CHAPTER 3

1) Strategic Investment Planning Introduction

As a mutual fund dealing representative, you have a responsibility to make suitable investment
recommendations to your clients. The Strategic Investment Planning (SIP) process helps you to follow
a clear series of steps to make good recommendations.
The Strategic Investment Planning Process

The Strategic Investment Planning (SIP) process consists of six steps. The six steps enable you as a
dealing representative to enter into client engagements, understand your clients’ needs and objectives, and
develop and implement financial plans that aim to meet your clients’ goals.
Your clients determine the level of service they are expecting from you. Some clients may retain you for
the entire planning process; others may retain you only for a part of the process. For instance, a client may
retain you for steps 1 to 4, in order for you to complete a financial plan.
1. Establish the Client Engagement
In this step, a potential client chooses you as his or her dealing representative and agrees to pay
you on a fee for service basis. In addition to completing your dealer’s New Account Application
Form, you also formalize your relationship with the client using a Letter of Engagement, which
specifies:
1. Your duties and responsibilities
2. Your client’s duties and responsibilities
3. The level of service you are offering
4. The agreed-upon fees that your client will pay for your services
Once the Letter of Engagement is signed by both you and your client, it becomes a valid legal
contract.
2. Gather Client Data and Identify Objectives
Once you are confirmed as the dealing representative for your client, you gather as much data as
possible about the client in order match their needs
Based on the information you have gathered, you and your client should work together to define,
quantify and prioritize his or her personal and financial goals.
This process is called Know Your Client (KYC).

3. Clarify Client Status, Problems and Opportunities

In this step, you conduct a detailed analysis of the client information you have collected, in order
to:
 Clarify the client’s status.
 Identify any constraints that might affect your client’s ability to meet his or her goals.

With the KYC information, you are in a position to judge whether the client’s resources are
adequate to meet his or her financial objectives. If the client’s resources are not sufficient, then you
must work with him or her to refine the established priorities.

4. Identify Strategies and Present the Plan

 Based on the client information, goals, and any constraints, you develop a financial plan to meet
the client’s objectives. The financial plan is based on basic and realistic assumptions about
financial parameters such as:
 inflation
 income tax rates
 interest rates
 anticipated rates of return

Any statements or illustrations about the future performance of a given investment must use
reasonable estimates, and in no way suggest that the projected results are guaranteed. A common
claim in complaints from clients relates to misrepresentations in financial plans and illustrations.
Therefore it is very important to include a qualifying statement to the effect that the financial plan
is based on assumptions made by you, results contained in illustrations are not guaranteed, and
actual performance and results may be different from the figures in the illustrations. For instance,
if you have based your financial plan on an assumed yield of 3% per annum (p.a.) compounded
quarterly, but the portfolio managed to earn only 2.5% p.a. compounded quarterly, the actual
value of the portfolio at the end of the time horizon will be less than the projected value.

5. Implement the Plan

The best investment plan is worthless unless your client makes a commitment to implement your
recommendations. Depending on your expected level of service, you now need to either
implement the plan, or guide your client if he or she wishes to implement the plan directly.
6. Monitor Performance and Update
Once you or your client has implemented the plan, it is essential to monitor the investments
periodically to compare their actual performance with the projected performance, and to monitor
variations in inflation and interest rates compared with the assumptions made during planning.
You should also review any changes in the client’s personal circumstances, to determine whether
any changes are warranted to the client’s portfolio. You are required to suggest changes to the
asset allocation mix, or to switch securities, in order to reflect changes to the client’s personal
circumstances or objectives, as well as changes to general and industry-specific economic
conditions.
The Letter of Engagement should clearly establish the level of monitoring the client expects you
to perform. It should specify what you will do, when you will do it, and why it is being done.

