IFC Regulation and Ethical Responsibilities 3 — Questions and Answers
Question 1: Under Canadian AML legislation, registrants must report suspicious transactions to:
- The OSC within 24 hours
- FINTRAC within 30 days (Correct answer)
- Their provincial securities regulator
- The RCMP directly
Correct answer: FINTRAC within 30 days
FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) is the federal body that receives suspicious transaction reports under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Question 2: The 'suitability' obligation under NI 31-103 requires that a registrant:
- Recommend only the highest-returning funds
- Ensure recommendations are appropriate for each client's specific circumstances (Correct answer)
- Match client portfolios exactly to benchmark indices
- Recommend only funds with the lowest MER
Correct answer: Ensure recommendations are appropriate for each client's specific circumstances
Suitability requires that each recommendation or trade take into account the client's KYC information, including financial situation, risk tolerance, and investment objectives.
Question 3: A registrant who knowingly submits a false or misleading document to a securities regulator may face:
- A written warning only on first offence
- Administrative penalties, fines, and possible criminal charges (Correct answer)
- Suspension of their license for 30 days
- No penalty if no client harm resulted
Correct answer: Administrative penalties, fines, and possible criminal charges
Submitting false documents is a serious regulatory violation that can result in administrative penalties, fines, disgorgement of profits, and referral for criminal prosecution.
Question 4: Which of the following describes a 'conflict of interest' that must be managed under NI 31-103?
- A client who disagrees with an investment recommendation
- A situation where the registrant's interests could improperly influence advice given to a client (Correct answer)
- Competition between two different fund companies
- A fund that underperforms its benchmark
Correct answer: A situation where the registrant's interests could improperly influence advice given to a client
A conflict of interest exists when a registrant's personal, financial, or business interests could compromise their ability to act in the client's best interest.
Question 5: The 'know your product' (KYP) obligation requires registrants to:
- Read only the fund's marketing materials before recommending it
- Understand the structure, risks, costs, and features of products they recommend (Correct answer)
- Recommend only products offered by their own firm
- Limit their product knowledge to a pre-approved short list
Correct answer: Understand the structure, risks, costs, and features of products they recommend
KYP requires registrants to conduct reasonable due diligence to understand each product's features, risks, costs, and suitability before recommending it.
Question 6: An investor purchases a mutual fund with a Deferred Sales Charge (DSC). Under typical DSC schedules, what happens if they redeem within the first year?
- They receive a full refund of all fees paid
- They pay a redemption fee that decreases over the holding period (Correct answer)
- They are locked in and cannot redeem at all
- The fund company repurchases units at NAV with no charge
Correct answer: They pay a redemption fee that decreases over the holding period
DSC funds charge a redemption fee that typically starts around 5–6% in the first year and declines each year until it reaches zero, usually after 5–7 years.
Question 7: Under Canadian privacy legislation (PIPEDA), a mutual fund dealer must:
- Share client data freely with affiliated companies
- Obtain client consent before collecting, using, or disclosing personal information (Correct answer)
- Retain client records for a minimum of 25 years
- Disclose all client information to provincial regulators on request without consent
Correct answer: Obtain client consent before collecting, using, or disclosing personal information
PIPEDA requires organizations to obtain meaningful consent from individuals before collecting, using, or disclosing their personal information, with limited exceptions.
IFC Regulation and Ethical Responsibilities 3
Under Canadian AML legislation, registrants must report suspicious transactions to: