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Disclaimer: This document has been developed as a possible example of relationship disclosure (RD). Dealer Members using this sample must use it only as a reference tool or meaningfully tailor it to their firm’s business model, client base and business mix. The information, examples and considerations contained here are to help IIAC members meet Investment Industry Regulatory Organization of Canada (IIROC) Rule 3500i requirements, and related Guidanceii dealing with relationship disclosure, a key part of the Client Relationship Model (CRM) rules, and part of National Instrument 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligationsiii,iv (NI-31- 103). This document is not intended to be all-encompassing, as the types of information relevant to different members’ differing client bases will be unique. Preparing RD documentation and supporting material, including written policies and procedures, as well as ensuring that these policies and procedures are followed, maintained, tested and updated as required and that adherence is monitored and an audit trail is maintained, is the responsibility of Dealer Members.
RELATIONSHIP DISCLOSURE CONSIDERATIONSv
Nature of the relationship to be disclosed: The document is about account relationship disclosure and, therefore, it does not require the disclosure of all services that a client may use. IIROC staff said that RD’s should not mix service offerings from outside the firm with account-related disclosures.
Extent of RD commitments: Beyond setting out client responsibilities, the RD reflects responsibilities of the Dealer firm and registered advisor. In the rare case of where there is a difference between responsibilities of the Dealer firm and advisor (for example, conflicts of interest of the advisor will differ from those of the firm), this should be made clear.
Expectation of advisor training: IIROC staff expect the RD to contribute to more consistency of investor treatment within (and across) firms. For this to occur, there is an expectation that Dealer firms will provide training and set clear expectations of advisors.
Deadlines: Firms must start providing RDs to new retail clients as of March 26, 2013 and to have provided RDs to existing retail clients by March 26, 2014.
Audience: The audience is retail clients. IIROC rules define a retail client as “a customer of a Dealer Member that is not an institutional customer” (that is, not an Acceptable Counterparty nor Institution, not a Regulated Entity nor Registrant (other than an individual) under securities legislation, nor a non- individual with total securities under administration or management exceeding $10 million). Dealer Members will want to remember that, by default, non-individuals with $10 million or less in assets under management, are retail clients. Some firms may choose to use the RD or a similar document for non- retail clients.
One or more RD (per account and/or client type): Rule 3500 states that a combined (single) RD may be provided to a client with more than one account “…as long as the Dealer Member determines that the combined disclosure is appropriate for the client in light of the relevant circumstances, including the nature of the various accounts.” However, IIROC staff said that if a single document is used, it is critical that the document make it clear what type of account or accounts the client actually has and, for example, whether they are fee- or commission- based. 2 | DRAFT
IIROC staff have indicated that IIROC is not in favour of the combined approach where there are multiple accounts that are different types of accounts or that have different fee structures, unless it can be made clear to the client which products, services, suitability assessment obligations andresponsibilities for decision-making, etc. apply to each account. In particular, IIROC staff expect the RD to be very clear whether advice is provided and, if so, who makes decisions. An industry observer has suggested that it may be possible to start with a “less is best” approach, preparing to add additional information if and as required – this would not require re-mailing to the extent there is not a material change to what a client might reasonably see as a firm’s or clients’ responsibilities. Documenting the decision process may be a wise practice and good preparation for IIROC examination.
Length: One example of an RD found on the internet is 24 pages in length. At an IIROC-IIAC CRM Seminar in June 2012, IIROC suggested that 10 pages might be appropriate. More recently, IIROC is reported as having referenced a couple of pages double-sided. Given the length of Rule 3500 itself, it is difficult to keep page-count low without including highlights only, and relying more on cross-references to other documents (e.g., service price list or links). As a number of topics in this document duplicate what may already be in account-opening, know-your-client (KYC) and other required documentation, firms can cross-reference these other documents, although a certain amount of summary information must be included in the RD. IIROC staff stated that if documentation is cross-referenced, including by reference to a URL, the documentation must be provided with the RD, unless already provided.
Language: The document is to be written in plain language and to be “communication,” rather than disclosures in legalese. This could mean a combination of shorter words, shorter sentences, no business or marketing jargon, few acronyms, and the use of formatting (titles, bullets) to improve readability and help with understanding.
Format: While an online version with links may be an easy way for an advisor to walk through the RD with a client – the RD is expected to be discussed prior to the conclusion of account-opening – a complete written version is expected to be typical. Other approaches are possible, for example, inclusion of the RD in account terms and conditions.
Sign-off/confirmation: There is no requirement to obtain client acknowledgment of the RD information. While Dealer Members must get client acknowledgment of the KYC information collected from the client at the time of account opening, it is only required to have an audit trail to evidence that account-related documents (which presumably include the RD) have been provided to the client.
Organization: The order and number of sections in the body of this document reflect the order and number of provisions in the IIROC rule (this differs from what is in NI 31-103). It may be that another order may be more logical (e.g., including fees related to a service after the service they relate to). That said, IIAC staff pointed out that the guidance references products and services (neither product nor service are defined), and then accounts, implying that products and services differ from accounts. IIROC staff, however, suggested that an account is a service and that certain investment types are products.