2) Suitability Requirement
As a dealing representative, you have a regulatory obligation to ensure that every client
transaction is suitable for your client. The process of assessing suitability involves matching the
characteristics of the proposed investment with the investor’s stated needs as documented in the
Know Your Client (KYC) information.
o EX: our client, Tim, is 72 years old. His investment objective is to earn income, and he has
$100,000 to invest over a five-year time horizon. Tim has low risk tolerance.
You have performed due diligence in researching the different products. Based on Tim’s
profile and investment goals, you recommend a portfolio of fixed income products matching
the five-year time horizon that will provide Tim with a regular flow of income, without
resulting in depreciation of his portfolio.
The fixed income products recommended in this example match the client’s investment goals and risk
tolerance as identified in the KYC information. They are therefore suitable for this client.
There are no investment products which are suitable or unsuitable in general terms. Suitability is
determined only when viewed against a given client’s KYC information.
Suitability Process:

Step 1: Know Your Client (KYC)

To fulfill the KYC requirement, you must:
1. Establish your client’s identity.
2. Where there may be cause for concern, establish your client’s reputation.
3. Ensure that you have sufficient information about your client to meet your regulatory
obligations
1. When you make a recommendation to your client
2. when you accept instructions from your client
Step 2: Know Your Product (KYP)
It is very important that you have in-depth knowledge about all products that you buy and sell for your
clients, or recommend to your clients. You must be able to explain to your clients each product’s key
features, risks, and any initial and ongoing costs and fees.
Step 3: Assess Suitability
To assess the suitability of a trade, you must match the characteristics of the proposed investment,
determined during the KYP due diligence, with the client’s stated needs as documented in the KYC
information.
EX: Bart is a new dealing representative. You have been asked to train and orient him. During the
course Bart wants to know the key concept pertaining to Know Your Product (KYP).
Which of the following is the key concept?
a) It is essential that you know and understand the attributes and risks of the product.
b) It is sufficient to know the representations about the product made by the issuer.
c) It is sufficient to know that the product is on the approved list of the dealer firm.
d) It is essential to know that no product can be recommended unless it has been initially
recommended by the securities commissions.

3) STEP 1:Know Your Client (KYC)

As a dealing representative, you have a responsibility to gather enough information about your clients to
ensure that any investments you recommend suit their needs.
What is KYC
Before you make any recommendations to, 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 client’s:
 financial circumstances
 risk tolerance
 investment knowledge
 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:
 Name
 Type of account
 Residential address and contact information
 Date of birth
 Employment information
 Number of dependents
 Other persons with trading authorization on the account
 Other persons with a financial interest in the account
 Investment knowledge
 Risk tolerance
 Investment objectives
 Time horizon
 Income
 Net worth
 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 required for relevant tax reporting, information
required 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 investment recommendations you provide are appropriate for the
investor, and it allows you to support your actions if a dispute arises.
- EX: John, a dealing representative, has two clients:
Thomas is a 30-year-old bank manager with an annual income of $75,000. He is
interested in growth-oriented products, has a 35-year time horizon and high risk
tolerance.

Martha, 65 years old, has just retired. She is interested in capital preservation and
income-generating products. She has a 7-year time horizon and low risk
tolerance.

Recommending high-risk funds may be suitable for Thomas but unsuitable for Martha.

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

Exercise: Refusal to Disclose KYC Information

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?
a) refer him to another dealing representative
b) write notes as an attachment to the New Account Application Form of the client’s
disinclination to furnish personal information
c) refer to your Policies and Procedures Manual and follow the company policy
d) receive the funds, open the account “subject to review”

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.

KYC Information
This section provides definitions and details about the following major components of the KYC
information:
 Risk Tolerance
 Investment Objectives
 Time Horizon
 Investment Knowledge
 Age
 Net Worth
 Annual Income
 Occupation
Exercise: Collecting KYC Information
Which of the following dealing representatives performed the suitability process step 1 correctly?
a) Tom, who has just opened an account for his friend, Jim. He knows his friend and does not see
the need to document much information about him.
b) Svetlana, who persisted in getting the KYC information from her potential client Steve, in spite of
Steve’s reluctance to give her his personal information.
c) Jeremy, who told the client point blank that if he were not inclined to give him the KYC
information, Jeremy would have no choice but to ask him to take his business elsewhere.
d) Shahid, who referred the “difficult client” to one of his of his colleagues.

Risk Tolerance
Risk tolerance is the amount of loss that an investor can tolerate or absorb in the event that his or her
investments depreciate in value. Risk tolerance changes with: age, employment situation, income,
investment knowledge, marital status and other priorities in life.
 EX: Jim Smith is 35 years old, married with two children, and has an
annual income of $80,000. His risk tolerance is reported as “high”. In the
event that Jim loses his job, with the resulting loss of income, his risk
tolerance will likely change.
It is not uncommon or unreasonable for clients to want investment vehicles that provide them with high
returns at little or no risk. You must make your clients aware that investments that provide an opportunity
to earn higher returns are also those that carry a higher degree of risk.
Risk tolerance is not just the client’s comfort level or attitude toward risk, but also his or her actual ability
to withstand financial losses. You should therefore determine your client’s risk tolerance as the lesser of
your client’s comfort level with risk, and his or her ability to withstand declines in the value of his or her
portfolio.
Assessing Risk Tolerance

One of the most common allegations made in client complaints to the MFDA is that the assessment of the
client’s risk tolerance was incorrect. Clients allege that the risk tolerance indicated on the KYC form was
higher than that which the client asserts is his or her actual risk tolerance.
You may face disciplinary action if you make an inappropriate recommendation for a client’s risk
tolerance level.
For these reasons, it is highly recommended that you use some form of risk profile in assessing a client’s
risk tolerance.
EX: Janice is a single mother of two children, ages 4 and 6. She has meagre savings of $20,000 and
works two part-time jobs to make ends meet. So far, Janice has preferred to place her savings in fixed
income products with low risk. However, extremely low rates of interest are providing her with a very
low rate of return on her savings.
She realizes that higher-yields will be possible only if she places her savings in higher risk investments.
During her meeting with you she expresses an interest in amending her risk tolerance level to “high”.
Although Janice says she is comfortable with high risk, her ability to sustain the loss of her savings is still
very low. You should advise her to keep her risk tolerance as low.
Investment Objectives
Investment objectives are among the most important considerations when dealing with clients. These
objectives form the basis of investment planning and subsequent sales of fund units to clients.
Investment objectives used for suitability assessment should be specific, for instance, income, growth, or
capital preservation. Clearly specifying the client’s investment objectives will help you to make
investment recommendations that are suitable to the client’s investment needs. Investment objectives
must be distinguished from the broader, overall objectives of the account such as “retirement savings” or
“tax planning”.
Investment objectives are often categorized as:
 Capital preservation
 Income
  Growth of capital
 Speculation, or aggressive growth of capital

In addition to the primary objectives listed above, a client may also be interested in secondary objectives
such as tax deferral or liquidity. For instance, a married couple in their mid-60s may be drawing a
retirement income. Their typical priorities are to preserve capital and generate regular income. However, a
younger investor may be more inclined to invest for longer-term growth. By investing for growth, the
younger investor homes to be able to meet his or her future financial needs.

Time Horizon
Time Horizon is the period from the initial investment to when the client may need access to a significant
portion of the money invested.

