Answer: While a firm is not required to approve securities that are held in an account as a result of a client-directed trade if they do not otherwise make those securities available to clients, the firm is required to: (a) inform the client of the basis for the firm’s determination that the trade is not suitable for the client, (b) recommend to the client an alternative action that would be suitable for the client, and (c) receive recorded confirmation of the client’s instruction to proceed with the trade despite the determination that has been made by the firm.
In respect to suitability, the Canadian Securities Administrators (CSA) have stated that all securities in a client’s account are subject to the registrant’s obligation to make a suitability determination, including required periodic suitability determinations. This is subject to a permitted client’s ability to waive suitability. Otherwise, a firm cannot get an explicit acknowledgement in writing in respect of a client-directed trade that the investment will not be considered to be part of the account and will not be part of any suitability assessment.
In respect to the know-your-product obligation, the CSA have stated that they expect registrants to take reasonable steps to assess and understand securities that form part of an account as a result of a client-directed trade, within a reasonable time after the trade, and, specifically with respect to registered individuals, that they will have an understanding of all securities held in a client’s account, including those that are held as a result of a client-directed trade in order to make the required periodic suitability determination. The CSA have acknowledged that the depth of the understanding required may vary depending on the nature of the securities, the client’s circumstances and investment objectives, and the relationship between the client and the registrant. Lastly, it should be noted that even where a permitted client has waived suitability, the CSA have provided that they still expect firms and their registered individuals to have an understanding of the securities in those situations.
September 30, 2021