CFR: Implementing KYP – Webinar Q&A

Recently, InvestorCOM hosted a webinar with “Client Focused Reforms: Implementing KYP” featuring Rebecca Cowdery and Michael Taylor from BLG, Richard Wylie from Assante Wealth Management, and Parham Nasseri and Dave Carr-Pries from InvestorCOM where they discussed approaches firms can take to meet their KYP obligation.

There was tremendous interest in this topic and we ran out of time to address many of the questions we had from our live audience.  The answers to our audience’s questions have been provided by our panelists and are now available in this blog post.

To watch the webinar on-demand, visit this page.



Q: Our firm has made a strategic decision to only offer proprietary products to our clients. Would the dealer KYP obligations differ from firms that have an open platform? 

A: A decision to offer only proprietary products is permitted – this will impact the RDI and COI disclosures given to clients, and changes will be necessary to suitability assessments.  From a KYP perspective, the same requirements apply – but practically speaking it may be easier to “know your product” as a firm and by representatives if only proprietary products are distributed.  The firm will be expected to implement a KYP process that reflects a review of non-proprietary reasonable alternatives to ensure competitiveness etc. of the proprietary products.


Q: How frequently should an advisor conduct a comparison among a reasonable range of alternatives. Given that advisors see the same types of clients every day, can advisors keep a due diligence file, updated frequently, appropriate for various types of recommendations? 

A: Individual advisors are required to conduct a comparison among a reasonable range of alternatives each time a suitability determination is required. The suitability determination must be specific for each affected client.


Q: How much documentation will satisfy regulatory reviews when it comes to the advisor’s obligation to “considered a reasonable range of alternatives”? 

A: As with all the enhanced CFR requirements – records should be kept of the advisor’s actions  -particularly around what the advisor considered as a reasonable range of alternatives. This can be documented via notes or some form of record of a systematic review of alternatives.  


Q: While some advisors use proprietary products at my firm, others use third-party products. Are the KYP obligations and assessment of reasonable alternatives the same for both types of products?

A: Yes. But if the advisors only generally recommend proprietary products – they should document what other prop alternatives they considered – and why they do not usually recommend third-party products (in which case, they did not consider these as alternatives).


Q: How are firms handling the IIROC product shelf, the universe is so large that defining the shelf seems impossible at a CUSIP level. We have a matrix at our firm that has exclusions. E.g. leveraged ETFs. How is this best handled? 

A: While there is no prescribed way in which to handle this challenge, it is clear that the firm must understand and perform due diligence on products that are made available to its registered individuals for sale, and that registered individuals must work within those boundaries.  The application of this will be firm-specific and likely include a combination of policy, process, and technology.  It is typically not a “one size fits all” approach for firms with complex business models.   


Q: How much and what kind of documentation will regulators want from advisors to demonstrate the advisor has “considered a reasonable range of alternatives”?

A: No guidance has been provided around the specific documentation required by advisors.  The regulation makes it clear that they will need to “demonstrate” that the KYP and enhanced suitability obligations have been met.  It is clear that “no evidence” is not acceptable, however, each firm must exercise its professional judgment of what is appropriate according to its business model.


Q: Product shelf monitoring for Mutual Funds will require the ability to track down to the fund code level. Is there automation to alert for new funds and merged/defunct funds? 

A: ShelfMonitor tracks all changes at the fund code level.  When fund information changes, it is applied to every associated fund code.  Similarly, when funds are launched or discontinued, they are tracked at the fund code level making it easy to understand and assess the implication of a change to products available on your shelf.


Q: Wouldn’t advisors be able to define their own micro-approved shelf of preferred fund cos that they recommend as part of their service offering and do a reasonable comparison on just those products vs the whole dealer approved product shelf? 

A: Advisors having preferred funds or fund companies is common.  Since the product due diligence or shelf management obligation is at the dealer level, depending on a firm’s specific business model, an advisor may find it difficult to demonstrate that recommendations are in a client’s best interest if only ‘favorites’ are considered in the product comparisons.   


Q: How are peer groups built for IIROC licensed reps when they are picking a stock as opposed to an ETF or Mutual Fund?

A: Peer groups are defined by the firm for each security type. Security types such as ETFs and Mutual Funds have a number of well-structured and commonly available data points to allow for the construction of peer groups.  For other security types such as equities, it can be more nuanced.  Peer groups typically include one or several of the following factors: Sector, Industry, Country, and Issuer Type.  While not an exact science, creating a well-defined peer group unlocks and streamlines much of your KYP processes from comparisons, best interest assessments, policy development, and surveillance.


Q: Is there any requirement to compare against products that are not on a specific dealer’s product shelf, or is the peer comparison contained only to those products on the shelf?  Are advisors required to offer all options for all financial institutions? Would we need a separate person that is kept up to date? 

A: As a dealer, the product due diligence or KYP obligation to assess, monitor, and approve products made available on your shelf does include aspects of considering products not on your shelf.  However, as an advisor, the KYP obligation is focused on considering only those products approved by your firm, that is, the shelf. 

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