EX: Your client Tom is 30 years old, and has a mutual fund portfolio of $100,000. He invests $2000
monthly. Tom’s objective is to use these funds to buy a house for $250,000.
Essentially, Tom’s time horizon is around 5 to 6 years, as his portfolio may very well be worth $250,000
by then
Identifying a Suitable Time Horizon

A client’s stated time horizon is important when considering the fee structure of a mutual fund. Generally,
it is considered unsuitable to recommend to a client a mutual fund that has a fee schedule of longer
duration than the client’s time horizon. Likewise, a financial product that has liquidity restrictions for a
period longer than the client’s time horizon would be considered unsuitable.
EX: Gerard, a dealing representative, recommends to his client Ritesh, age 27, a fixed income product
yielding 4% per annum, maturing in 7 years and non-redeemable prior to then.
Ritesh has a stated time horizon of 5 years, at which point he plans to use the funds as a down payment to
buy a house.
Although this investment fits with Ritesh’s high risk tolerance level and investment objective of growth,
the 7-year maturity date is longer than Ritesh’s stated time horizon. It is therefore unsuitable.
Exercise: Risk, Objectives and Time Horizon

Your client, Jane Pelletier, has just called you to let you know that she has won $1 million in a lottery.
This is a huge windfall for her, since at age 35 she has little savings.
Currently, Jane works part-time as a waitress, and studies acting in her spare time. She earns a modest
income but now that she has won the lottery, she wants to quit her job to pursue an acting career full-time.
Jane is not concerned about variations in her portfolio, but does not really understand investments.

WHAT IS JANES FINANCIAL OBJECTIVE?

a) Long term growth
b) Capital preservation
c) Income
 d) Risk-taking
WHAT IS JANES RISK TOLERANCE?
a) Ultra high
b) High
c) Med
d) Low

WHAT IS JANES TIME HORIZON

a) 0-5 yrs
b) 5-10 yrs
c) 10-15 yrs
d) 15 plus years
Investment Knowledge
Investment knowledge includes what a client knows about: investing, investment products, and their
volatility and associated risks.
Investment experience is not the same as investment knowledge. You cannot assume that because a client
has previous investment experience that he or she has investment knowledge. Some clients may know a
great deal about investing and various types of investments without ever having made investments. Other
clients may know very little, despite having numerous previous investments.
Becoming familiar with your client’s level of investment knowledge helps you to determine the types of
investments you can recommend.

Age
A client’s age is important for several reasons:
 There is a legal age of majority in each province.
 Agreements, including the purchase of mutual funds and other securities, entered into by
people who are not of legal age may not be enforceable.
 Your client’s age ties in closely with his or her short-, medium- and long-term financial
goals.
For instance, a 25-year-old single man with 40 years until retirement will likely have different investment
objectives and risk tolerance than a man of 60 who is approaching retirement.
There are age restrictions for certain accounts, such as Registered Education Savings Plans (RESPs) and
Registered Retirement Savings Plans (RRSPs).
Net Worth
Net worth denotes wealth. A client's assets minus their liabilities equals their net worth. Knowing a
client’s net worth is critical in assessing his or her financial condition. It helps you to determine the
client’s resources and ability to invest, as well as any tax implications that may affect investment choices.

EX: An investor wishes to purchase high-risk speculative investments. However, his financial situation
indicates that he is not in a position to tolerate the potential losses from such an investment. As a dealing
representative, you have an obligation to discourage the client from selecting investments that may have a
material negative impact on his financial situation.
EX: Your client, Cheri Jones, has a net-worth of $10 million. She is interested in reducing the amount of
tax she is required to pay
At higher levels of net worth, reducing tax exposure is often a priority. Please note that it is best to refer a
client seeking specific tax advice to a qualified tax professional.
Net worth information should be computed in detail, showing liquid assets and fixed assets, less
liabilities. You should have a detailed view of the client’s net worth in order to be able to recommend
suitable products.
Annual Income
Annual income is a critical factor in assessing an individual’s financial condition. For instance, a client’s
annual income may indicate whether the client will depend on the income generated by their investments
to cover their basic living expenses.
Generally, clients with low income also have a higher need to preserve their principal. These clients can
usually be expected to have lower risk tolerance.
Computation of annual income should include income from all relevant sources. It should be collected as
a number, or by using reasonable ranges.
Occupation
You need to know about your client’s occupation in order to know the nature of his or her income. Some
clients may have seasonal jobs or be paid on commission. In these cases, their income may vary
dramatically from year to year. You should recognize the potential gaps in your clients’ income and work
with them to meet both short-term liquidity needs and longer-term investment requirements.
Exercise: KYC Rule
Which of the following is a key objective of the Know Your Client rule?

