Know Your Product – CFR Series
Lesson 3: P ractical Considerations and Note Taking
Practical Considerations
and Note Taking
3•3
INTRODUCTION
3•3
PRACTICAL CONSIDERATIONS
3•4
NOTE TAKING
3•4
Importance of Written Notes
3•5
SUMMARY
3•6
REFLECTIVE QUESTIONS – RESPONSES
3
© CANADIAN SECURITIES INSTITUTE (2021)
LESSON 3 PRACTICAL CONSIDERATIONS AND NOTE TAKING
INTRODUCTION
From both a regulatory and commercial perspective, firms and individual registrants must be able to show that
they have sufficient knowledge and understanding of a particular product. The more complex the product, the more
important it is that registrants can demonstrate their knowledge of it.
As noted, the regulations are clear in this respect and without evidence supporting product knowledge it will be
difficult for a registrant to demonstrate that a particular transaction was suitable and more likely that the registrant
will be liable for additional regulatory infractions. This lesson discusses how registrants can protect themselves and
their firms, satisfy regulatory obligations, and, most importantly, provide timely, accurate, and helpful advice to
their clients.
LEARNING OBJECTIVES
By the end of this lesson, you will be able to:
1 | Identify how registrants can manage their risks when selling a new or complex investment product.
2 | List the information to include in every client note made to evidence a client conversation.
PRACTICAL CONSIDERATIONS
Just as an investor assumes some risk when purchasing a product, individual registrants and their firms both assume
risk when recommending or introducing a client to an investment.
To manage this risk registrants can follow these best practices when assessing investments and recommending
them to clients:
•
•
Remember that the KYC and suitability rules remain fundamental to all client-registrant interactions.
•
All relevant investment considerations and risks must be clearly communicated to your clients. If a client does
not understand the product, do not sell it to that client.
•
In addition to sending the disclosure documents to the client you should also explain and discuss their
contents with them. Product disclosure documents usually have a “Risk Factors” or similar section. For higher
risk products, statements like “this investment is speculative in nature” and “investors should be prepared to
suffer the loss of a significant proportion or all of their investment” are usually made. You should convey this
information to your clients and avoid any inconsistent statements. The issuer makes these statements for a
reason and so should you.
•
Well-diversified and constructed client portfolios may remain one of the best protections for clients, individual
registrants, and the firm. New, complex, or non-traditional investment products recommended on the basis of
reducing overall portfolio risk should be approached with caution. A “higher risk” security can arguably reduce
overall portfolio risk if it has an opposite market bias or is uncorrelated to other holdings. However, it itself is
still a risky investment and must be explained to clients as such.
•
Expect to invest extra time in educating yourself on the product type generally and on a product-by-product
basis.
Fully understand each product and how it works before selling it to clients. If you don’t understand the product,
don’t sell it.
If a security is sold under a prospectus and/or dealer registration exemption (e.g., private placements sold to
“accredited investors”) in securities legislation, all applicable requirements must be strictly complied with. And the
basic KYC, suitability and KYP obligations must also be complied with.
© CANADIAN SECURITIES INSTITUTE (2021)
3•3
3•4
KNOW YOUR PRODUCT – CFR SERIES
NOTE TAKING
Client file maintenance is another matter to consider when complying with your firm’s KYP policies. This includes
creating and maintaining client notes and documentation to record all client account activity.
It is worthwhile reiterating that regulators have a fundamental expectation that individual registrants will
completely and properly document all client interactions and the client relationship will be accurately reflected in
the documentation between the client and the firm. While it is beyond our scope to explore this issue at length,
remember that a complete client file, including detailed note-taking and evidence of client conversations, is critical
to protect the client but also for the protection of the firm and the individual registrant.
This is particularly relevant with respect to KYP. Without proper documentation or notes, it will be difficult to prove
that a client understood the nature of an investment and that the registrant properly explained the applicable risks
to them. An absence of notes may also in and of itself be an aggravating factor against the registrant. In any case,
without thorough documentation a client complaint may be more likely to succeed. Regulatory actions may also be
taken.
Moreover, from a technical standpoint, having additional notes and documentation as a means to confirm
discussions with a particular client, will help the firm and individual registrant, regulators, courts (and opposing
counsel) “give life” to the standard client documentation and activity on the client account.