Procedures: Rule 3500.6. requires a partner, director, officer or designated supervisor to approve the RD provided to the client whatever the form of the RD. The supervisor approving new accounts must ensure (and presumably document) that the correct version (whether standardized or customized) is used in each client situation. 1 | Relationship Disclosure DRAFT Relationship Disclosure (RD)
[Insert member firm name] believes the best way to help you meet your financial goals, and for us to keep serving you as a valued client, is to provide you with the account type(s) and access to investments in a way that best suits your needs. We want to help you save and invest in the way you are most comfortable with in the changing environment in which we live. We think we can do this most successfully if we both know what to expect from each other. For this reason, we would like you to have a good understanding of the products and services we offer; the features of your account(s) and how it/they operate(s); and our responsibilities to you.vi
We also want you to understand how your input through the “Know Your Client” (KYC) form you complete is critical to our meeting your expectations. Securities regulators have recommended that we promote active client participation for a mutually successful relationship. Regulatory guidance (National Instrument 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligations) encourages us to ask you to: Keep us up to date. “Clients should provide full and accurate information to the firm and the registered individuals acting for the firm. Clients should promptly inform the firm of any change to information that could reasonably result in a change to the types of investments appropriate for them, such as a change to their income, investment objectives, risk tolerance, time horizon or net worth.” Remain informed. “Clients should understand the potential risks and returns on investments. They should carefully review sales literature provided by the firm. Where appropriate, clients should consult professionals, such as a lawyer or an accountant, for legal or tax advice.” Ask us questions. “Clients should ask questions and request information from the firm to resolve questions about their account, transactions or investments, or their relationship with the firm or a registered individual acting for the firm.” Stay on top of your investments. “Clients should pay for securities purchases by the settlement date. They should review all account documentation provided by the firm and regularly review portfolio holdings and performance.”
We will update the RD when there are material changes to it [by referring you to our websitevii or in hardcopy if you request]. If you later have any questions related to the contents of this document, or need to change your KYC informationviii, please contact your financial advisor. You will be provided with a copy of the KYC information that we get from you at the time of account-opening and when there are material changes to the information.
1. The services and products we offer
Here is a brief summary of the services and products we offer you:
• Services:ix [Insert name] provides three types of accounts discussed further in the next section. The accounts are: order execution accounts managed accounts advised accounts.
• Other Services We offer, for an additional charge, other services related to the main products and services you use. These include the following:
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(Insert applicable services, for example, estate planning, but exclude service offering outside the firm from account-related disclosures ) . [For more services, please visit URL where more information can be found].
Products We offer the following investment products: Cash and cash equivalents Fixed income or debt securities Equities including warrants Investment funds such as mutual funds Alternative investments such as options, futures, income trusts, etc. [Insert other(s) as apply].
Your advisor can explain these investment products to you, as well as how they work, their risks and possible returns, and whether they are appropriate for you. For more information, you can also read plain-language investment explanations in Investments at a Glance, a booklet prepared by the Canadian Securities Administrators for financial consumers like you.
• New services and products We will offer additional services and products as they are developed. You can find out about new offerings and whether they are appropriate for you by visiting our website, speaking with your advisor or reading information included with your statements or in other communications.
2. The account(s) you have and how they operate
We offer our clients one or more of three basic account types and your advisor will work with you to determine the right account(s) and best services for you.
Your account type(s), when you sign this RD, are checked off below:
Order-execution accounts: These are often known as discount online brokerage accounts. You receive no advice although may use our online tools and contact our call centre associates for information. You are responsible for your own investment decisions.
[Note: Consider inserting relevant fees/charges associated with order-execution accounts]
Managed accounts: These are also referred to as “non-advisory” or "discretionary accounts" where your advisor independently exercises his or her authority (uses his or her discretion) to make investment decisions within the framework of your overall directions. [Mention ability for clients to establish any limits or standing instructions].x He or she makes no recommendations to you and you make no decisions, as he or she invests on your behalf.
[Note: Consider inserting relevant fees/charges associated with managed accounts]
Advisory (or advised/discretionary) accounts: Your advisor is responsible for providing suitable and unbiased investment recommendations to you that meet the standard of care expected of a trained investment professional based on the KYC information that you provide to us. You (or your authorized representative) direct(s) all trading and is(are) responsible for all investment decisions in your account.
[Note: Consider inserting relevant fees/charges associated with advised accounts]
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3. The fees you will be paying and how they are calculatedxi
All fees are disclosed as required by regulation and vary depending on the accounts and services you use.
We offer you a choice of commission- and fee-based accounts [define each, e.g., transaction-based, x% of the value of the assets, etc.]. xii We will recommend the one that is appropriate for you based on how you expect to use the account (for example, if you expect to buy and hold securities for a long time or intend to be buying and selling more frequently), as well as your personal preferences.xiii
Some charges are fixed – a list of these is provided when you open your account.
