IFC The Know Your Client Process 3 — Questions and Answers
Question 1: A new client discloses they are a politically exposed foreign person (PEFP). What additional obligation does this trigger for the dealer?
- The account must be declined automatically
- Enhanced due diligence and senior management approval are required (Correct answer)
- The client must be reported to FINTRAC within 24 hours
- A higher commission rate must be charged
Correct answer: Enhanced due diligence and senior management approval are required
PEFP status triggers enhanced due diligence requirements and typically requires approval by senior management before opening the account.
Question 2: Which KYC element most directly determines whether a client can financially absorb a potential investment loss?
- Investment objectives
- Risk tolerance
- Risk capacity (Correct answer)
- Investment knowledge
Correct answer: Risk capacity
Risk capacity measures the client's financial ability to withstand losses, as opposed to risk tolerance which reflects their emotional comfort with risk.
Question 3: A client opens a joint account with their spouse. Whose KYC information must be collected?
- Only the primary account holder
- Only the spouse if they will be making trades
- Both account holders (Correct answer)
- Whichever account holder has the higher income
Correct answer: Both account holders
KYC information must be collected for all parties on a joint account to properly assess suitability for all account holders.
Question 4: Under the client-focused reforms (CFRs) in Canada, what new obligation was added regarding KYC and conflicts of interest?
- Representatives must disclose all personal investments to clients
- Firms must prioritize client interests over firm and representative interests (Correct answer)
- Clients must sign a conflict waiver before any trade
- KYC forms must now be submitted to the regulator annually
Correct answer: Firms must prioritize client interests over firm and representative interests
The CFRs require that registrants prioritize clients' interests, including resolving material conflicts in the client's favour.
Question 5: A client's net worth is $500,000, but $450,000 is tied up in their primary residence. Why is this distinction important for KYC purposes?
- Primary residence value is excluded from net worth calculations entirely
- Illiquid assets may not be available to meet investment losses or margin calls (Correct answer)
- The Canada Revenue Agency requires a separate declaration for real estate
- Residential property automatically qualifies as a low-risk asset
Correct answer: Illiquid assets may not be available to meet investment losses or margin calls
Illiquid assets like a primary residence cannot be easily converted to cash, so a client's effective investable assets and risk capacity may be much lower than total net worth suggests.
Question 6: What is the purpose of collecting information about a client's 'investment objectives' during KYC?
- To determine the client's tax bracket
- To ensure recommendations align with what the client wants to achieve financially (Correct answer)
- To establish minimum account balance requirements
- To assess the client's knowledge of securities law
Correct answer: To ensure recommendations align with what the client wants to achieve financially
Investment objectives capture what the client is trying to accomplish (e.g., growth, income, capital preservation), enabling the representative to recommend suitable products.
Question 7: Which document typically serves as the primary record of KYC information collected at account opening?
- The trade confirmation slip
- The new account application form (NAAF) (Correct answer)
- The client's tax assessment notice
- The prospectus of the first fund purchased
Correct answer: The new account application form (NAAF)
The New Account Application Form is the standard document used to record all required KYC information when a new account is opened.
IFC The Know Your Client Process 3
A new client discloses they are a politically exposed foreign person (PEFP).
What additional obligation does this trigger for the dealer?