Put another way, in five or eight or even 10 years into the future, will you remember the details of a particular
conversation with a particular client? It is highly unlikely. However, the notes that were taken at the time of the
conversation will act as a permanent and timely record of the events, actions and discussions that took place at that
time.
With this in mind, set out below are some note-taking basics that will help with proper client file maintenance.
Every note of a client conversation (whether by telephone or in person), should detail the following information:
•
•
•
Time and date of the interaction.
•
Substantive details of the conversation, including, in the context of a KYP discussion details of the nature of the
investment and its risks. This is particularly important to note for a complex investment.
•
Conclusions, determinations, decisions and next steps. Like a novel, there needs to be an “ending” to the client
note and this will typically be what actions each party is to take. For example, “I have instructions to transact as
follows…”.
•
Any customer requests for follow up should be noted.
All participants in the conversation.
Whether the interaction was initiated by the registrant or the client. For example, “I received a telephone call
from Mr. Jones today”.
IMPORTANCE OF WRITTEN NOTES
Client notes are a form of evidence in support of account activities. Undocumented conversations are also a form of
evidence but are less reliable than a physical note. Written client notes are often considered to be the best evidence
available because they are created contemporaneously with the conversation. A client note should be created
immediately following the client interaction when the conversation is still fresh in your mind.
The subject of note-taking exemplifies perfectly the pull between compliance and sales. Writing notes takes time
away from sales activities and is not revenue generating. On the other hand, the compliance department would
be pleased to see you taking notes all day long to ensure detailed evidence of all your client interactions. The take
away is a balanced approach that works to support the registrant. If you have been subject to complaints or worse,
litigation, you are likely a champion of note taking. Unfortunately, most registrants learn the importance of note
© CANADIAN SECURITIES INSTITUTE (2021)
LESSON 3 PRACTICAL CONSIDERATIONS AND NOTE TAKING
taking the hard way. You only need to review current disciplinary cases to appreciate that it is still challenging for
firms to ensure that registrants develop good note-taking habits.
Reflective Questions
How do you manage the risk involved with recommending an investment to a client? What best practices should you
consider?
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
How do you comply with the regulatory requirement around client file maintenance?
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
SUMMARY
Both you and your firm must fully understand the products the firm offers and be able to demonstrate that
knowledge. Make sure that you properly maintain client files and take detailed notes of your conversations
with clients. In the absence of evidence supporting product knowledge, it will be difficult for you to prove that
a particular transaction was suitable, making it more likely that you and the firm will be liable for regulatory
infractions.
© CANADIAN SECURITIES INSTITUTE (2021)
3•5
3•6
KNOW YOUR PRODUCT – CFR SERIES
REFLECTIVE QUESTIONS – RESPONSES
How do you manage the risk involved with recommending an investment to a client? What best practices
should you consider?
•
Registrants assume risk when recommending or introducing a client to an investment. Hence the
importance of determining suitability based on KYC and KYP obligations. To manage this risk there are
many best practices you can follow when assessing investments and recommending them to a client. These
include fully understanding each product you are recommending and being able to clearly communicate
the product features, risks, and benefits to your clients; discussing the contents of disclosure documents
and particularly information related to risk factors with your clients; and taking the time to educate yourself
about your firm’s product shelf.
How do you comply with the regulatory requirement around client file maintenance?
•
Client file maintenance is part of your compliance with your firm’s KYP policies. This includes creating and
maintaining customer notes and documentation to record all customer account activity. Regulators have a
fundamental expectation that registrants will completely and properly document all customer interactions
to ensure that the customer relationship is accurately reflected in the documentation between the customer
and the firm. Remember that a complete client file, including detailed note-taking and evidence of customer
conversations, is critical to protect you and your firm as well as the client.
•
As you might expect, remembering the details of a conversation with a client a few years from now will be a
challenge. Without proper documentation or notes, it will be difficult to prove that a client understood the
nature of an investment and that you properly explained the risks to them. The notes you made at the time
are a permanent record of the events, actions, and discussions that took place at the time.
© CANADIAN SECURITIES INSTITUTE (2021)