Other charges are negotiable and depend on the business you have built up over time with or bring to us. In the case of negotiable charges, we need your consent and charges are included on the transaction confirmation slips we send you.xiv
The fees you will pay for services we provide – and these will vary depending on whether you have chosen a commission-based or a fee-based modelxv – encompass:xvi
Fees and charges for execution-only/discount brokerage accounts [insert or cross-reference]
Fees and charges for managed accounts [insert or cross-reference]
Fees and charges for advised accounts
For a commission-based account: o We charge a commission of for every trade we make for you based on (flat dollar amount, percentage of the value of the securities purchased or sold, other)
. For debt securities: [margin, mark-up; insert or cross-reference]
. For equity securities: [insert or cross-reference]
. For mutual funds: [insert or cross-reference] Mutual fund managers usually charge a percentage fee called a management expense ratio (MER) and transaction costs by deducting charges from fund performance. From the MER, fund managers pay us trailing fees (deferred sales charges – DSCs) for ongoing services we provide to you. Below is an example of how DSCs work, reflecting the average price of the services the [insert company name, carrying broker name] and your advisor provide and the funds you choose. DSCs can range from 0.x% (one x/100th of one per cent or $x per $100 of securities held) to 0.y% (one y/100th of 1% or $y per $100). Of this, .a% is paid to the [carrying broker], b% is paid to us from which c% is paid to your [advisor]. In dollar terms, if you hold $1,000 with us, and the DSC is x%, o [carrying broker] receives $x for processing transactions and providing reports and tax slips to you, o [insert company name] receives $y for the cost of premises, computers, compliance, property taxes and so on, and
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o your [advisor] earns $z for time spent researching investments that may be appropriate for you, answering questions, helping develop goals, and so on.
o We also charge other account operation fees, which can include (account maintenance fees, fees for failing to maintain a minimum balance, account transfer fees, account inactivity fees, wire transfer fees, “finder’s fees,” referral fees, third-party custodian fees, costs of account closing, SDRSP administration fees, attestations of assets; etc.).
For a fee-based account: o We charge a fee that will be applied (monthly, quarterly, annually) and (charged against your account, other ). It is calculated as (a percentage of assets or a flat annual fee or different charges for different asset classes),
o (If the number of trades per year exceeds xx, commissions will be charged for any additional trades).
o We also charge additional fees for (minimum balance fees, etc.)
Other fees and charges
You will pay fees for products or services you buy through us (for example, insurance-related companies can provide products that complement the investments or services we provide directly).
You also may be subject to other costs relating to services that you use that are not our service offerings. For example, there may be charges levied by third parties for services that help you save more quickly and securely such as for pre-authorized transfers. There may be penalties related to the early withdrawal from, or encashment of, certain instruments. Also, if you own shares of small emerging companies, you may be required to pay for valuations of these holdings to satisfy Canada Revenue Agency requirements. Knowing about and planning for these costs are your responsibility.
Notice of price changes: We will provide you with at least 60 days’ written notice of any new fee or changes in charges. Note: Interest charged on accounts and commissions for executing trades are excluded from notice – clarify how a client may be made aware of this]
Pricing reminders: In addition to providing you with advance notice of the prices of the services you use, [IIROC recommends that the charges specific to a transaction be disclosed prior to recommending or accepting instructions from a client to purchase or sell a security in an account other than a managed account; consider how to address this].
Reminder: For a full list of products and services, and the relevant commissions and fees, please ask your advisor or visit our website at [insert url; provide hardcopy].
4. How we will assess the suitability of an investment when making recommendations to you
Order-execution accounts: We do not have suitability obligations as holders of these types of accounts have chosen to make their own decisions.xvii
Managed accounts: Discussion with you about the suitability for you of individual investments is not required as your account will be managed according to your KYC. Ongoing suitability is
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provided as part of the managed account services according generally to the process discussed below.xxii
Advised accounts: Before we provide you with recommendations as to which investments to purchase, or if you ask us to buy or sell a security, we will first see if we believe that investment is suitable for you according to our understanding of the information you have given us when you completed the KYC form. That is why keeping this up to date and accurate is very important. We know many people are concerned about sharing some of this information, however, without all the necessary information, we may determine that the order you provided to us is not suitable for you in the context of your overall portfolio. In that case, we must advise against proceeding with the order.
The suitability factors that guide us in our decision as to an investment’s suitability include what we understand to be your current: 1. Financial situation: What financial assets (deposits, investments) and liabilities (debt, mortgage) you have and the sources and amount of your income – we will consider the size of any transaction compared to the overall value of your net financial assets (assets minus liabilities). 2. Investment knowledge: Whether you consider yourself, or we understand you, to be a novice at investing, have some knowledge or feel you understand some of the new more complex financial products. 3. Investment objectives: What you tell us are your specific financial goals; this will help us determine how to balance the desire to keep your money safe (not lose principal), earn income, and increase your capital through growth in the market value of your holdings/account. 4. Time horizon: When you expect to need your financial assets, for example, to buy a house, pay for education or enter retirement – in retirement, this may also include consideration of tax requirements to withdraw minimum amounts. 5. Risk tolerance: Whether, even if you have many years to earn and save, you feel comfortable with the possibility of losing money in some years. 6. Investment portfolio composition and risk levelxviii: How the purchase or sale of particular securities affects holdings in your overall account(s) in terms of allocation of holdings between debt, equity and other classes, and the riskiness of the assets held.
Our understanding of your profile is critical. Some of the above factors are relatively easily answered with a “yes” or “no” or a number, however, some are more complex, particularly your risk tolerance.xix, xx
The combination of these factors that make up your profile will help us suggest the allocation of your holdings between, for example: registered (tax-advantaged) and non-registered accounts; debt, equity, mutual fund and other instruments; Canadian and foreign investments; whether to borrow to invest rather than paying in cash only; terms of specific instruments; and the riskiness of both individual securities and the combination of securities in your portfolio.
