1. MFDA Update Carte Wealth Management Inc.
Niagara Falls, ON
October 24, 2017
DM#577860

2. Agenda Reasonability of KYC Suitability of Investments for Seniors
Exchange-Traded Funds
Outside Activities

3. Rule 2.2.1 – KYC - Brief History
Pre-MFDA, many Dealers did not collect KYC information, and many had no account opening forms, other than fund company forms
2001 – original Rule required Members to have a NAAF and to collect KYC information at account opening
Over time, this Rule has been expanded to address suitability of transfers-in, leveraging, and material changes to KYC information

4. Policy No 2 – Supervision - Brief History
2001 – original Policy 2 included a sample NAAF/KYC form with KYC fields.
Over time, this Policy has been expanded to detail minimum standards for the collection of KYC for personal and corporate accounts, internal controls, review and approval, changes to KYC, KYC for leveraging, reviews of KYC at time of transfers etc., and how KYC should be used in the context of other supervisory reviews (i.e. suitability)

5. Other KYC Guidance - Brief History
MSN-0069 – Suitability was issued in 2008 (revised 2013):
Contains additional guidance on the collection of KYC, KYC definitions, and how KYC information should be used in the suitability review process
The sample KYC form was moved from Policy 2 to MSN-0069
Leverage Guide (Member’s Only Site) – contains guidance on the suitability review process for leverage recommendations

6. Reasonability of KYC Information
MFDA staff assess for the reasonability of KYC information during compliance examinations by:
Reviewing for patterns/uniformity of KYC within an Approved Person’s book of business
Assessing for inconsistent KYC information for individual client accounts. Examples include:
Long TH for Senior clients/RRIF accounts
Low Risk Tolerance with a Growth Objective
Short-term TH with Growth Objective or High Risk Tolerance

7. Focus on Seniors
Seniors have long been a priority in our Strategic Plans and a focus of our activities. For example:
Sales compliance examinations:
Seniors is one of four “Risk-based” trade sample selection criteria
Tests for reasonability of KYC information for Seniors
Suitability assessments use client age as a criteria

8. Focus on Seniors 2015 DSC Sweep
Reviewed Member’s suitability policies and procedures regarding age and the purchase of DSC funds
Tested for instances of DSC purchases and DSC charges incurred by seniors and Member supervisory inquiries

9. Focus on Seniors 2015 DSC Sweep
20% of accounts sampled had a time horizon less than the DSC schedule (in many cases less than 5 years)
DSC purchases for clients over 70 ranged from 4.2% to 11.3% of a Member’s total DSC purchases
In general, Members’ trade review and inquiry process did not adequately consider the appropriateness of DSC as a factor in assessing suitability

10. Focus on Seniors Client Research Project
Research analysis included scenarios regarding at risk seniors
Data will be analyzed to identify potential areas of compliance risk including instances where seniors are holdings DSC funds, higher risk products, and concentrated positions

11. KYC for Seniors Seniors are more likely to have:
a reduced/fixed income
a need for cash flow (withdrawals)
a shorter time horizon
more conservative investment objectives
a reduced risk capacity and increased risk aversion
less ability to recover from an investment loss
health and diminished mental capacity concerns
As a result, there is a greater need to:
update KYC (and move beyond the core KYC)
take detailed notes (including observations)

12. KYC for Seniors
There are several products/strategies that are less likely to be suitable for Senior Investors and thus should warrant special consideration prior to being recommended to seniors:
Illiquid products are not suitable for withdrawing monies to meet expected or unexpected cash flow needs
Products with withdrawal penalties or charges, including DSC funds
Products with long holding periods
High risk products
High risk strategies such as leveraging
Concentration of positions
These characteristics often lead to a suitability issue.

13. Reasonability of KYC information: Sales Compliance Review Findings
No documentation to support the reasonability of KYC beyond the KYC form itself
No supervisory queries relating to reasonability of KYC information
Instances of Approved Persons having patterns of KYC for Seniors (e.g. Growth and Higher Risk Tolerance)
Queries raised indicate that the Member’s supervisory review is primarily a completeness check

14. Suitability of Investments for Seniors: Sales Compliance Review Findings
Seniors with DSC funds incurring redemption charges
Seniors in high risk strategies/products
Seniors with concentrated holdings
No queries found regarding:
Suitability of DSC purchases (at time of purchase or at time of redemption charge)
Suitability of higher risk strategies/products

15. Responses to Seniors Findings
Client is healthy
Client has signed the KYC form
Client needs growth and higher risk products to generate enough income
It is for estate planning
Client is aware of all the risks
Client is eligible for the product
Ageism is a Human Rights Charter issue

16. Best Practices
Ask the client, and document, specific follow-up questions including:
Specific details on their retirement needs/plan and how their holdings meet those objectives
Scenarios regarding what the client would do if:
their holdings decline in value
their health deteriorates
they incur unplanned expenses

17. Best Practices Use a questionnaire
Disciplined, transparent process that evidences the appropriate questions were asked
For example:
What is your age?
When do you expect to need to withdraw a significant portion of the money in your investment portfolio?
How much of a decline in your investment portfolio could you tolerate in a 12 month period?

