 10 comment letters from the following commenters:

Howard Alter
C.A.R.P.
The Canadian Advocacy Council of CFA Societies Canada
Ruth Elliott
Investment Industry Association of Canada
Morningstar Research, Inc.
Rick Price
Responsible Investment Association
Arthur Ross
Peter Whitehouse

Copies of these comment letters are publicly available on IIROC’s website (www.iiroc.ca). The following table sets out a summary of the comments received and our response.

Summary of Comments

IIROC Response

General Comments

Commenters expressed support for:

  • the Guidance’s acknowledgement that the Know-your-client (KYC) requirement is not “one-size fits all” and that Dealer Members (Dealers) can use various means to meet their regulatory obligations,
  • our recognition that there may be multiple suitable recommendations that put the client’s interest first, and
  • our plan to consider what a reasonable person (in the same circumstances) would have done when reviewing a Registered Individual’s suitability determination.

Thank you for your comments.

One commenter recommended we publish our own Client Focused Reforms frequently asked questions, similar to the Canadian Securities Administrator’s (CSA) Client Focused Reforms frequently asked questions (the CSA CFR FAQs), which we can update on an ongoing basis.

Thank you for the suggestion. Given that the IIROC Client Focused Reform rule amendments1  and the Guidance are harmonized in all material respects with the CSA’s Client Focused Reforms, we expect Dealers will reference the CSA CFR FAQs. We will engage with Dealers to provide further clarity, as needed.  

Know-your-client Comments

s.2.02.02 – Client identification

Commenters asked us to confirm that identification methods required under federal anti-money laundering requirements remain acceptable methods to satisfy our client identification requirements in Part A of Rule 32002 .

We confirm that identification methods required under federal anti-money laundering requirements remain acceptable methods to satisfy our client identification requirements in Part A of Rule 3200.

s.2.02.06 – Creditworthiness of the client

Commenters asked us to clarify that Dealers who offer order execution only accounts (OEO Dealers) are expected to collect certain financial circumstances information as needed, as opposed to all financial circumstances information.

We expect OEO Dealers to collect any client financial circumstances information they need to meet applicable regulatory requirements, including our margin rules.

We clarified this expectation in section 2.03.02 of the Guidance.

s.2.03.01 – Client’s personal circumstances

Commenters asked us to clarify what personal circumstances information we considered to be essential facts relative to a client that an OEO Dealer must collect. These commenters argue that, in this section, we suggest that OEO Dealers must collect all information listed as the client’s personal circumstances, which is inconsistent with other parts of the Guidance and the exception for OEO accounts in clause 3208(1)(i).

We clarified that OEO Dealers are not required to collect all the information listed in this section. Rather, OEO Dealers are required to collect what information they need to satisfy themselves that they know the essential facts relative to every client.

One commenter recommended we include the following items as essential facts to be obtained for each client:

  • number of dependents
  • potential vulnerabilities.

In the Guidance, we include “number of dependents” as a personal circumstance Dealers must collect about their clients when assessing suitability. In response to this comment, we have clarified that the list of personal circumstances information was non-exhaustive.

Whether any information is considered “essential facts” of the client will depend on the client themselves and the Dealer’s service offering.

One commenter suggested we indicate that the description of a client’s employment status and occupation be as specific and informative as possible.

We agree that Dealers should collect meaningful employment status and occupation information. In the Guidance, we clarified that Dealers should record the details of their current or former occupation.

s.2.03.02 – Client’s financial circumstances

One commenter recommended we use the definition of “financial assets” from National Instrument 45-106 Prospectus Exemption when describing “net financial assets” for greater consistency across our Dealers.

We decided not to use this definition of “financial assets” to ensure the Guidance is harmonized in all material respects with Companion Policy 31-103CP – Registration Requirement, Exemptions and Ongoing Registrant Obligations (CP 31-103).

One commenter recommended we remind Dealers of obligations they have under other rules to collect information about a client’s financial and personal circumstances.

Dealers are responsible for knowing all regulatory requirements that are applicable to their business. As our Dealers’ business models differ greatly, it would be impractical for us to provide a reliable list of laws that are applicable to them.

s.2.03.03 – Client’s investment needs and objectives

Commenters recommended we include a client’s desire to invest according to environmental, social and governance criteria, or other personal values in our discussion of investment objectives. They argued these items were investment objectives rather than investment strategies and should be discussed as such in this section.

We agree with the commenters that a client’s desire to invest according to environmental, social and governance criteria, or other personal values should be considered as an investment objective. As such, we have included language to this effect in this section of the Guidance.

s.2.03.04 – Client’s investment knowledge

Commenters recommended Dealers and Registered Individuals should test a client’s investment knowledge as part of KYC collection.

When assessing a client’s investment knowledge, Dealers and Registered Individuals are required to collect sufficient information to make a suitability determination. Dealers and Registered Individuals should:

  • use their professional judgement when choosing their methods of information collection, and
  • be able to demonstrate that they have met this requirement.

As noted in section 2.06.04 of the Guidance, Registered Individuals should be prepared to assess the validity of the information they collect.

s.2.03.05 – Client’s risk profile

Commenters recommended we include the need for risk taking in our discussion of a client’s risk profile.

We do not consider a client’s risk needs to be a component of the client's risk profile assessment. The client’s risk needs are part of the holistic review process that must be undertaken to determine the reasonableness of the client’s KYC information. Specifically, if the client’s risk profile is at a lower risk level than the risk that is needed to be assumed by the client to reach their stated investment objective(s), then the client should be informed that their financial objectives may not be achievable within the time they want to achieve them.

Commenters asked for more detail on the various factors that make up a client’s risk profile. More specifically, they recommended we:

  • distinguish between which factors contribute to a client’s risk tolerance as opposed to their risk capacity,
  • clarify how Dealers and Registered Individuals should calculate risk capacity,
  • discuss the severity of failure when discussing a client’s capacity for loss,
  • clarify what we meant by the client’s ability to withstand loss, and
  • discuss investment time horizon in this section, as they claim risk capacity cannot be assessed without the client’s time horizon.

The Guidance is principles-based and, as such, does not detail every consideration that could makeup a client’s risk profile. 

Dealers and Registered Individuals must use their professional judgement to assess whether they have collected sufficient risk profile information to meet the suitability determination obligation, based on, at minimum, the client’s risk tolerance and risk capacity.

One commenter expressed concern that if a Registered Individual only collects risk tolerance and risk capacity information (and does not collect other risk factors), this could result in KYC collection being a less meaningful ‘check the box’ exercise.

We agree with the commenter that Dealers should collect a client’s risk profile information in a meaningful manner. In section 2.06.03 of the Guidance, we specify that KYC is not a “tick the box” exercise, and that a Dealer’s process for collecting information should amount to a meaningful interaction with the client.

One commenter asked us to clarify the phrase “the process for developing a client’s risk profile should be supportable and reliable”. Specifically, they recommended we include guidance on using the consistency of a client’s risk profile to evaluate risk profile questionnaires.

As noted in the Guidance, Dealers should ask questions that are fair, clear and not misleading, and document those questions. Registered Individuals should not:

  • manipulate a client’s risk profile to justify certain investments, and
  • should not influence clients to respond to question in a certain way.

In section 2.06.05, we add that:

  • Dealers should ensure client answers are consistent and reasonable, and 
  • Registered Individuals should be prepared to assess the validity of any information they collect.  

s.2.03.06 – Client’s investment time horizon

One commenter recommended we explain how a client’s investment time horizon relates to portfolio risk management.

We discuss how a client’s investment time horizon, as part of their KYC, is a key component of making a suitability in section 3.03 of the Guidance.

One commenter asked us to clarify that the investment time horizon may differ based on the type of account.

We clarified that the client’s investment time horizon impacts which account types may be appropriate for the client.

s.2.03.07 – Detail of KYC information to be collected for suitability determination purposes

Commenters expressed support for the flexible approach to KYC collection based on Dealer business model.

 

We thank you for your comments.

s.2.04 – Is the KYC obligation the same for all accounts?

Commenters asked us to clarify that the requirements to determine a client’s investment knowledge, liquidity needs and investment time horizon are not applicable to order execution only accounts.

We clarified that Dealers do not have to collect a client’s investment knowledge, liquidity needs and investment time horizon for order execution only accounts, direct electronic access accounts, accounts maintained at a Dealer who is the carrying broker for the accounts, and accounts held by institutional clients.  

s.2.06 – Interactions with the client

One commenter recommended we encourage the use of detailed questionnaires, both at account opening and during routine reviews of KYC information.