a) To ensure that a dealing representative has sufficient information about the client’s past
investment history to help avoid making mistakes on future transactions.
b) To ensure that a mutual fund dealer has sufficient information about the client to enable it to
carry out its suitability obligation.
c) To ensure that a dealing representative has done sufficient due diligence on a client to enable
the detection of fraud, money laundering or other illegal activity.
d) To ensure that an Ultimate Designated Person (UDP) has sufficient access to client personal
and account information to properly approve high-value transactions.

4) STEP 2: KNOW YOUR PRODUCT (KYP)

As a dealing representative, it is your responsibility to understand each product well enough to explain to
your client the product’s risks, key features, and initial and ongoing costs and fees.
To fulfill the KYP obligation, you should have in-depth knowledge of all products that you recommend to
your clients.
Your mutual fund dealer is required to perform a reasonable level of due diligence on products, prior to
approving the products for sale by dealing representatives. Mutual fund dealers must develop an investor
profile or guidelines for each of the products that are considered generally suitable, including risk levels,
time horizon, and investment objectives.
Inclusion of a product on your mutual fund dealer’s list of approved products does not diminish in any
way your obligation to ensure that each recommendation you make or order you accept is suitable to the
client. Nor does inclusion on the list indicate that a product is suitable for all clients.

What You Must Know About Your Products

As a dealing representative, it is your responsibility to know the following about each product you buy or
sell for your clients, or recommend to your clients:
 Key features of the product
 How the product is structured
 Initial, ongoing and back-end fees
 Product restrictions
 How the product is taxed
 How the product generates returns
 Risk factors
 The role that the product can play in a portfolio

It is important for you to understand any product you recommend, but it is equally important to ensure
that your client understands the product. Although your client may profess to know the product, you may
need to ask some probing questions to verify that your client understands the information you have
provided.

EX: Your client James was told by his friend that the only way to improve interest yield in a low-interest-
rate environment was to invest in Principal Protected Notes (PPNs). James comes to your office and asks
you to sell his existing redeemable Guaranteed Investment Certificate (GIC) and invest in a 5-year PPN.
You begin to explain to James the features of the product, but he interrupts you by saying that he knows
what a PPN is. As long as the principal is secured he is comfortable. You realize that James does not have
much liquidity in his portfolio except for the GIC. You ask him a few questions, inquiring if he is aware
that unlike his existing GIC, the PPN is not redeemable. Based on this discussion, James chooses not to
buy the PPN.
You do not have to familiarize yourself with a new product if your dealer has already created
investor profile for which it is suitable.
A) TRUE
B) FALSE
Your dealer is required to perform a reasonable level of due diligence on products before you can
sell them.
 A) TRUE
B) FALSE
Your client wants to invest in a mutual fund that you do not know, but it is similar to one you do.
This is sufficient to satisfy KYP.
A) TRUE
B) FALSE

