Appendix A – Registered Representatives on leveraged strategies

  1. Registered Representative Obligations

    IIROC Rules set out several requirements relating to minimum standards for business conduct. The following points provide a reminder of some of these obligations, along with some best practices that should be considered:
    • Registered Representatives must fully understand the consequences of a client using borrowed money to invest,
    • Registered Representatives must continually update their knowledge and training to ensure a sufficient understanding of the products, borrowing-to-invest strategies and the associated risks,
    • Registered Representatives should apply their education and training in a thorough and meaningful discussion with the client about borrowing-to-invest strategies, and
    • Registered Representatives should properly document any recommendations they make regarding the use of a borrowing-to-invest strategy,
  2. Making Specific Leverage Recommendations
    The following checklist lists some issues that Registered Representatives should consider before making a specific recommendation or agreeing to a specific client request to invest with borrowed funds:
    • Has the Registered Representative:
      • collected sufficient information about the proposed loan, including amount and term of the loan, loan interest rate and the securities/assets to be used as collateral for the loan?
      • determined on a pro-forma basis the impact on the proposed loan on the client’s financial situation?
      • determined that the loan arrangement is suitable, and, if not, informed the client that they do not believe the loan arrangement to be suitable for the client and/or, in the case of a proposed Dealer loan, refused to advance the loan to the client?
      • provided the client with and received client acknowledgement of receipt of the leverage risk disclosure statement or equivalent margin account agreement disclosure pursuant to subsection 3217(1)?
  • In determining the impact of the proposed loan on the client’s financial situation and in determining the suitability of the proposed loan, has the Registered Representative considered:
    • how the client’s total monthly debt service costs (taking into account the proposed loan), combined with the client’s other monthly expenses, compares to the client’s monthly income?
    • whether the resultant client’s overall debt to net worth leverage ratio (taking into account the proposed loan) is appropriate for the client?
  • whether other client assets are to be used to secure the loan and, if so, whether the client fully appreciates the encumbrance placed on these other client assets?
    • in the case of a proposed third party or “off-book” loan, whether the proposed loan involves higher leverage than is permissible “on-book” under IIROC’s margin rules?