Posted by Anjali Kaur on Jun 24, 2022

Know Your Client (KYC)

As a dealing representative, you are responsible for gathering enough information about your clients to ensure that any investments you recommend suit their needs.

What is KYC?

Before you make any recommendations too or accept instructions from a client, you are required to take reasonable steps to ensure that the proposed purchase or redemption is suitable to the clients:

  1. financial circumstances
  2. risk tolerance
  3. investment knowledge
  4. investment needs and objectives

Step 1: Know Your Client (KYC)

Mutual Fund Dealers Association (MFDA) Policy No. 2 specifies the minimum requirements when collecting KYC information. Before making any investment recommendations to a client, at a minimum you must find out the following:

  1. Name
  2. Type of account
  3. Residential address and contact information
  4. Date of birth
  5. Employment information
  6. Number of dependents
  7. Other persons with trading authorization on the account
  8. Other persons with a financial interest in the account
  9. Investment knowledge
  10. Risk tolerance
  11. Investment objectives
  12. Time horizon
  13. Income
  14. Net worth
  15. For non-registered leveraged accounts, details of the net worth calculation, specifying liquid assets plus any other additional assets less total liabilities.

Note: Information required by other laws and regulations applicable to the Member’s business as amended from time to time including information needed for relevant tax reporting, information necessary for compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, and any authorization necessary to provide information to the MFDA under applicable privacy legislation.

Why Gather KYC Information?

KYC is the single most important rule that you as a dealing representative must remember when selling mutual funds. This rule ensures that the investment recommendations you provide are appropriate for the investor, and it allows you to support your actions if a dispute arises.

Regulations have been enacted by the Canadian Securities Administrators (CSA), MFDA and Investment Industry Regulatory Organization of Canada (IIROC) that provide a fairly broad standard for KYC and suitability.

MFDA guidelines require you to take reasonable steps to maintain accurate and complete KYC information at the time of opening new accounts and to update the KYC information of existing clients whenever there are material changes.

As a good business practice, you should:

  1. Learn the essential facts about each client, and each order or account accepted.
  2. Periodically review these essential facts with your clients to ensure that you learn about material changes.
  3. Ensure that the acceptance of any order for any account is within the bounds of good business practice.

Dealing Agent Responsibilities

The more information you are able to obtain about a client’s financial circumstances and investment needs, the better a position you are in to serve your client. With all the relevant information in hand, you can formulate a mix of investments and services that best suits their needs.

A New Account Application Form (NAAF) must be completed for each new client account. The NAAF must include KYC information and must be approved in writing by a designated officer, partner, director, or branch manager no later than one business day after the initial transaction in the account.

If a Client Will Not Disclose Certain KYC Information

A great deal of care must be taken in obtaining the minimum KYC information required by MFDA Policy 2. It may occur that a client does not want to disclose the required information. If the client is still resistant after you have explained the need to collect this information, you need to either:

  • Reject the client’s business, or
  • Contact your Compliance Department. They may be able to help you with explaining to the client that the account cannot be opened without obtaining the information required by securities rules and regulations.

NOTE: The Policies and Procedures Manual of your dealer firm provides guidelines for dealing with a client who refuses to disclose KYC information to you. In some circumstances, the client’s failure to provide you with required KYC information may also constitute an attempted suspicious transaction that must be reported to the Financial Transactions and Analysis Centre of Canada (FINTRAC).

Keeping KYC Information Up-to-Date and Documenting Material Changes

Over time, clients’ investment objective risk tolerance, time horizons, net worth and income may change as major life events take place. These major events are called material changes. The MFDA requires that member firms contact their clients in writing at least once a year with a request for information on any material changes. This request is often included with one or more of the account statements sent by the mutual fund dealer to the client each year.

Changes must be noted on clients’ KYC information forms. In addition, the dealer must maintain on file sufficient evidence that the client is authorized to make the changes to the KYC information. Material changes may include:

  • Birth of children
  • Change in marital status
  • Inheritance or other material changes in net worth
  • Significant changes in salary
  • Retirement or loss of employment
  • Change in risk tolerance
  • Change in investment objectives, for instance, a previously unexpressed desire to purchase a house.

All of these events, and others, could change a suitability assessment for a client.

You should always try to collect as much KYC information as you can. In a climate of increasing litigation about the suitability of clients’ investments, a file containing little more than a NAAF with the basic minimum KYC information may not stand up in court under scrutiny, if you have not augmented it with additional relevant information such as risk profiles, tax returns, and notes from meetings.

Time to Test

  1. You get a walk-in client, Jeff, who would like to invest $50,000. You proceed to obtain KYC information from him. He answers the first 3 general questions but later refuses to answer further questions. In his opinion, it is his money and he can do whatever he wanted without anyone telling him what to do.

As a dealing representative, what should you do?

Answer: refer to your Policies and Procedures Manual and follow the company policy

Thank You!

You can read more posts related to IFIC Exams:


Disclosure: Some of the links on the website are added, meaning at no additional cost to you, I will earn a commission if you click through or make a purchase. Please support me so that I can continue writing great content for you.  Subscribe 

Notify of
Inline Feedbacks
View all comments

Learn with Anjali started because there wasn't an easy-to-consume resource to help students with their studies. Anjali is on single-minded mission to make you successful!

If you would like to suggest topics, leave feedback or share your story, please leave a message.

Leave a message