One of your clients, Tom Jones, asks for your opinion about an aggressive fund suggested by one of
his friends, who was very happy having invested in the fund.
You have heard about this fund for the first time from Tom. Before you recommend the fund to
your client what are you required to know? Check all the answers that apply
A) HOW THE PRODUCT IS STRUCTURED
B) HOW THE PRODUCT IS TAXED
C) THE RISK ATTRIBUTES OF THE PRODUCT
D) THE SALES COMMISSION RATES THAT THE PRODUCT PAYS
5) STEP 3: ASSESS SUITABILITY
Assessing suitability involves matching the characteristics of a proposed investment, as determined by the
due diligence conducted in the KYP process, with the stated needs of the client, as documented in the
KYC information.
If there is any discrepancy between the KYC information and the proposed investment, the investment is
generally considered unsuitable.
Making unsuitable recommendations has severe consequences for you and for your mutual fund dealer,
which may include:
 Client complaints against you
 Internal investigation by your mutual fund dealer
 An external enforcement investigation by the Mutual Fund Dealers Association
(MFDA)
Exercise: Required Client Information
Robert is a 38 year old dentist, single, earning approximately $90,000 annually, with a net worth of
$250,000. He is working towards saving $500,000 within 5 years to buy a house and settle down. He is
not investment savvy, and depends on you to achieve results.
Do you have all the required client information to make a suitable recommendation?
A) YOU HAVE THE REQUIRED KYC INFORMATION
B) YOU HAVE THE REQUIRED INFORMATION TO RECOMMEND A MANAGED
PORTFOLIO THAT HAS BEEN FOUND TO BE SUITABLE FOR EVERYONE SO FAR
C) YOU HAVE OMITTED INFORMATION ABOUT HIS RISK TOLERANCE
D) YOU HAVE OMITTED INFORMATION ABOUT HIS INVESTMENT OBJECTIVES

Comparing KYC to the Product

When assessing suitability, you are required to compare the characteristics of the product with the
following elements of the KYC information:
 risk tolerance
 investment objectives
 time horizon

EX: Joe is a 27-year-old single male, working as a computer programmer, making $65,000
annually. Joe lives with his parents and manages to save a major portion of his income. Joe has a
high risk tolerance. His investment objective is growth of capital, as he wants to have the
flexibility to achieve major financial goals later in life. He plans to work overseas to better his
prospects, and wants to keep his portfolio fairly liquid so that he can invest overseas in the
country where he will work.
Joe is young, with a good income and high risk tolerance. However, his time horizon is short and
uncertain due to his possible relocation. Suitable investment products for Joe are liquid
investments such as money market funds, treasury bill funds or redeemable GICs.

Beyond a client’s risk tolerance, investment objective and time horizon, other KYC elements can be used
to refine your recommendation of suitable products, including the client’s:
 investment knowledge
 net worth
 age
NOTE: Disclosure does not justify an unsuitable recommendation. For instance, recommending to a client
with medium risk tolerance that he or she buy a high-risk product is unsuitable, even if you provide
disclosure to the client that the investment is high-risk. Likewise, giving the same client a prospectus that
fully discloses that a product is high-risk does not justify selling an unsuitable investment.

Exercise: Comparing KYC to the Product

Steve, a dealing representative, has a client, Edwin, who is 75 years old, with a low risk tolerance,
investment objective of income, and a 3 year time horizon.
Steve recommends a deferred sales charge (DSC) fund with a 7 year fee schedule to Edwin.
Which of the following statement is TRUE?
A) Steve’s recommendation is suitable as the DSC schedule reduces over time.
B) Steve’s recommendation is not suitable, as the DSC schedule is for a longer duration than the
client’s time horizon.
C) As long as Steve has disclosed to the client, he is covered.
D) The disclosure has to be in writing to make the recommendation suitable.

Trades Proposed by the Client

When a client proposes a trade, called an “unsolicited purchase”, you are required to assess the suitability
of the product, just as you would for an investment you are recommending.
Refusing an Unsuitable Purchase Order
If you receive instructions from a client to invest in products which in your view are not suitable, you are
required to provide cautionary advice that the investment is not suitable. You must also document that:
 the transaction was unsolicited
 you performed a suitability review
  you gave the client cautionary advice
 you obtained authorization from the client to proceed with the transaction

IMPORTANT: Before you execute an unsuitable, unsolicited order for a client, you should clear the
transaction with your Compliance Department or Branch Manager.

