Table of Contents

Opening Accounts.......................................................................................................................................2
The Cardinal Rule – Know Your Client.........................................................................................................2
Factors to consider when assessing suitability:.......................................................................................2
• Client Identification Requirements: Anti-Money Laundering...................................................................2
Individual Accounts.................................................................................................................................3
corporate and trust accounts..................................................................................................................3
non-resident individual accounts............................................................................................................4
personal holding company or personal investment corporation.............................................................4
institutional accounts..............................................................................................................................4
The New Account Application Form (NAAF)................................................................................................4
CLIENT INFORMATION.............................................................................................................................5
Account Opening Red Flags.................................................................................................................6
ACCOUNT INFORMATION........................................................................................................................6
Account Types.....................................................................................................................................7
Cash.....................................................................................................................................................7
Margin.................................................................................................................................................7
Delivery Against Payment (DAP)..........................................................................................................7
Receipt Against Payment (RAP)...........................................................................................................7
Registered accounts............................................................................................................................7
Pro accounts........................................................................................................................................7
Investment club accounts....................................................................................................................7
Simple Discretionary Accounts............................................................................................................8
Managed Accounts..............................................................................................................................8
Payment and Delivery..............................................................................................................................8
REGISTRANT INFORMATION/REGULATORY SECTION..............................................................................9
Licensing..............................................................................................................................................9
Source of client....................................................................................................................................9
Direct or indirect interest....................................................................................................................9
Insider Status.......................................................................................................................................9
Control Person.....................................................................................................................................9
Trading Authorization..........................................................................................................................9
 Client Acknowledgment...........................................................................................................................9
Additional Documentation For Retail Clients...............................................................................................9
Records of Orders......................................................................................................................................10

Opening Accounts
The Cardinal Rule – Know Your Client
The KYC rule requires that every dealer member use due diligence:

• To learn the essential facts relative to every client and to every order or account accepted;

• To ensure that the acceptance of any order for any account is within the bounds of good
business practice; and

• To ensure that recommendations made or accepted for any account are suitable for the client
and in keeping with their investment objectives

Factors to consider when assessing suitability:

Marital status; • Age; • Occupation; • Income and net worth; • Number of dependents; • Risk tolerance;
• Investment objectives • Investment knowledge and experience • Time horizon; and • The account’s
current investment portfolio composition, duration and risk level

KYC + KYP  investment suitability

• Client Identification Requirements: Anti-Money

Laundering
Rules 1300.1 and 1300.2 and Rule 2500 require that for each account opened, a dealer member must
obtain and maintain information to verify client identity

Generally accepted identification includes:

• passport;
• driver’s license; •
• citizenship card; •
• birth certificate (for applicants under the age of 21); •
• a personal cheque drawn and cleared from a Canadian financial institution (requires banking
information); and •
 • verification from a Canadian deposit-taking institution that the applicant has an account in his or
her name (requires banking information).

Photocopies or notarized copies are not acceptable.

When opening accounts, enough info should be gathered to allow for:

 a reasonable risk-based assessment of clients,

 their source of income and
 amount of expected activity in an account

AML regulations require that dealer members verify the identity of an individual (including date of birth)
opening a securities account before any transactions, except for an initial deposit, are conducted.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) requires securities
dealers to maintain a signature, account operating agreement or account application that shows the
signature of individuals authorized to give instructions for an account, and in instances where the
person’s identity is verified by confirming that the person has an account at another financial entity, the
firm is required to maintain the account number of that financial entity account

(1) Individual Accounts

IIROC Guide to Record Retention Requirements, for an individual’s account these records should be
retained for seven years:

 new account application forms,

 confirmations of purchase or sale,
 guarantees,
 trade authorizations,
 powers of attorney,
 joint account agreements
 a copy of every statement sent to clients
 all correspondence about the operation of the account.