One commenter recommended we emphasize the importance of investment policy statements and financial planning in the Guidance.

Dealers’ tools should be sufficiently detailed to obtain the KYC information they are required to collect to meet IIROC requirements and any other applicable laws. 

s.2.06.01 – How does the client confirm the accuracy of this information?

Commenters asked us to clarify whether the Dealer had to take additional steps to verify a change in client information, where:

  • the client provided their updates through a signed form, or
  • the client provided verbal updates, which they confirmed during a recorded conversation.

The Guidance provides Dealers flexibility in documenting a client’s confirmation of a change in their information.

When a client provides their updates through a signed form, we expect the Dealer to provide the client with a copy of that form.

In some cases, a recorded phone call may be sufficient (which we expect to be made available for supervisory review). However, where the client provides a recorded verbal update, and this update results in a significant change to the client’s information, we expect the Dealer to give the client written confirmation of the significant change and provide the client with an opportunity to make any corrections.

S.2.06.05 – Validate client information

One commenter asked what we expect a Registered Individual do in situations where they are unable to reconcile client information.

In situations where a Registered Individual is unable to reconcile client information, we expect them to assess what reliable information they have about the client and determine whether this information is sufficient to meet our suitability determination requirements and other applicable laws. Where they deem the information insufficient, the Dealer should consider restricting the activities in the client’s account until the Dealer or Registered Individual can collect the information needed to ensure compliance with IIROC requirements.

s.2.07 – Use of one set of KYC information for multiple accounts

One commenter recommended that Dealers and Registered Individuals limit their use of one set of KYC information for multiple accounts to situations where there are compelling reasons to do so.

Dealers and Registered Individuals should use their professional judgement and consult the Guidance to determine in which situations it is appropriate to use one set of KYC information for multiple accounts.  

s.2.11.01 – Keeping KYC information current

Commenters asked us to clarify that OEO Dealers may choose how to keep KYC Information current as per their business model and their clients.

We made this change.

s.2.11.02 – Significant change to client information

One commenter recommended we include all KYC factors (not only certain factors) in our description of a significant change to client information in this section.

We decided not to include these additional KYC factors to ensure the Guidance is harmonized in all material respects with CP 31-103.

s.2.12 – Is there anything that should not be done as part of the collection and maintenance of KYC information?

Commenters recommended we indicate that while pre-populating KYC questionnaires is inappropriate with new clients, it can be appropriate with existing clients (in certain cases).

We updated the Guidance to indicate that Dealers could pre-populate KYC questionnaires with the client’s biographical information.

Commenters recommended we clarify that updates of risk tolerance can be appropriate when completed in connection with a suitable investment action.

We agree that updates of a client’s risk tolerance information can arise in connection with a suitable investment action. However, in this section, we chose to emphasize those situations where such updates are made to validate otherwise unsuitable investment recommendations.

Suitability Comments

s.3.01.03 – What does it mean to “put the client’s interest first”?

One commenter asked whether a Dealer or a Registered Individual was required to recommend the lowest cost investment when making a suitability determination that puts the client’s interest first.

Dealers and Registered Individuals are not required to recommend the lowest cost investment, however, they must put the client’s interest first before any competing considerations, include a higher level of remuneration, when making a suitability determination.

s.3.01.04 – Account portfolio of investments approach to suitability

Commenters recommended this section should be more consistent with section 3.06 of the Guidance as it relates to accounts held outside the Dealer.

We agree with the commenters that there were some inconsistencies between these two sections. As such, we updated section 3.06 of the Guidance to be more consistent with this section.

s.3.02 – How should a suitability determination be carried out?

One commenter asked for greater clarity on what would constitute a suitable recommendation. They acknowledge that our principle-based approach encourages the Dealer and Registered Individual to use their professional judgement in making a suitability determination, but recommend we advocate for a higher standard.

We have chosen to maintain our principles-based approach to ensure the Guidance is harmonized in all material respects with CP 31-103.

s.3.02.01 – What should the Registered Individual consider?

One commenter asked whether a Dealer or a Registered Individual could rely on the risk rating in a Fund Facts document (FFD) when determining whether a mutual fund is suitable for a client and puts their interest first.

