OSC Reinforces View On Client KYC & Suitability Delegation

By Mark Barnicutt on October 24, 2010

The Ontario Securities Commission (OSC) recently released their 2010 Compliance & Registrant Regulation (CRR) Branch Annual Report.

One of the topics that received considerable, plain language commentary was how Portfolio Managers collect and use client’s KYC information in providing suitable investment advice, especially as it relates to Portfolio Managers who operate under Referral Agreements with financial professionals such as MFDA and Insurance Advisors.

Before registration reform in September 2009, these KYC collection practices may have been a grey area as the regulators were not very specific but that is quickly changing.  Now, the OSC (through their 2010 Annual Report) has made it very clear Portfolio Managers MUST meet with clients to collect such information; in other words, KYC and Client Suitability obligations cannot be delegated to other financial services professionals.

The analogy I’ve always used with people on this topic is that of a Medical General Practitioner (ie: the local GP) and the Medical Specialist (ie: the Cardiologist).  In the wealth management industry, a Financial Planner is the equivalent of the Medical GP whereas a Portfolio Manager is the equivalent of the Medical Specialist.  If you’re visiting your doctor for a general physical and he/she notices something irregular about your heart beat, they don’t diagnose you and send the results to the Cardiologist to confirm them.  Not a chance…….the “Generalist” needs an “Expert” opinion.  As a result, you have a scheduled appointment with the Cardiologist so that they can conduct their own professional and specialized assessment and then report back to the GP.  Then, if specialized treatment is required, the GP and the Cardiologist work together to treat the patient.

I’ve provided the OSC’s commentary below from their 2010 Annual Report:

Delegating Know Your Client (KYC) and Suitability Obligations To Other Parties

 

Some portfolio managers enter into referral arrangements with mutual fund dealers and their salespersons, or with financial planners, for the referral of clients to the portfolio manager for a managed account, in return for an on-going referral fee. In some of these cases, the portfolio managers do not meet with their clients to understand their investment needs and objectives, financial circumstances and risk tolerance. Instead, they rely on the mutual fund salesperson or financial planner to perform these duties, assist the client in completing the portfolio manager’s managed account agreement, and updating KYC information. This practice is contrary to securities law, as registrants may not delegate their KYC and suitability obligations to other parties. If portfolio managers do not have complete and accurate KYC information for their clients, they cannot adequately perform their suitability obligations.

Portfolio managers are required by sections 13.2 and 13.3 of NI 31-103 to establish the identity of each of their clients and to ensure they have sufficient and current KYC information for each client (including the client’s investment needs and objectives, financial circumstances, and risk tolerance) so that they can assess the suitability of each trade made for their clients. Further, mutual fund salespersons and financial planners do not have the proficiency or registration required to perform these activities for a managed account. Referral arrangements must not allow an individual or firm to perform registerable activities unless the individual or firm is appropriately registered.

Suggested Practices

A registered portfolio manager should:

– Meet with each client to understand their KYC information before managing their portfolio

– Explain the firm’s investment process and strategy and other relationship information to the client

– Assist the client in completing and signing necessary forms and agreements, such as an investment policy statement and managed account agreement

– Regularly communicate the investment holdings and performance of the managed account to the client, and

– Keep each client’s KYC information up-to-date by:

  • Immediately contacting the client when they know that their circumstances have changed, and
  • Periodically contacting the client (at least annually) to assess if their circumstances have changed.

Also, registered firms should review referral arrangements to ensure that all activity requiring registration is performed by appropriately registered firms and individuals.

HighView has always held the view with respect to KYC and Investor Profiling obligations that it is impossible for any investment professional to provide tailored and prudent investment advice to clients without “meeting” with them.  For Portfolio Managers who accept completed KYC & Suitability information without personally being part of the entire Investor Profiling process and confirming this information with clients, as well as a their investment objectives and risk tolerances, are not only employing poor professional practices that cheapen the value of the expert advice of Portfolio Managers but, as noted above, are violating provincial securities rules.

To view the 2010 Compliance & Registrant Regulation Branch Annual Report, please click here.

About Mark Barnicutt

As HighView’s President, CEO, and Co-Founder, Mark Barnicutt is knowledgeable in all major functional areas of the family wealth business. He is an expert in wealth management, leading HighView with over 25 years of experience in the industry.
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