Registrants are reminded that your basement is not the only thing that may need some spring cleaning – it may be time to dust off the product shelf and review your Know-Your-Product (KYP) documentation to ensure it is up to date.
With securities regulators likely entering the final stages of their Know-Your-Client (KYC), KYP and suitability sweep, we should be receiving additional guidance and feedback soon on what their specific expectations are regarding KYP, but until then, registrants should keep the following core obligations in mind.
As set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), registered individuals are prohibited from trading or recommending securities to a client unless they have taken steps to understand the securities, including the securities' structure, features, risks, initial and ongoing costs, and the impact of those costs. Also, firms are prohibited from making securities that are approved and on their product shelf available to clients unless they have taken reasonable steps to monitor the securities for significant changes. Collectively, whether directly or by implication, these two requirements establish an obligation upon both firm and individual registrants to ensure their KYP documentation is periodically kept up to date.
A firm's KYP process should include monitoring for significant changes to securities that have been approved by the firm and that continue to be made available to clients. What constitutes an appropriate monitoring process may vary, depending on the type or complexity of the security, as well as the business model of the firm, the proficiency of its registered individuals, and the nature of the relationships the firm and its registered individuals have with clients. It is the responsibility of the firm to determine at what frequency the monitoring will take place.
Where there are significant changes to securities that the firm has approved and continues to make available to clients, firms should consider revisiting their approval of or controls on the securities, as appropriate. Firms and their registered individuals should consider whether such changes would require new suitability determinations for clients holding that security where appropriate, as required under NI 31-103.
We remind registrants of the requirement for periodic suitability determinations in connection with clients' accounts and the securities within those accounts. As an example, for firms offering managed accounts, KYC information is required to be refreshed every 12 months, and exempt market dealers are required to have updated KYC information within 12 months of trading or recommending a security to a client.
It is important to note that any KYP updates should be documented in the client's file, similar to how KYC or suitability updates should be documented.
The failure to keep KYP documentation up to date would not only be the type of deficiency that is likely to be identified in a regulatory audit, but it could also have the potential to negatively impact other regulatory obligations that rely on KYP, such as the suitability obligation. Given that these obligations are designed to better client outcomes, stale KYP documentation runs the risk of causing unsuitable investment actions and negative client outcomes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