While a Dealer or Registered individual can rely on FFD as a key component of their assessment of an investment fund, the Dealer and the Registered Individual should also determine whether more analysis is necessary. For example, a Dealer or Registered Individual may need to conduct further due diligence where the FFD isn’t sufficient to provide a meaningful analysis of the investment fund. Ultimately, Dealers and Registered Individuals must demonstrate how they discharged their responsibilities under Rule 3300 and sub-clause 3402(1)(i)(b). 

Further, while Dealers and Registered Individuals may consult an investment fund’s FFD when assessing the risk of a client’s account portfolio of investment that contains the investment fund, they should not necessarily rely on it or base their assessment solely on it. Dealers and Registered Individuals should conduct further analysis of the risk of their clients’ account portfolio of investments.

Another commenter recommended the Guidance encourage Dealers and Registered Individuals to use risk assessment methodologies whose ratings are based on short-term market volatility, rather than the risk rating in an FFD, which is based on long-term market volatility.

When conducting their analysis of an investment fund, we expect the Dealer and Registered Individual will use their professional judgement in determining which risk assessment methodology to use and will consult GN-3300-21-001 – Product Due Diligence and Know-Your-Product (the PDD Guidance).

Commenters recommended we clarify that, when disclosing any negative or positive factors involved in the transaction, Registered Individuals should use their professional judgement to determine the extent of disclosure required.

As noted in the Guidance, the Registered Individual should disclose sufficient information to ensure the client understands the risks involved.

s.3.02.04 – Consideration of a reasonable range of alternatives

One commenter asked us to clarify our expectation of a Registered Individual’s awareness of alternative investment products and explain how a review of such products results in satisfying our requirement to put a client’s interest first.

 

We expect Registered Individuals to consider a reasonable range of alternatives available to them through their Dealer only. What constitutes a reasonable range of alternatives will depend on the circumstances, including products and services offered by the Dealers, the Registered Individual’s skill and proficiency and the client’s circumstances.

While there may be multiple suitable investments for a client, we expect Registered Individuals to review the range of suitable investments and put the client’s interest first when opting for one recommendation amongst suitable options.

Where a Registered Individual’s skill and proficiency is limited to certain products, that do not represent all the products on the Dealer’s shelf, the Registered Individual should be transparent with their clients and ensure they understand this limitation.

s.3.03.01 – What is the account appropriateness obligation?

Commenters asked us for more guidance on how Dealers and Registered Individuals should assess the appropriateness of fee-based accounts, given their popularity.

Dealers and Registered Individuals must assess, based on what information they have about the client, whether a fee-based account is appropriate for the client and puts the client’s interests first.

Dealers and Registered individuals must also identify any existing or potential material conflicts of interest between themselves and the client and address that conflict in the best interest of the client. We discuss compensation-related conflicts in Notice 17-0093.

Dealers must explain the features and costs of a fee-based account to their clients and disclose their fee model to clients in their relationship disclosure information. Clients can then make an informed decision about whether to open a fee-based account with the Dealer.

Commenters asked us to clearly state that OEO Dealers are not required to assess the appropriateness of the scope of products and services.

While OEO Dealers are responsible for assessing the appropriateness of the account service offering, they are not responsible for assessing the appropriateness of the products and services made available to clients through the order execution only account.

In the Guidance, we clarified that the requirement to assess the appropriateness of the scope of products and services available to clients does not apply to order execution only accounts and direct electronic access accounts.

s.3.04.04 – Reassessing suitability

One commenter asked us to clarify whether Dealers and Registered Individuals were required to reassess suitability in the event of market turbulence.

Where market turbulence results in a change in a security in a client’s account that could result in a significant change to the client’s portfolio of account investments, the Dealer and Registered Individual must reassess suitability.

In the PDD Guidance we clarify that, generally, we would not consider a change in the overall market or economic conditions to require a reassessment of individual securities. However, a change in market conditions that affects only a particular security, or sector, or new information regarding a particular security or sector, may require a reassessment of the affected securities. We expect Dealers to use professional judgment in determining whether there is a change in a security, as a result, that would trigger an account suitability determination review. 

s.3.05.01 – Conditions for assessing suitability on a combined basis for multiple accounts

Commenters argue that it is overly restrictive to require a client be the same individual for all accounts to conduct suitability on a combined basis. These commenters claim this position conflicts with the CSA’s CFR FAQ, which, their opinion, permits clients to choose to have their suitability assessed on a “household” basis. They recommend we remove this restrictive language.