Allowed to maintain accounts for clients identified only by number, nominee name or other symbol…
BUT sufficient information/documentation must be retained at head office identifying and verifying the
beneficial owner’s identity or persons financially responsible for the account

Dealer members are expected to update a client’s profile and investment objectives whenever there is a
material change

unusual activity: example - an increase in account assets beyond the apparent means of the client or a
pattern of transfers or deposits of cash or securities involving third parties

Periodic review. FINTRAC guidelines suggest regular intervals of 2 years,

  resident individual accounts
 non-resident individual accounts
IIROC requires dealer member to, in-person:

 View a current passport or

 other valid government identification

an agent in the client’s home country may be hired to conduct the “in-person” verification,
notarized copies are NOT acceptable

 In Trust For (or un-official trust account)

(2) Corporate and Trust accounts

regulators require dealer members to

 identify and verify the identity of the beneficial owners of a corporation, trust or other entity
opening an account
o 10% or more of the shares (IIROC)
o 25% or more of the shares (PCMLTFA)
 obtain the name and occupation of all of its directors, settlors or beneficiaries
 obtain the name, address and occupation of any individuals that own or control (directly or
indirectly)

must be obtained prior to opening an account

for other beneficiaries not listed above the dealer member/IA has up to 6 months after account opening
to obtain the required identity verification

note that current provincial and federal securities laws do not prohibit the use of brokerage accounts
where the beneficial owners are unknown

(3) Personal Holding Company or Personal Investment Corporation

IA must take steps to determine whether the account is being set up by, or for the benefit of, a senior
public official or politically exposed person

(4) Institutional Accounts

must have supervisory reviews that are designed to detect transactions that raise suspicion of money
laundering or terrorist financing activity.

IIROC rules require that all dealer members must use due diligence to learn and remain informed of the
essential facts relative to every customer and to every order or account accepted

PCMLTFA exempt dealers from identity and verification requirements for certain types of Canadian
institutions and intermediaries that are themselves subject to its regulations,
similar foreign institutions and intermediaries are not exempt.

The New Account Application Form (NAAF)

The general categories of information required on the NAAF, from top to bottom are:

1. client information;
2. account information; and
3. registrant information.

The NAAF has three main purposes:

i) client’s investment objectives and risk tolerance;

ii) creditworthiness of the client; and
iii) identify any industry regulations which will apply to this client.

The form should be updated whenever there is a major change in a client’s circumstances such as:

• change of account name (i.e.: from “Marie Roy” to “Marie and Robert Roy”);
• address change which would take client out of RR’s jurisdiction;
• new marital or employment status;
• another person who takes a financial interest in or who gains control over the account;
• new trading authorization;
• a major change in financial circumstances;
• new investment objectives or risk factors; or
• any amendment to items in the regulatory section (i.e., insider status)

a suitability review be conducted whenever any of the following trigger events occur:

i) A trade is accepted
ii) A recommendation is made
iii) Securities are transferred or deposited to an account
iv) There is a change of representative, or portfolio manager responsible for the account; or
v) There is a material change to the KYC information for the account

(1) CLIENT INFORMATION

NAAF should contain:

• correct legal name (of the client)

• a permanent address (a residence address and a business address)
o trade confirmations
o confirm that IA is registered in the province the client resides
 • SIN number
• Date of Birth
o To ensure client may enter into legally binding contracts in all Canadian jurisdictions
o RRSP - RRSP has to be converted to RRIF when the RRSP account holder reaches 71
years old
o RRIF – RRIF has mandatory annual withdrawal according to the age of the account
holder
• Citizenship
o Only citizens resident in Canada can purchase certain percentages or numbers of shares
of “constrained share companies” - companies that are considered culturally or
economically important to Canada (i.e.: broadcasting companies, banks and other
financial institutions)
o In general, If the client is a U.S. citizen or U.S. corporation, Canadian Investment Dealer
cannot open account
• Marital status/Employment status
o Creditworthiness
o Insider trading – spouse can be an insider
o Investment objectives (from a household/family unit perspective)
o Guarantors
• Net Worth
o Understand source of funds from AML perspective
o Suitability
• Investment knowledge
• Investment objectives and risk tolerance
o percentages of funds allocated to
 safety,
 income and
 growth can then be determined

Account Opening Red Flags

Red flags that IAs may encounter during the account opening process include:

1. clients who are reluctant to provide adequate information or supporting documentation;

