No note-taking requirements in CFRs? Think again!

If you too think notes are not required, it may be because you do not understand that the CFRs are in code. I will help you crack the code.

There are few specific references to “notes” or “note taking” in the regulation (NI 31-103) or companion policy (31-103CP, which explains how to fulfil the obligations in the national instrument) or even in the rules of the Canadian Investment Regulatory Organization (CIRO). There is, however, language that requires registered firms/dealers to establish and maintain compliance with policies and procedures (Part 11 of NI 31-103), which includes to “document” information and “demonstrate” compliance by registered individuals to ensure requirements are met related to dealing with clients (Part 13 in both the national instrument and companion policy).

The language in Part 13 includes that you as a registered advisor must take “reasonable steps” to:

• establish whether the client is an insider (s. 13.2(2)(b));
• keep know-your-client (KYC) information current (s. 13.2(4)); and
• obtain clients’ trusted contact persons (TCPs) (s. 13.2.01).

You must also:

• ensure there is “sufficient information” to support investment choices, including the client’s financial circumstances, investment knowledge and so on (s. 13.2(2)(c)); and
• take “steps to understand the securities” recommended to clients (s. 13.2.1).

It is impossible to prove you fulfilled your CFR obligations without recording client conversations (I recommend recording client conversations only in limited circumstances), writing emails or letters, or entering into your client relationship management (CRM) system notes reflecting your discussions with clients. While the language in the CFRs appears to be in code, the intention is to provide advisors and firms/dealers with some flexibility by not prescribing how to fulfil these obligations. I suggest note taking is the simplest and least time-consuming option, but you can choose other means.

Let’s look at an example. Mr. Salisbury is your client. You are completing his KYC form, and you ask him to provide the name and contact information of a TCP. Mr. Salisbury says he doesn’t have anyone or doesn’t want to choose anyone, so you mark on the form (KYC or otherwise) that he refuses to provide a TCP.

Are you done? Have you taken “reasonable steps,” and can you prove you fulfilled the requirement?

Let’s decode the CFRs — the national instrument and the companion policy — as well as CIRO’s rules and determine whether the advisor had to do more than tick off a box or whether additional proof, in the form of notes or otherwise, is required.

NI 31-103, s. 13.2.01(1), provides (in my words) that, when you are collecting a client’s KYC information, you must take “reasonable steps” to obtain the name and contact information of a TCP along with written consent that you can contact the TCP to make inquiries regarding:

a. concerns about the possible financial exploitation of the client;

b. the client’s mental capacity, which might impact the client’s ability to make decisions and instruct you;

c. the name of the client’s lawyer, if any (presumably to obtain a copy of the power of attorney or to otherwise protect the client); and

d. how you can contact the client when you cannot locate the client by email or a phone number you previously relied on.

The companion policy, Appendix G, sets out the purpose of the TCP and provides examples of “reasonable steps” the advisor can take when the client refuses to provide a TCP, as Mr. Salisbury did. While no reference is made to “notes,” I set out below in brackets how notes would be useful:

• Explain to the client (taking notes that you did so) the purpose of the TCP and the disclosure required under 14.2(2)(l.1) of the circumstances (“a” through “d” above) under which a registrant might contact a TCP.
• Document (by taking notes) the reason for the client’s refusal (in this case, Mr. Salisbury says he doesn’t have anyone) and what you suggested in response to his refusal (in this case, you suggested that, say, he think about whether he has a niece or neighbour, and you reminded him that no financial acumen is required as TCP because no financial information is to be shared with the TCP).
• Document (by taking notes or) using written correspondence with the client to show you took “reasonable steps” and made “reasonable efforts” (e.g., in an email you encouraged him to consider appointing a TCP because it would protect him in case you cannot locate him by usual means and other circumstances (“a” to “c” above) that could arise).

Furthermore, the companion policy provides that if the client refused to provide a TCP in the past, the advisor should still ask the client at each update (and take notes of having asked) if they would like to provide a TCP. So, a note in the CRM system at the time of a KYC update would be evidence of having taken “reasonable steps.”

Whether it is the TCP provisions or any other CFR provision that refers to “reasonable efforts,” ask yourself how you will pass an audit if you do not have a record, be it notes in the system (less time consuming) or a professionally composed email, mail, fax or other written communications to the client (more time consuming).

To summarize, while there are not many references to “notes” or “note-taking” in the CFRs, know that firms/dealers are expected to ensure that the advisors maintain proof.

I hope I have cracked the code, and you now appreciate that “reasonable efforts,” along with other language, means that, while you can choose how you want to document these efforts, note taking is the easiest and least time-consuming way to protect yourself, your firm and your clients.