Csa Staff Notice 33 315 Suitability Obligation And Know Your ...
CSA Staff Notice 33-315
Suitability Obligation and Know Your Product
Purpose
This notice reminds registrants of their duty under securities law to satisfy their
suitability obligations to clients, including the requirement to fully understand the products
recommended to clients. It also provides guidance to registrants on how to meet their
obligations.
Suitability obligation
Securities law requires registrants to determine whether a proposed purchase or sale
of a security1 for a client is suitable.2
There are two key requirements for determining suitability. Registrants must
understand:
1.
the general investment needs and objectives of their client and any other factors
necessary for them to be able to determine whether a proposed purchase or sale is suitable
(know your client or KYC), and
2.
the attributes and associated risks of the products they are recommending to clients
(commonly referred to as know your product or KYP)
Registrants must meet the KYC and KYP requirements in order to make the
suitability determination required by law. This notice focuses on the KYP requirement.
Know your product
Registrants must understand the structure and features of each investment product
they recommend. This includes costs, risks and eligibility requirements. The KYP
requirement applies to both the firm and the individual.
We expect firms 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 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 or not
transparent in structure) may require a more extensive review than more straightforward
products. Products that are sold under a prospectus exemption may require a more
extensive review because of the limited disclosure available about them.
Individual registrants
The firm’s approval of an investment product alone does not satisfy KYP.
Individual registrants must thoroughly understand a product before they can determine
1 In Alberta, British Columbia, Saskatchewan and as of September 28, 2009, New Brunswick, a reference
to “security” in this notice includes “exchange contract”.
2 The requirement to assess whether the purchase or sale of securities is suitable for a client is in
section 13.3
of
Regulation 31-103 respecting Registration Requirements and Exemptions
(Regulation 31-103). Before Regulation 31-103, provincial securities laws imposed similar suitability
requirements.
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whether it is suitable to recommend the product to a client. Firms may want to provide
product training to ensure that their representatives can conduct their suitability review with
an appropriate understanding of the products and their risks.
Although firms may set out general investor profiles describing the type of investor
for whom a product may be suitable, individual registrants must still determine suitability
on each transaction for a client. Individual registrants should also explain the risks of
products they are recommending to their clients.
Unless a registrant can rely on a specific exemption from its suitability obligation, a
registrant has a suitability obligation to all clients, including accredited investors and
investors who buy a product under a prospectus exemption. Individual registrants may not
delegate their suitability obligations to their client, another registrant or anyone else.
Product review process
The firm’s 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 they recommend to clients. They cannot recommend a product
based solely on:
•
information from issuers or other third parties, including related parties,
about the product’s suitability or risk profile
•
similarities with other products, or
•
recommendations made by other market participants to their clients
Registrants should consider factors such as product features and structure, including
risks, costs, management and financial strength of the issuer. They should also determine
whether expected returns are realistic. Registrants will also need to re-evaluate an existing
product if a change to a key feature causes significant changes to the risk and return profile
of the product.
Listed below are some factors that registrants should consider when assessing
investment products.
General features and structure
•
basis of security’s return (e.g. minimum return, dividends, interest rate)
•
use of leverage
•
conflicts of interest arising from the compensation structure or other factors
•
overall complexity, transparency and uniqueness of features of the product’s
structure
Risks
•
the possibility that a client may lose some or all of the principal amount
invested
•
risks relating to the product, such as liquidity risk (including redemption
rights and any features that lock in the principal and/or returns for a specified period), price
volatility, default risk, and exposure to counterparty risk
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•
risks related to assets underlying derivatives or structured products
Costs
•
fees paid to registrants or other parties, such as commissions, sales charges,
trailer fees, management fees, incentive fees, referral fees and early redemption fees
•
embedded costs, such as bid-ask spreads or other expenses
Parties involved
•
the issuer’s financial position and history
•
qualifications, reputation and track record of the parties involved in key
aspects of the product, for example, the fund manager, portfolio manager, product
manufacturer or sponsor, any guarantors and significant counterparties
Legal and regulatory framework
•
any laws or rules of self-regulatory organizations that apply to the registrant
•
if distributed under an exemption, whether the product meets the
requirements of that exemption
•
legal characteristics of derivatives and structured products (e.g. jurisdiction
of special purpose vehicles, bankruptcy protection and RSP eligibility)
•
frequency, completeness and quality of the issuer’s disclosure
Policies and procedures
Registrants should establish and enforce written policies and procedures to ensure
that they satisfy their KYC and suitability obligations, including KYP. These policies and
procedures should include the steps the registered firm and registered individuals should
follow to identify investment products requiring review, the process to review these
products, and how to assess the suitability of a product for each client. All firms should
have these written policies and procedures, regardless of the firm’s size. Firms should
monitor and assess compliance by the firm and its individual registrants.
Guidance from self-regulatory organizations
The Investment Industry Regulatory Organization of Canada (IIROC) and the
Mutual Fund Dealers Association of Canada (MFDA) have issued the following notices
addressing their members’ know your product and suitability obligations:
•
IIROC Notice 09-0087 Best practices for product due diligence dated
March 23, 2009
•
MFDA Member Regulation Notice MR-0048 Know-Your-Product dated
October 31, 2005, and
•
MFDA Member Regulation Notice MR-0069 Suitability Guidelines dated
April 14, 2008
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For more information, please contact:
Éric René
Manager, Inspection
Autorité des marchés financiers
514-395-0337, ext.: 4751
Toll-free : 1 877 525-0337
eric.rene@lautorite.qc.ca
Lorenz Berner
Manager, Legal
Market Regulation
Alberta Securities Commission
403-355-3889
Lorenz.Berner@asc.ca
Mark French
Manager, Registration and Compliance
Capital Markets Regulation
British Columbia Securities Commission
604-899-6856
mfrench@bcsc.bc.ca
Paula White
Senior Compliance Officer
Manitoba Securities Commission
204-945-5195
Paula.White@gov.mb.ca
Pat Chaukos
Assistant Manager, Compliance
Ontario Securities Commission
416-593-2373
pchaukos@osc.gov.on.ca
Maye Mouftah,
Legal Counsel, Compliance
Ontario Securities Commission
416-593-2358
mmouftah@osc.gov.on.ca
September 2, 2009
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Document Outline
