explain it to clients. EMDs should be able to point to the training
program in the course of a compliance field review by the
Know Your Client form – EMDs should create and use an
accurate form for collecting KYC information. The KYC form (often
a new client account opening form) must include information
about client’s financial circumstances, investment objective and
risk tolerance but should also have information to confirm an
individual is an Accredited Investor.
Communication with the client – Explain the Accredited
Investor definition to clients and ensure that their KYC forms are
properly completed. Completing the KYC form is not a form filling
exercise but a dialogue with the client about their investment needs.
Clients should not believe all they need to do is check the Accredited
Investor box rather the definition should be clearly explained to
clients before they complete their KYC form. Any relevant notes
about the client’s status as an Accredited Investor should be made
on KYC form or kept with the form in the EMD’s files.
Supporting documentation – Do not sell an exempt security
if you do not have sufficient information to determine whether the
client qualifies as an Accredited Investor. An EMD must verify that
the KYC information satisfies the appropriate Accredited Investor
definition. An EMD cannot simply rely on a signed subscription
agreement or the client’s representation of the commonly used
statement “Of course I’m an Accredited Investor”. In some cases
even a business card could be a supporting document (e.g.
Suitable investments – In addition to making certain the
client meets the Accredited Investor definition, an EMD must
ensure the exempt security is suitable for the client. Section 13.3
of NI 31-103 sets out the suitability requirement. The companion
policy of NI 31-103 and CSA Staff Notice 33-315 – Suitability
Obligation and Know Your Product, provide useful guidance
to dealing representatives in relation to determining whether a
proposed trade is suitable.
CCO review – The CCO must review the KYC form to ensure
that the information collected is complete, accurate and consistent
with the appropriate Accredited Investor definition and the trade
is suitable for the client. The CCO is in effect the “second set of
eyes” to ensure compliance with the EMD’s gatekeeper role.
Record keeping – EMDs should retain records that support
reliance on the Accredited Investor definition and that the
client was properly eligible to rely on the Accredited Investor
exemption. Regulators will want to review this documentation
when conducting a compliance field review of the EMD. It is a
good practice for a dealing representative to have a back-up set
of client records.
Policies and procedures – An EMD’s Policies and Procedures
Manual (PPM) should establish policies and procedures to ensure
securities sold under the Accredited Investor exemption are sold
only to investors who satisfy the appropriate Accredited Investor
definition. The CCO has the responsibility of ensuring the PPM
is followed in conjunction with the Ultimate Designated Person.
Reporting – The sale of exempt securities must be reported
to the appropriate securities commission. The CCO is responsible
for verifying that the issuer has filed a Form 45-106F1 for sales
made in reliance on the Accredited Investor exemption. A copy
of a signed Form 45-106F1 should be included in a closing book
in connection with a private placement offering. As noted above,
the requirement to treat your clients honestly, fairly and in good
faith is considered the cornerstone of securities regulation. When
dealing with Accredited Investors meeting this requirement starts
with the definition of Accredited Investor and knowing your client
meets the definition.
For more information contact:
1. An individual whose net income before taxes exceeded $200,000 in
each of the 2 most recent calendar years or whose net income before
taxes combined with that of a spouse exceeded $300,000 in each of
the 2 most recent calendar years and who, in either case, reasonably
expects to exceed that net income level in the current calendar year
financial assets having an aggregate realizable value that before taxes,
but net of any related liabilities, exceeds $1,000,000.
3. An individual who, either alone or with a spouse, has net assets of at
The requirement to treat your clients honestly,
fairly and in good faith is considered the
cornerstone of securities regulation.