Below we provide a summary of the procedures we use to help you understand how we bring all the information you provide to us into decisions as to what investments to recommend to you.
Suitability process:
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We use a three-step approach to determine if an investment is suitable for you.
1. Based on discussion with you and your answers on the KYC form, we determine whether you are a risk-averse client, somewhat risk-tolerant or can accept higher losses in the search for higher gains.
2. We rate investments as low, medium or high risk. For example, a GIC is low risk whereas borrowing to invest in stock from companies in developing countries is very high risk.
3. We consider other relevant factors, for example:
Managed accounts: If you want predominantly socially responsible investments or at least to avoid investment in firms whose products are alcohol, tobacco, pornography, gambling, guns, and chemical, biological or nuclear weapons.
Advised accounts: If you are risk-averse, but have a reasonable amount of financial assets and you want to invest a small amount of your overall account in a new issue of a start-up company run by someone you know and whose business acumen you respect, we would tell you that while the specific investment is not suitable for you, it might be acceptable if you can “afford” to lose some money, even that entire investment. An investment that is small in proportion to the total portfolio is not unsuitable.xxi
If, when you place an order, what you would like to invest in is not consistent with what your profile suggests to us, we will advise against proceeding with the order [elaborate; we will ask you to sign a letter recognizing we advised against it; we will accept if the amount is not material; will not if…; review and adjust KYC, other?].
Suitability review timing
When (1) accepting each of your orders or (2) recommending a security or strategy to you, we will review each order [each order or each order larger than a certain size of percentage value?] or strategy in the context of the six [or seven] KYC suitability factors described above.
We will also conduct a suitability determination when: 1. Securities are deposited or transferred to your account/(s); and/or 2. The advisor or portfolio manager responsible for the account changes; and/or 3. There has been a material change in your personal or financial circumstances or objectives [Note: So as not to be overlooked as a footnote might be, IIROC staff advise that a change in financial circumstances includes a major change in financial assets due to a major market fluctuation]; and/or 4. [insert as appropriate]; and/or 5. [insert as appropriate]; and/or 6. [insert as appropriate].
If during the suitability determination we identify any concerns, we will discuss them with you and may be required by our regulators or good business practice to document our discussions and, if we are strongly concerned, may have [address view that a concern with a client’s decision may result in refusing to execute a transaction or to terminate an account relationship].
To ensure that the position(s) held in your account or accounts is/are suitable for you as time passes, we will review the suitability of the investments in your account(s) and your holdings altogether: 1. Annually; and Date: Insert date/version 7 | Relationship Disclosure DRAFT
2. When required due to one of the reasons described above; 3. [insert as appropriate – what if a company becomes subject to a cease trade order and a security holding becomes non-qualified or prohibited? Do you notify clients?]; and/or 4. [insert as appropriate].
[Note: So as not to be overlooked as a footnote might be, IIROC staff advise that the following paragraph is worded too categorically. Specifically: “… a suitability assessment must be performed when there is a “material change to the client’s “know your client” information”. As an example, a material change in a client’s financial situation resulting from a major market fluctuatiom would trigger a suitability assessment. Similarly, other material KYC changes would trigger a sitability assessment. This section needs to be rewritten]. Given the long-term nature of investing for most clients, we do not automatically review the suitability of the investments in your account(s) when there are market fluctuations, even large fluctuations. Your advisor is ready to discuss the effect of market fluctuations on your portfolio with you when you request. We encourage you to speak with your advisor, especially if you expect to need to convert your assets to cash in the near future (for example, for a major purchase such as a house), if you want to change when you retire and in the case of other major changes to your KYC profile.
5. The ways we will avoid, manage or disclose conflicts of interest that may arise as we serve your and others’ interests
Actual, potential and perceived conflicts of interest arise where an action or decision by someone has the effect of benefiting others at that person’s expense. Such conflicts exist in almost all human interactions and, as we are an intermediary, acting for both buyers and sellers, conflicts will arise from time to time: Between you and our firm, as well as between you and your advisor Between you and our other clients: we act for many clients and must allocate investment opportunities among all of them fairly, so as not to favour intentionally one client over another Between us and our related or associated companies.
The types of conflicts of interest that may exist can differ between account types:xxii Order execution account: [identify particular examples] Managed accounts: [identify particular examples] Advised accounts: [identify particular examples].
We have policies and procedures in place to address the handling of conflicts of interest.
We avoid conflicts prohibited by law as well as conflicts that we cannot effectively control.
In situations that we do not or cannot avoid, where our interests may compete with yours, your interest is always given priority by our acting in one of two ways:
We control or manage acceptable conflicts by physically separating different business functions, restricting the internal exchange of information in person or through systems, reducing the possibility of one part of our organization unsuitably influencing another, removing the financial incentive of an employee to favour a particular product or service over another that may be more suitable, and setting up and testing our operational review and approval processes.
We disclose information about any remaining conflicts to you so that, when you evaluate our recommendations and actions, you can assess independently if conflicts are significant for you. Date: Insert date/version 8 | Relationship Disclosure DRAFT
To help you understand and assess material potential and actual conflicts of interest, we have prepared a more detailed explanation of typical conflicts, with examples of what we do in the case of any material ones. It can be found at [insert URL and include a copy in new client kit]. If you ever have any questions or concerns, whether they involve conflicts of interest or anything else, please ask your advisor for an explanation and more information.