Exercise: Registrant Responsibilities

Which word pair below best completes the blanks in this sentence:
"Once registrants know the essential ____ about the client, investment and investment strategy, they are
responsible for ensuring that the investment is _________ and aligned with the client’s investment
needs."
A) INFORMATION/PROFITABLE
B) FACTS/SUITABLE
C) DETAILS/INSURED
D) DATA/REGISTERED

Handling an Unsuitable, Unsolicited Purchase

As a dealing representative you are not required to accept an unsuitable purchase order. Whether or not
you can refuse a trade depends on your mutual fund dealer’s internal policy. Before you refuse an order
for an unsuitable trade, review your dealer’s Policy and Procedures Manual, and check with your
Compliance Department.

EX: Edwin, a client, asks Steve, his dealing representative, to sell all units of his Treasury Bills Fund,
which represents 50% of Edwin’s portfolio. He asks Steve to invest the proceeds of the sale in precious
metals, as he overheard someone at a cocktail party say that precious metals are about to soar.
Steve cautions Edwin that precious metals are unsuitable for him, as they do not align with Edwin’s KYC
information, but Edwin is firm in his decision.
Steve reviews his dealer firm’s Policy and Procedures Manual, and follows the process set out for
completing unsuitable unsolicited trades. This includes getting a signed acknowledgement from Edwin
that the transaction was unsolicited, a suitability review was performed, and Edwin was advised that the
proposed transaction was unsuitable.
Exercise: Trades Proposed by the Client

One of your clients, Bob Jones is a lawyer, 27 years old and single. He earns $70,000 annually and has
saved $30,000. He has been investing in equities for the past two years. Bob plans to use this money to
start investing for retirement.
Bob does not plan to retire until age 65, and is not concerned about volatility since his job is stable and he
does not need the money at this time . Bob reads the business section of the newspaper each morning and
has a good understanding of financial markets.
In a recent newspaper article, Bob read about a new growth fund and its portfolio manager. He is
interested in investing $5,000 in this mutual fund.
Are you required to do a KYC suitability review for unsolicited orders received from Bob?

A) YES
 B) NO

Leverage

In personal finance, leveraging by an investor often involves buying securities using a portion of his or
her own money and borrowing the rest. By borrowing money an investor can make a larger investment,
which can lead to greater potential returns. However, since markets and securities decrease as well as
increase in value, leveraging can also result in greater losses.
There are detailed MFDA policies and guidelines specifying what you and your mutual fund dealer are
required to do when recommending a leveraged strategy, or executing an unsolicited leveraging strategy
in your client accounts.
MFDA regulations require you to:
 Conduct a leveraging suitability assessment before recommending or
undertaking a leveraging strategy at a client’s request.
 Inform the client about the risks, and deliver the risk disclosure documents.
 Be aware of and fulfill your responsibilities as a dealing representative.

Suitability of Leverage Strategies

EX: Catherine Brown, an elderly widow in her 80s, has a need for regular income, a low risk tolerance
and a short time horizon. Peter Sly, a dealing representative handling her account, without discussing any
aspects of suitability, recommends that she undertake a leverage strategy to boost her depleting income.
Peter suggests a few aggressive global funds which have had impressive returns during the past three
months.
Peter has violated MFDA regulations by recommending a leveraging strategy without conducting a
leveraging suitability assessment.
EX: Joe Joseph, one of your clients, wants to undertake a leveraged transaction by borrowing funds and
investing them in precious metals. He heard from his friends that precious metals have fallen significantly
in value, and the only way for them to go now was up.
You need to complete a leveraging suitability assessment, and then prepare a balanced presentation for
Joe about the associated options and risks. You must inform Joe, and document the fact that you disclosed
the following information:
 The value of the leveraged portfolio may fall below the value of the loan.
 Investment risks as well as gains are magnified.
 Interest costs may at a time exceed the returns received.
 Irrespective of the outcome, Joe is responsible for repaying the loan with
interest.
 Never to use leverage as a tax-reduction strategy.
You need to ensure that Joe understands the disclosures that you made. You must also deliver risk
disclosure documents to Joe, and record his acknowledgement of having received them.