2. clients who submit documentation that appears to be altered or counterfeit or if all of the
documents have recent issue dates;
3. clients who submit documents that are photocopies, facsimile images or other electronic
reproductions, even when certified as true copies by an attorney acting on behalf of the client;
4. clients who attempt to open accounts in other people’s names;
5. clients who supply information that seems vague or even potentially untrue;
6. clients who provide an address that is out of the local service area;
7. clients who provide a P.O. Box, General Delivery, or other type of mail drop address, instead of a
street address when this is not the norm for that area;
 8. clients who provide a phone number, but the client cannot be reached there;
9. clients who make inquiries that suggest a desire to avoid reporting;
10. clients who do not complete or supply required documentation;
11. inquisitiveness about compliance and anti-money laundering procedures; and
12. attempting to use aliases or open accounts in different names.

(2) ACCOUNT INFORMATION

Account information consists of:

1. account type;
2. beneficial ownership;
 RRSP – account ownership is the account holder or contributor, but the beneficiary
is cannot another person (when account holder dies)
 Spousal RRSP – account ownership is the account holder, i.e. the spouse, not the
contributor
 RESP – account holder is the contributor, but the beneficiary is the child
3. currency;
4. payment/delivery procedures; and
5. special instructions.

Account Types
Cash
 client is meant to deposit payment in full for each purchase transaction (there should be enough
cash on the settlement date)
 dealer does not provide credit to client

Margin
 margin agreement must be completed
 Client can make partial payment for a purchase
 Dealer extends credit based on the loan value of securities being purchased or in the account
already
 Types of margin account
o Long margin account
o Short margin account – client can borrow stock from Investment Dealer and sell now at
high price, and try to buy back at lower price later
 Client can take on long or short security positions
 If a short position is acquired the proceeds from the short sale must be kept in
the account plus an additional margin amount to protect the dealer from an
increase in the price of the underlying security (until the securities are
purchased by the client to cover the short position and return the borrowed
stock to the Investment Dealer)
Delivery Against Payment (DAP)
o A COD account
o Purchase of security by client.
 The dealer member delivers the securities to the purchaser or the purchaser’s
settlement agent, who pays for the securities in full

Receipt Against Payment (RAP)

o COD account
o Sale of security by client
 The dealer member receives the securities from the client (or its agent) and
pays the client (or its agent) in full

Payment and Delivery

any request for payment or receipt of funds to a third party is a warning flag and management should be
consulted. This may indicate that a party other than the client has an interest in the account

Registered accounts
 RRSP – client can contribute to the account and reduce the taxable income, investment
will grow within account without paying tax, however, any withdrawal from the account
will be regarded as taxable income of the year
 RRIF
 RESP
 TFSA – money can withdraw any time and there will be no tax

Pro accounts
 IAs and all other employees of the dealer member (or related company) and family
members living in the same home are non-clients or “pros”

Investment club accounts

 an “Investment Club Agreement” must accompany the standard application.
 This agreement must contain the names, addresses and signatures of all of the
individual members of the Investment Club.
 one or more of the members of the club has to be authorized to give trading and
administrative instructions on behalf of the Investment Club.

Simple Discretionary Accounts

 the client gives discretionary authority to a dealer member to select securities and
execute orders on his or her behalf on a temporary basis
 Discretionary authority is only valid for a maximum term of twelve months
 Both the client and the dealer member must sign a discretionary account agreement,
which includes any restrictions to the trading authorization.
 If the client is terminating the agreement, he or she may do so at any time by notice in
writing, which shall be effective on receipt by the dealer member
 Trading in discretionary accounts:
o Orders in such accounts must be marked as Discretionary orders
 o cannot be for securities issued by the dealer member or a related company
o IA must have at least 2 years’ experience trading in whichever security is to be
traded on the discretionary account
o must be reviewed at least monthly and must include all discretionary accounts
handled by registrants, Supervisors, partners, Directors or Officers

Managed Accounts
discretionary authority given on an ongoing basis, and is permanent, rather than temporary

 Dealer members must be approved by IIROC to handle managed accounts

 client must sign a managed account agreement, and the dealer member’s designated partner,
Director or Officer or a Supervisor must accept it
 managed account agreement must indicate the client’s investment objectives for this account
 Registered Rep, or partner, director, officer (PDO) responsible for managing the account must
be approved by IIROC as a portfolio manager or assistant portfolio manager.

Without the written consent of the client, dealer members dealing with managed accounts are
restricted from:

x investing in an issuer in which the registrant is an Officer or Director, unless such offi ce or
Directorship has been disclosed to the client;
x investing in a security which is being bought or sold from the registrant’s account to a managed
account;
x investing in new or secondary issues of securities underwritten by the dealer member; and
x making a loan to a registrant or his or her associate.

Managed accounts must be reviewed on a quarterly basis by a designated person to ensure that the
investment objectives are met and that the managed account is being conducted in accordance with the
applicable regulations.

(3) REGISTRANT INFORMATION/REGULATORY SECTION

Licensing
The jurisdiction/province where the IA is licensed should be reviewed to ensure IA can service the client
particularly if client resides out-of-province

Walk-In clients
prospective clients who are “phone-ins” or “walk-ins” should be treated with caution unless they have
been referred by someone known to the registrant

Direct or indirect interest

Full disclosure of the registrant’s interest in a client account should be made on the NAAF

These accounts must be opened as “PRO” accounts.

Insider Status
If a person owns > 10% of a class of voting or equity shares (i.e. common shares) of an issuer, then that
person is generally considered to be an insider.

Persons who have insider information may not:

• purchase or sell securities of an issuer about which they have inside information;
• pass the inside information along to someone else (“tipping”); or
• induce someone else to trade in the securities.

As a general standard for members of the CSA, insiders are required to report their trades within 10
days after the date of the trade

Control Person
generally owns more than 20% of the equity of an issuer and can significantly influence the company

Control persons typically may not sell securities of their company unless they file a prospectus or other
disclosure documents with the securities commission and stock exchange where the securities trade

Trading Authorization
If anyone other than the account holder has authority to trade for the account, the IA must determine
exactly what authority is being delegated

Client Acknowledgment
All documentation must be positively acknowledged by the client at the time of account opening

Additional Documentation for Retail Clients

• IIROC’s “An Investor’s Guide to Making a Complaint” brochure,
• Cash account agreement
• Margin account agreement
• Guarantee Form:
o This form is required when an account is guaranteed by an individual other than the
account holder, i.e.: one spouse guaranteeing an account in the other spouse’s
o clients cannot guarantee accounts of partners, Directors, shareholders, IAs or other
employees unless they are immediate family members
o if someone wants to guarantee a group of accounts, these accounts have to be clearly
identified and the commonality of these accounts has to be revealed (i.e.: they all
belong to the guarantor’s children or grandchildren).
• Discretionary account agreement
• Managed account agreement
• Joint account
• Trust account
• Registered account – RRSP, RRIF, LIRA, RESP, TFSA
• Investment club account; and
• Options or futures accounts.
A single NAAF can cover all cash and margin accounts for one client if the objectives for all accounts are
the same. Separate NAAFs are required for accounts in which the client has differing interests. For
example, if a client has a personal account, a joint account with his or her spouse and an account for a
personal holding company, there should be different NAAFs for the each account.

Records of Orders
Client must be sent a trade confirmation for each and all trades

 RR’s conversation with client: voice recording is not required

 IR’s (of discount broker) conversation with client: usually voice recording is required

Clients can complain in the following ways:

 Complain to RR
o RR will try to explain to the client, hopefully to calm the client
o RR has to report the client’s complaint to the Investment Dealer
o RR cannot compensate the client directly
 Complain to the Branch Manager or Compliance Department of the Investment Dealer
o Sometimes, the Investment Dealer will settle with client outside the court
 Complain to IIROC – investigates RR and the Investment Dealer
o IIROC will not ask RR and/or Investment Dealer to compensate client
o IIROC can ask RR and/or Investment Dealer to pay a fine or suspend registration
 Litigation – sue the RR and/or Investment Dealer in the court
o Before the start of the legal process, judge will advice client and RR (with approval of
the Investment Dealer) and/or Investment Dealer to settle with the client outside the
court
o The court can demand RR and/or Investment Dealer to compensate client after the legal
proceeding