18. Exchange-Traded Funds

19. Exchange-Traded Funds
Members and Approved Persons are permitted to sell ETFs that meet the definition of a mutual fund
As with the sale of any product, the Approved Person must have the education, training, and experience that a reasonable person would consider necessary to perform the activity competently, including understanding the structure, features, and risks of each security that the Approved Person recommends.
MFDA Policy 8 sets out the minimum requirements that Members and Approved Persons must meet in order to sell ETFs 18

20. MFDA Policy No. 8
Policy addresses proficiency and training, including:
Information about the characteristics, features, benefits and risks of ETFs; and
How ETFs will be offered through the Member
There are 3 courses identified the Policy that will satisfy the product training component
Additional training on specifically how ETFs will be offered must be provided by the Member 19

21. OUTSIDE ACTIVITIES

22. Outside Activities
MFDA Rule – Outside Activity means any activity conducted by an Approved Person outside of the Member:
for which direct or indirect payment, compensation, consideration or other benefit is received or expected;
involving any officer or director position and any other equivalent positions; or
involving any position of influence. 21

23. Outside Activities
Outside Activities (or OAs) can include a single transaction or event.
MFDA Rule (Requirements for Outside Activity):
Not prohibited by MFDA or securities regulatory authority;
Disclosed to Member prior to engaging in the activity;
Written approval by Member prior to engaging in the activity;
Allowable, and does not bring the MFDA, Member or mutual fund industry into disrepute; and
Disclosure provided to clients where client confusion may exist. 22

24. Outside Activities Client disclosure in writing:
For new clients, at the time the relationship is established
For existing clients, where the Approved Person starts a new OA (or there is a change in the existing OA), written disclosure at the time the Approved Person first engages in the outside activity with the client
Disclosure should include the nature of the OA and the legal entities through which it is being provided
OA must be disclosed to securities regulatory authorities 23

25. Outside Activities Members must have adequate approval process
Conflicts of interests
Potential servicing issues
Standards of conduct
Nature of the activity and related proficiency
Risk management issues
Ability to supervise
Members must take reasonable measures to ensure that there is no change in the OA
Members are expected to conduct a reasonable investigation to ensure that issues raised regarding OAs are resolved 24

26. Outside Activities Positions of Influence
Religious leaders
Health care professionals
Military officers
When reviewing an OA with a position of influence, Members must consider the nature of the position, and the degree of influence. Outside activities may be:
Not approved
Approved with terms and conditions
Approved with additional supervision/monitoring 25

27. Outside Activity Cases Chang (Aug 2017)
Undisclosed Outside Activity, Misleading Member on the OA, Failure to report disciplinary proceeding, Personal Financial Dealings
Reported the acquisition of an accounting firm, advising he was not involved in the day-to-day operations or in client related activities
Member approved OA based on these representations
However, he proceeded to provide various planning services to clients through the accounting firm
Did not report this outside activity
Panel made findings of misconduct, decision on penalties has been reserved

28. Outside Activity Cases – Bemelekot Tewahade (June 2017)
Dually employed with 2 FINRA firms
Did not disclose for over 6 years
In those 6+ years he had completed a number of documents which clearly indicated he was to disclose outside business activities
Respondent submitted that he believed there was no MFDA regulatory obligation to disclose his dual occupation/outside business activity 27

29. Outside Activity Cases Bemelekot Tewahade (June 2017)
Hearing Panel Analysis and Decision
Failure to disclose outside business activities/dual occupations impedes a Member's ability to supervise the Approved Person
Failure to disclose outside business activities/dual occupations prevents a Member's ability to ensure that clients and the general public are aware that the outside business activity is not the business or responsibility of the Member and that any actual or potential conflicts are dealt with appropriately 28

30. Outside Activity Cases Patrick Caicco (Jul 2015)
Undisclosed securities related business outside the Member
Advantage Wealth Building Strategies
Between May 12, 2009 and March 12, 2010 sold approximately $3.35M of investments outside the Member to at least 33 clients and others:
Skyline Apartment REIT
Assaly Group - Nature’s Walk and Villa Montague
Did not disclose the Outside Activity
Came to the attention of the Member through an article

31. Outside Activity Cases Patrick Caicco (Jul 2015) cont’d
Penalties
Permanent prohibition
$50,000 fine
$5,000 costs
Member failed to adequately supervise Caicco and follow-up on red flags
$60,000 fine
$10,000 costs

32. Questions?