[Mention outside business activities?]
6. The reports we will provide to help you monitor your financial assets and their performance, as well as the fees and charges you pay us or to third parties through us
Confirmations: We provide you with written confirmation, electronically [through online notice, e- mail] or by post [mailed no more than two days after transactions] of the details of every purchase, sale, transfer or other relevant transaction details. Please look for and review your confirmation as soon as you receive it or it is available online.
Note: We do our utmost to avoid errors, however, misunderstandings and mistakes can happen. Please let us know within (xx) days/months if you see any transactions that you do not recall or identify any errors.
Account statements: You will receive brokerage statements directly from [name] on a monthly or quarterly basis [specify]; [name] provides an independent confirmation of your holdings. Your account statement confirms all account activity, including purchases and sales of securities, contributions and withdrawals, dividends, interest earned and paid, transfers, and any other transactions that occurred in your account over the previous period. Note: These statements also list your current holdings and the net value of your portfolio as if you had closed all positions as of the date on the statement. The value of most securities you hold is calculated [insert]. In the case of securities that have ceased trading, where the company is bankrupt, in the instance of thinly traded securities and of Canadian Controlled Private Corporations (CCPCs), [insert; consider referencing, “where external valuations are usually required at the owner’s cost, and the costs can be significant, we use N/A”].
Performance: We provide you with the return on your investments over various periods [say whether or not account percentage return information will be provided;xxiii insert frequency of performance reporting]. Please note that you may earn more or less than others may have made on the same investments or that you may read in market commentary due to differences in when you buy and sell securities [insert relevant approaches to performance calculation].
Fees and charges paid: Fees are reflected on your statements and/or you are advised of fees or methods of compensation. We are working on more complete reporting (see Future Reporting enhancements below.
Future reporting enhancements: [Note: Some of the following may currently be provided; what is provided may be enhanced or new reporting will be added] We regularly look at ways to improve the reporting and documents we provide to you to make them more informative, clearer and useful for you and other clients. We are working on changes related to account holdings, fees that you pay, and performance. As part of our service commitment, we will keep you posted on the timing of changes and how to understand new report formats. For updated information at any time, please ask your advisor or visit (insert URL].xxiv, xxv
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We hope to enjoy a long successful relationship with you and look forward to serving you, your family and any people you may refer to us.
We think that open communication is the best way to achieve this, however, misunderstandings can arise and mistakes can occur. If you have complaints (or compliments), please let us know.
Complaint-handling procedures: [summarize]
Checklist of documents to be provided to you at account-opening: [insert]xxvi
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END NOTES i New Rule 3500 – Relationship disclosure 3500.1. Objective of relationship disclosure requirements (1) This Rule establishes the minimum industry standards for relationship disclosure to retail clients. This Rule does not apply to accounts of institutional clients. Relationship disclosure is a written communication from the Dealer Member to the client describing: • the products and services offered by the Dealer Member; • the nature of the account and the manner in which the account will operate; and • the responsibilities of the Dealer Member to the client. Relationship disclosure must be provided to a client at time of opening an account or accounts and when there is a significant change to relationship disclosure information previously provided to a client. References in this Rule describing the obligations of the Dealer Member in relation to services provided on advisory and managed accounts apply equally to the Approved Persons of the Dealer Member providing services on such accounts. This Rule should be reviewed in conjunction with: • Rules 1300.1 and 1300.2 – “Know your client”, suitability and supervision; • Rules 1300.3 to 1300.21 – Discretionary and managed accounts; • Rule 2500 – Minimum standards for retail account supervision; and • Rule 3200 – Minimum requirements for Dealer Members seeking approval under Rule 1300.1(s) for suitability relief for trades not recommended by the Dealer Member.
3500.2. Definition of account relationship types (1) An “advisory account” is an account where the client is responsible for investment decisions but is able to rely on advice given by a registered representative. The registered representative is responsible for the advice given. In providing this advice, the registered representative must meet an appropriate standard of care, provide suitable investment recommendations and provide unbiased investment advice. (2) An “order-execution service account” is an account opened in accordance with “order-execution service” requirements set out in Rule 3200. (3) A “managed account” is an account as defined in Rule 1300.3.
3500.3. Form of relationship disclosure (1) Dealer Members have the choice of providing customized relationship disclosure to each client, or appropriate standardized relationship disclosure to separate classes of clients. (2) Where standardized relationship disclosure is provided to the client the Dealer Member must determine that the disclosure is appropriate for the client. Specifically, the disclosure must accurately describe: (a) the account relationship the client has entered into with the Dealer Member; and (b) the advisory, suitability and performance reporting service levels the client will receive from with the Dealer Member. (3) Where a client has more than one account, combined relationship disclosure information may be provided as long as the Dealer Member determines that the combined disclosure is appropriate for the client in light of the relevant circumstances, including the nature of the various accounts.
3500.4. Format of relationship disclosure (1) The format of the relationship disclosure is not prescribed but: (a) The relationship disclosure must be provided to the client in writing; (b) The relationship disclosure must be written in plain language that communicates the information to the client in a meaningful way; and (c) The relationship disclosure must include all the required content set out in Section 3500.5, or, where specific information has otherwise been provided to the client by the Dealer Member, a general description and a reference to the other disclosure materials containing the required information. (2) Dealer Members may choose to provide the relationship disclosure as a separate document or to integrate it with other account opening materials.
