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

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

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 2.2.1 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

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)

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

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

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

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

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

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

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)

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.

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

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

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

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

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?

Exchange-Traded Funds

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

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

OUTSIDE ACTIVITIES

Outside Activities MFDA Rule 1.3.1 – 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

Outside Activities Outside Activities (or OAs) can include a single transaction or event. MFDA Rule 1.3.2 (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

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

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

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

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

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

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

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

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

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