Debra Foubert, OSC Discusses the Client Focused Reforms
Over the past twelve months, InvestorCOM has hosted several forums for firms to exchange ideas on how they plan to meet the new KYP and enhanced suitability requirements of the Client Focused Reforms (CFRs). These discussions have provided many of our clients with insights on how to implement the requirements with confidence.
Recently, Debra Foubert, Director of Compliance and Registration Regulation, from the Ontario Securities Commission (OSC) participated in a “Fireside Chat with the OSC regarding Client Focused Reforms” presented by Morningstar Canada where she provided much-needed clarity on what regulators will expect to see from firms. To keep our clients informed, the following are some quotes from Ms. Foubert’s commentary and key components of the CFR’s KYP requirements as well as a link to the Morningstar presentation.
Firm’s KYP Responsibilities
The KYP rules will require firms to assess, approve and monitor the products they put on their shelves and require advisors to understand the products that they use in their clients’ accounts. The principle is that advisors will have to know their product in order to meet the suitability determination standard.
We acknowledge that for many firms, the KYP requirements will require significant work to establish the policies procedures and monitoring systems which will vary depending on the business model, the types of securities they offer, the proficiency of the firm’s registered individuals, and the nature of the relationship that the firm has with its clients.
The expanded KYP requirements are the newest part of the regulation that require the most amount of work for the majority of market participants. At many firms, it’s going to be a lot of work based on questions posed directly to the OSC through the FAQ documents.
Monitoring Significant Change
We [the OSC] chose to use the term significant change rather than the defined term of a material change to give firms the flexibility and permit the use of professional judgment when determining what type of change may require consideration by the firm or by the advisor to make change for the clients’ accounts. An example of a significant change may be a change in the risk rating of a security on the firm’s product shelf. Based on the change in the risk rating, we would expect the firm and representatives to consider whether or not any adjustments should be made to the client’s holding in that security.
The term significant change is not defined. Use the firm’s professional judgment to determine what significant changes they will be monitoring for. And then, then from that subset, the advisor will then have to understand what the changes are and what impacts it would have on the client accounts that hold that security.
Shelf Assessment & Approval
We’ve built-in flexibility for a firm to set up a KYP process that’s tailored to the type of securities being considered, how complex they are, and what the risks are. The firm will have the ability to determine the extent of the assessment, the approval, and the monitoring process. The firm is going to have to decide what they’re going to do based on the nature of the securities being considered, and what an appropriate process will be, and they must document it.
We expect that firms will set up a process that is not duplicative because that doesn’t help anybody. Firms will have the flexibility to determine the KYP process and what works best for their business model. The firm remains ultimately responsible for complying with the KYP requirements for the securities that they offer. But advisors will need to comply with their own individual KYP obligation to take reasonable steps to understand the securities that they recommend to the clients.
Advisor’s KYP Responsibilities
We expect firms will provide advisors with the necessary information and the tools to understand the products that they’re able to offer. The CFRs don’t prescribe specific documents that must be looked at in order to discharge this KYP obligation. But of course, regulatory documents can be relied upon. And the firm can assess other sources that they feel are reliable that can allow the advisors to help understand the securities that they recommend.
We don’t expect advisors to understand thousands of products. We do expect advisors to thoroughly understand all the products they recommend to buy or sell for their clients. This includes understanding the structure, the features, risks, and initial and ongoing costs of the product, and the impact of those costs. We expect advisors to understand a reasonable range of alternatives that are available to them on the firm shelf.
Considering a reasonable range of alternatives as part of making the suitability determination for your client, you also may be required to look more broadly at a reasonable range of available alternatives that could meet the needs of your clients when deciding whether to recommend a specific security or not. In order to do this, firms will need to implement a process to make sure the securities they offer, whatever the type, are assessed, approved, and monitored.
Then the advisors will need to determine what securities meet their suitability determination obligations, and that the security is suitable and puts the client’s interests first.
There isn’t a one-size-fits-all process, obviously, for researching and documenting. It will depend on the business model of a firm, the type or complexity of the security or products that the firm makes available to the clients. We expect the firm to put in place a process to determine what significant changes will be monitored for. They will have to determine who will be monitoring for the changes, and then establish a process to notify the representatives of the significant change. Then the representative can then consider whether or not to make any adjustments to the client accounts. As for documentation, it needs to be sufficient enough to evidence the rationale for the action or inaction. And also, we know that there are a lot of technology service providers out there that are developing tools to assist in this area. We’re fully expectant that there will be technology solutions to help firms sort through this requirement.
Meeting your KYP Requirements with InvestorCOM
Firm KYP Responsibilities
Stay on top of material changes on your shelf with custom monitoring and alerts that give you the information you need, when you need it. InvestorCOM ShelfMonitor is a powerful web app that monitors and tracks changes on a firm’s product shelf such as sales and fees, management information, product suitability, and risk. ShelfMonitor’s new Materiality Index allows firms to go beyond filtering data and to now identify which changes are most significant.
- Real-time monitoring of your investment product shelf.
- Customizable alerts notify when material change happens.
- Materiality Index puts you in control of your data.
Advisor KYP Responsibilities
Make it easy for your advisors to demonstrate they are acting in the best interest of retail clients. PeerCompare generates a product peer group of reasonably available alternatives comparing cost, risk and return. Deliver compliant investment recommendations to investors, while tracking all activity and relevant notes.
- Identify a product peer group for Mutual Funds, ETFs, Seg Funds, and Variable Annuities based on cost, risk, and return.
- Create a recordkeeping transaction for each recommendation.
- Generate and deliver a PDF record for sharing with the client.
A link to the Morningstar presentation is available here.