3500.5. Content of relationship disclosure (1) The relationship disclosure information must be entitled “Relationship Disclosure”. (2) Subject to subparagraphs (3) and (4), the relationship disclosure must contain the following information: (a) A description of the types of products and services offered by the Dealer Member; (b) A description of the account relationship; (c) A description of the process used by the Dealer Member to assess investment suitability, including: (i) a description of the approach used by the Dealer Member to assess the client’s financial situation, investment objectives and time horizon, risk tolerance and investment knowledge and a statement that the client will be provided with a copy of the “know your client” information that is obtained from the client and documented at time of account opening and when there are material changes to the information; (ii) a statement indicating that the Dealer Member will assess the suitability of investments in the client’s account whenever: (A) a trade is accepted, (B) a recommendation is made, (C) securities are transferred or deposited into the account, (D) there is a change in the registered representative or portfolio manager responsible for the account, or (E) there is a material change to the client’s “know your client” information; and (iii) a statement indicating whether or not the suitability of the investments held in the account will be reviewed in the case of other triggering events not described in Rule 1300.1(r) and, in particular, in the event of significant market fluctuations; (d) A description of the client account reporting that the Dealer Member will provide, including: (i) a statement indicating when trade confirmations and account statements will be sent to the client; (ii) a description of the Dealer Member’s minimum obligations to provide performance information to the client and a statement indicating when account position cost and account activity information will be provided to the client; and (iii) a statement indicating whether or not the provision of account percentage return information will be an option available to the client as part of the account service offering; (e) A statement indicating Dealer Member and Approved Person conflicts of interest and stating that existing and potential material conflict of interest situations, where not avoided, will be disclosed to the client as they arise; (f) A description of all account service fees and charges the client will or may incur relating to the general operation of the account; (g) A description of all charges the client will or may incur in making, disposing and holding investments by type of investment product; (h) A listing of the account documents required to be provided to the client with respect to the account; and (i) A description of the Dealer Member’s complaint handling procedures and a statement that the client will be provided with a copy of an IIROC approved complaint handling process brochure at time of account opening. (3) For order-execution service accounts, the Dealer Member does not have to provide the relationship disclosure information required under subparagraph 2(c), provided that disclosure is made in compliance with the requirements in Rule 3200. (4) For managed accounts, the required disclosure referred to in subparagraph 2(c)(iii) does not apply and the relationship disclosure provided by the Dealer Member must include a statement that ongoing suitability is provided as part of the managed account services.
3500.6. Review of relationship disclosure materials (1) Pursuant to Rule 1300.2, the relationship disclosure provided to the client must be approved by a partner, director, officer or designated supervisor. This approval must occur regardless of the form the relationship disclosure takes. If the document is a standardized document, the supervisor who approves new accounts must ensure that the correct document is used in each client circumstance. If the relationship disclosure is a customized document for each client, the designated supervisor must approve each document.
3500.7. Audit trail and client acknowledgement requirements (1) The Dealer Member must maintain an audit trail to evidence that account related documents required by IIROC Rules have been provided to the client. (2) Dealer Members must obtain their clients’ acknowledgement of receipt of the “know your client” information. A client signature acknowledging receipt is preferred, but not required. If the client’s signature is not obtained, another acceptable method of documenting the client’s acknowledgement of receipt of this information must be used. ii See March 26, 2012 IIROC guidance: http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=C168CD670F80468EB38BC6EF773ECC41&Language=en Relationship disclosure – New Dealer Member Rule 3500 Pursuant to the requirements in new IIROC Dealer Member Rule 3500, every Dealer Member will provide its retail clients with the following information regarding the relationship they are entering into with the client: • a description of the types of products and services offered by the Dealer Member; • a description of the account relationship to which the client has consented; • where applicable, a description of the process used by the Dealer Member to assess investment suitability, including a description of the process used to assess the client’s “know your client” information, a statement as to when account suitability will be reviewed and an indication whether or not the Dealer Member will review suitability in other situations, including market fluctuations; • a statement indicating material Dealer Member and adviser conflicts of interest and stating that future material conflict of interest situations, where not resolved, will be disclosed to the client as they arise; • a description of all fees, charges and costs associated with operating the account and in making or holding investments in the account; and • a description of account reporting the client will receive, including a statement identifying when account statements and trade confirmations will be sent to the client and a description of the Dealer Member’s obligations to provide account performance information and a statement indicating whether or not percentage return information will be sent.