Our understanding is that under section 13.3 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, Canadian securities registrants are required to assess suitability at the individual account level. As such, any suitability assessments performed for multiple accounts cannot replace the individual account suitability assessment. Where a registrant performs a suitability assessment for multiple accounts, such as a suitability assessment on a “household” basis, they would be doing so in addition to individual account suitability assessments.

In the Guidance, we maintained our existing interpretation (from Notice 12-0109) that Dealers can perform multiple account suitability assessments instead of individual account suitability assessments where all the accounts are held by the same individual. In addition, we clarified in a new section 3.07 that Dealers could assess suitability on a “household” basis in addition to assessing suitability on an individual account basis in certain circumstances. This new section is consistent with recent updates made to the CSA’s CFR FAQs.

 

s.3.07 – What are the obligations when a client has accounts in separate business lines at the same Dealer?

Commenters recommended we incorporate language relating excluding certain securities when assessing the concentration and liquidity of securities in a client’s account from the CSA’s CFR FAQs.

As our suitability requirements are harmonized in all material respects with the CSA’s, Dealers can rely on the CSA CFR FAQs when determining whether to exclude certain securities when assessing concentration and liquidity.

s.3.09 – What if a client wants to make an unsuitable trade?

One commenter asked whether, when fulfilling an unsolicited unsuitable trade, the Registered Individual should review the client’s KYC information to see if this investment action impacts it.

To meet their obligations under subsection 3209(3), Registered Individuals should use their professional judgement, given the circumstances, to decide to inquire whether there have been any significant changes to a client’s circumstances. If the client indicates there has been a significant change to their circumstances, the Registered Individual must update the client’s KYC information.

If a Registered Individual otherwise becomes aware of a significant change in a client’s circumstances following an unsolicited unsuitable trade, the Registered Individual must update that client’s KYC information. 

One commenter recommended we clarify whether there were any situations where the Registered Individual should not proceed with an unsolicited unsuitable trade.

We expect Registered Individuals will comply with subsection 3402(5) and use their professional judgement when deciding whether to proceed with an unsolicited unsuitable trade.

s.3.10 – Is there anything that Dealers and Registered Individuals should not do?

Commenters argue that Registered Individuals are not required to document their suitability determination analysis under our record keeping requirements in section 3804. These commenters claim that only Dealers are required to maintain such documentation according to section 3804, and that they can do so without Registered Individuals recording their suitability determination analysis. As such, they recommend we revise the language in this section.

We disagree with this comment as subsection 3406(1) clearly states that complying with the suitability obligation is primarily the Registered Individual’s responsibility.

Comments on topics outside of the scope of the consultation of Notice 21-0111 

Several comments received fall outside of the specific scope of the consultation under this notice. At a high-level, commenters made recommendations on the following areas of IIROC Rules:

  • further clarity of definitions,
  • further enhancements of KYC information collection processes and amendments to our KYC requirements,
  • close monitoring of Know-you-product (KYP) rules for unintended consequences, and more guidance relating to KYP and PDD,
  • further amendments to our suitability determination requirements,
  • introduce specific rules on the use of titles and designations,
  • introduce specific rules for vulnerable investors,
  • set the bar higher for the suitability and reasonableness standard,
  • introduce additional account statement requirements,
  • introduce specific rule on exempt market products,
  • review the IIROC rulebook holistically, including the complaint handling practice, for congruence with the intent and spirit of the CFRs, and
  • broaden CFRs, beyond securities services, to capture the breadth of wealth management services offered by Dealers.

We thank the commenters for sharing their comments and recommendations on these areas. We welcome feedback from the public, even on matters that fall outside the scope of a specific consultation.

Even though we did not respond to these comments, we have taken note and will consider these recommendations as part of our continuous evaluation of the IIROC Rules and guidance. For more information on our policy initiatives, please consult our Policy Priorities.

 

 

  • 1See Notice 21-0148, Notice 20-0238 and Notice 20-0239.
  • 2All references are to the IIROC Rules unless otherwise specified.