In other posts, we considered Re: Daubney. The Ontario Securities Commission (OSC) dealt with a leveraged loan scheme recommended to a series of clients in circumstances that the OSC found inappropriate. The OSC ruled that the financial adviser (FA) did not appreciate the risks of the strategy faced by clients. As such, it was a failure of Know Your Product (KYP). This post will discuss what that means.
In the Canadian regulatory regime, FAs have an obligation to know their clients (KYC) and to make suitable investment recommendations. To fulfil this obligation, they must also know their products.
KYP is not restricted simply to specific mutual funds, life insurance policies or securities that FAs may recommend for purchase or sale. As established by the OSC, KYP also includes the strategy for which the mutual fund, insurance policy or security is bought or sold. Leveraged loans, like tax shelters and segregated funds, are a strategy option. However, as with all strategies, they must be suitable for clients. FAs have an obligation to determine suitability by fully understanding the parameters of the leverage strategy. This includes risk, as well as reward. A generic comment, such as, “well, the markets can be volatile, you know,” will not suffice.
As with everything FAs do in their business, they should keep documentary evidence to establish the purpose of any investment strategy, the nature of the risks and the communications with the client. In Re: Daubney, the OSC determined that there was inadequate disclosure to clients of the risks that were foreseeable in a leveraged loan strategy. The reason for the inadequacy of disclosure was that the FA did not himself understand the risks involved.
In the case of a dealer (either in mutual funds or securities), it is up to the supervisor and compliance officer to ensure that the FA appreciates and communicates to the client both products and strategies that are recommended. In Re: Daubney, there was a general breakdown in the KYP process, for which the client suffered.
If your client requires timely and effective legal advice from the experienced lawyers at MBC Law Professional Corporation, we are professionals who are already on your side. Contact Harold Geller or John Hollander toll-free at 1-888-288-2033 ext. 234 or by email.