The obligations of Dealer Members to provide certain specific disclosures regarding suitability will vary for order- execution service accounts and managed accounts, in that there is no suitability obligation regarding order-execution service accounts and managed accounts must be monitored and supervised according to the specific, more rigorous standards imposed under Dealer Member Rules 1300 and 2500. IIROC is not mandating the format of the disclosures, but will require that the information be: • Provided to the client in writing at the time of account opening; • Written in plain language; and • Included in a document entitled “Relationship Disclosure”. Dealer Members are obligated to provide some of the relationship disclosure information under the current Rules. The new Rules allow for information already provided to clients to essentially be incorporated by reference as long as the relationship disclosure contains a description of this information and the client is specifically referred to the other documents. iii Extract from National Instrument (NI) 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligations Part 14 Handling client accounts – firms Division 1 … 14.1 … Division 2 Disclosure to clients 14.2 Relationship disclosure information (1) A registered firm must deliver to a client all information that a reasonable investor would consider important about the client's relationship with the registrant. (2) The information required to be delivered under subsection (1) includes all of the following: (a) a description of the nature or type of the client’s account; (b) a discussion that identifies the products or services the registered firm offers to a client; (c) a description of the types of risks that a client should consider when making an investment decision; (d) a description of the risks to a client of using borrowed money to finance a purchase of a security; (e) a description of the conflicts of interest that the registered firm is required to disclose to a client under securities legislation; (f) disclosure of all costs to a client for the operation of an account; (g) a description of the costs a client will pay in making, holding and selling investments; (h) a description of the compensation paid to the registered firm in relation to the different types of products that a client may purchase through the registered firm; (i) a description of the content and frequency of reporting for each account or portfolio of a client; (j) if section 13.16 applies to the registered firm, disclosure that independent dispute resolution or mediation services are available at the registered firm's expense, to resolve any dispute that might arise between the client and the firm about any trading or advising activity of the firm or one of its representatives; (k) a statement that the registered firm has an obligation to assess whether a purchase or sale of a security is suitable for a client prior to executing the transaction or at any other time; (l) the information a registered firm must collect about the client under section 13.2 [know your client].
(3) A registered firm must deliver to a client the information in subsection (1) before the firm first (a) purchases or sells a security for the client, or (b) advises the client to purchase, sell or hold a security.
(4) If there is a significant change to the information delivered to a client under subsection (1), the registered firm must take reasonable steps to notify the client of the change in a timely manner and, if possible, before the firm next (a) purchases or sells a security for the client, or (b) advises the client to purchase, sell or hold a security.
(5) This section does not apply if the client is a registered firm, a Canadian financial institution or a Schedule III bank. (6) This section does not apply to a registrant in respect of a permitted client if (a) the permitted client has waived, in writing, the requirements under this section, and (b) the registrant does not act as an adviser in respect of a managed account of the permitted client. iv From NI 31-103 Companion Policy 14.2 Relationship disclosure information Content of relationship disclosure information There is no prescribed form for the relationship disclosure information required under section 14.2. A registered firm may provide this information in a single document or in separate documents, which together give the client the prescribed information.
Disclosure of costs Under subsection 14.2(2)(g), registered firms must provide clients with a description of the costs they will pay in making, holding and selling investments. We expect this description to include all costs a client may pay during the course of holding a particular investment. For example, for a mutual fund, the description should briefly explain each of the following and how they may affect the investment: the management expense ratio the sales charge options available to the client the trailing commission any short-term trading fees any switch or change fees Permitted clients Under subsection 14.2(6), registrants do not have to provide relationship disclosure information to permitted clients if: the permitted client has waived the requirements in writing, and the registrant does not act as an adviser for a managed account of the permitted client Promoting client participation Registered firms should help their clients understand the registrant-client relationship. They should encourage clients to actively participate in the relationship and provide them with clear, relevant and timely information and communications. In particular, registered firms should encourage clients to: Keep the firm up to date. Clients should provide full and accurate information to the firm and the registered individuals acting for the firm. Clients should promptly inform the firm of any change to information that could reasonably result in a change to the types of investments appropriate for them, such as a change to their income, investment objectives, risk tolerance, time horizon or net worth. Be informed. Clients should understand the potential risks and returns on investments. They should carefully review sales literature provided by the firm. Where appropriate, clients should consult professionals, such as a lawyer or an accountant, for legal or tax advice. Ask questions. Clients should ask questions and request information from the firm to resolve questions about their account, transactions or investments, or their relationship with the firm or a registered individual acting for the firm. Stay on top of their investments. Clients should pay for securities purchases by the settlement date. They should review all account documentation provided by the firm and regularly review portfolio holdings and performance. v Rule 3500 specifies that the document must be called “Relationship Disclosure”. vi If the RD is longer, some members may wish to list the sections that follow. vii It is not clear that reference to a website for a material change will be acceptable, however, there are no identified downsides to this. viii Firms may want to cross-reference other documentation (e.g., KYC information) “Until you provide complete KYC information, our regulators require that we not complete any account transactions other than to liquidate trades and transfers, payments or deliveries out of funds or securities until we have received the required information from you.” ix IIROC staff accepted that checkboxes could be a way to address clearly the account or accounts a client has. x The above account types can be categorized by their beneficiary(ies) and characteristics. We have checked off the categories and characteristics of your account(s): Beneficiary(ies) Individual Corporation Joint Estate Trust Investment clubCategory Registered (including RRSPs, RRIFs, TFSAs, RESPs, RDSPs) Non registered/cash Margin Futures and options. xi Although regulatory documentation uses multiple terms for what a client pays, IIROC staff suggest that the RD not use multiple words for what is a payment (fees, charges, compensation, costs, commission, etc.), that firms perhaps stick to fees and charges. xii Note that some member firms may do a separate RD for commission-based vs. fee-based accounts and some of the text that follows this reference will not apply. xiii IIROC staff emphasized that the dealer has an obligation to ensure that the client selects the most appropriate account compensation structure: specifically, the dealer does not “help” the client decide, but recommends to the client. xiv In answer to a question in Notice 12-0107 regarding whether there is a requirement for Dealer Members to disclose charges in advance of the purchase or sale of a security, the IIROC staff response was: “The Guidance Note has been revised to encourage Dealer Members to adopt best practices, including the disclosure of charges specific to a transaction, prior to the acceptance of a client’s order.” xv From IIROC’s “Request for comments on draft guidance regarding compensation structures for retail investment accounts” 1) For a commission-based account: The disclosure should consist of: a commission list that identifies the charges associated with each type of transaction (e.g. dollar amount, percentage of the value of the securities purchased or sold); and a list of any other fees or charges, such as account maintenance fees, fees for failing to maintain a minimum balance, account transfer fees, account inactivity fees, wire transfer fees, “finder’s fees,” referral fees or other hidden fees or compensation. (2) For a fee-based account: The disclosure should indicate: how the fee is calculated (e.g. a percentage of assets or a flat annual fee); the frequency with which the fee will be charged (e.g. monthly, quarterly, annually); if applicable, the maximum number of trades per year allowed in the fee-based account, as well as the commission that will be charged for any additional trades; the services that may be offered with fee-based accounts, as well as any applicable conditions or restrictions on these services and any additional fees that may apply (e.g. minimum balance fees, etc.); and whether different asset classes will be subject to different fees or service offerings (e.g. equities, options, fixed income). xvi IIROC staff emphasized that a general description of fee types is not enough: the rule requires a :description of all charges the client will or may incur in making, disposing and holding investment by type of investment product. xvii Notice 12-0107 provides that: (3) For order-execution service accounts, the Dealer Member does not have to provide the relationship disclosure information required under subparagraph 2(c), provided that disclosure is made in compliance with the requirements in Rule 3200. (4) For managed accounts, the required disclosure referred to in subparagraph 2(c)(iii) does not apply and the relationship disclosure provided by the Dealer Member must include a statement that ongoing suitability is provided as part of the managed account services. xviii While some CRM documentation has the last KYC factor as investment portfolio composition, there is a seventh factor which is investment portfolio risk. IIROC staff say that these two can be combined or split out. xix NI 31-103 requires a description of the risks to a client of using borrowed money to finance a purchase of a security. xx NI 31-103, 14.2(2)(c), requires firms to include a description of the types of risks that a client should consider when making an investment decision. This is not in the IIROC rule or guidance; some members may have covered off risks as part of their KYC; others may want to consider including reference in the RD to the extent their experience shows this remains an area of challenge. Wording to consider might be along the lines of the following: “Caution: In any investment account you have, whether advised, execution-only or managed, there are investing risks that will affect your account(s). The value of individual securities (unless specified) is not guaranteed. Nor is the value of your portfolio guaranteed and you could lose part or even all of your investments. Unlike bank accounts or guaranteed investment certificates, the value of stocks, bonds, money market securities and funds is not covered by the Canada Deposit Insurance Corporation or other government deposit insurer. However, if our firm should become insolvent, the Canadian Investor Protection Fund (CIPF) will ensure your cash and securities are returned to you to a maximum of $1 million or more, within CIPF limits. Risks that the value of your investments face include fluctuations in market value due to micro and macro-economic conditions; risk-return trade-offs; risks relating to concentration; credit; interest and exchange rates; liquidity (how quickly you can sell a security with little change in price); structured products and derivatives; and regulatory risk. As the net equity of your portfolio will rise and fall, the value you receive when redeeming a security(ies) or your portfolio may be more or less than its(their) value when you bought it(them). There is also a risk of not investing and of holding savings in a deposit account: over time, low interest rates will not allow financial assets to grow, on average, as much as inflation may reduce the purchasing power of your holdings.” xxi IIROC staff said that the RD can protect a Dealer firm against a client trying to “cherry-pick” – one asset alone is not unsuitable if it is 1% or 2% of the total portfolio. xxii IIROC staff advised that the RD should tell the client about the typical and unique conflicts of interest situations for each type of account. xxiii IIAC staff had implied some flexibility in this section given the performance and other reporting rules are not final, however, refer members to 3500.5(2)(d). xxiv CRM guidance provides an example of what to include with respect to any required future reporting: “… provide you with regular updates as part of its client newsletter (or by other means) on the performance information they will be provided in the future.” xxv Some members may reference other documentations, such as tax slips/reports and when they may be received. xxvi According to the Opening Your Retail Account: http://www.iiroc.ca/Documents/RetailAccountBrochure_en.pdf “Under IIROC rules and securities legislation, your advisor must provide you with additional documents that disclose: The risks associated with borrowing money to finance the purchase of securities (Leverage Risk Disclosure Statement) IIROC’s “An Investor’s Guide to Making a Complaint” brochure The risks associated with trading in strip bonds (Strip Bond Information Statement) Whether there are service fees.
If your investment dealer engages in certain activities or business structures itself, your advisor is also required to provide you with additional documents that disclose: The risks associated with trading futures or options If the investment dealer is an introducing broker in a relationship with a carrying broker If the dealer shares premises with a financial services entity If the advisor is an agent rather than an employee of your firm If the firm trades or advises with respect to their own securities or securities of issuers related or connected to the firm and a list of those securities (Statement of Policies) Whether there are any referral fees