Chap 6: Product Due Diligence, Recommendations, and Advice

Question 1

Regarding Suitability, all RRs must be able to answer “yes” to the following questions:

Answer 1

Have I analyzed each factor professionally and competently?

Will I be able to defend the analysis as meeting an acceptable professional standard?

Question 2

Where an advisor receives an unsolicited order that is unsuitable for a client’s objectives, the advisor must take appropriate measures to deal with the unsuitable order. These measures may include…

Answer 2

recommending suitable alternatives or refusing the order.

Question 3

If a clients investment objectives have changed, the ___________ __________ must be updated to reflect the change.

Answer 3

Account Application

Question 4

As an RR, you have a responsibility to ensure that the recommendations you make to clients are made _________.

Answer 4

Competently

Question 5

Before executing a trade, you must give a _________ _________ to the client, disclosing all relevant information, both positive and negative, about the securities under discussion.

Answer 5

balanced presentation

Question 6

In making a recommendation, you must give no assurance or guarantees in the following regard:

Answer 6

• The future market price of a security
• Future payments of dividends or interest
• The client’s ability to sell a security at a stated price, other than in the case of a retractable or callable security.
• The listing of a security on an exchange at a future date.

Question 7

Generally, whether a particular transaction is, in fact, recommended depends on an analysis of all the relevant facts and circumstances of each case. Analysis should be based on whether a _________ person, in similar circumstances, would believe that a recommendation had been made.

Answer 7

reasonable

Question 8

IIROC defines an institutional client as follows:

Answer 8

1. Acceptable counterparties
2. Acceptable institutions
3. Regulated entities
4. Registrants (other than an individual registrant) under securities law
5. A non-individual with total securities under administration or management exceeding $10 million

Question 9

Dealer members do not have a __________ ________ to institutional clients who are also permitted clients, and who have waived, in writing, the protections offered to them under IIROC rules.

Answer 9

suitability obligation

Question 10

Before recommending the purchase of any investment product to a client, you must first…..

Answer 10

understand how it is constructed and how it is likely to perform in various market conditions.

Question 11

Without this knowledge, you can neither assess suitability nor explain the product’s features and risks.

Answer 11

KYP

Question 12

The dealer member must establish a _____ _________ __________whose job is to evaluate any product the firm is contemplating as an addition to its offerings

Answer 12

new product committee

Question 13

These types of funds are highly complex financial instruments designed to achieve their stated objectives on a daily basis.

Answer 13

Leveraged and Inverse ETFs

Question 14

IIROC rules require that dealer members determine the _________ of transactions before recommending or
accepting client orders to purchase or sell a security.

Answer 14

suitability

Question 15

Suitability is based on factors including the……

Answer 15

client’s current financial situation, investment knowledge, investment objectives, time horizon, and risk tolerance

Question 16

If you receive an unsuitable order from a client, you must, at a minimum……

Answer 16

advise the client against proceeding with it.

Question 17

Dealer members must have a supervisory system in place to ensure compliance with applicable IIROC rules and securities laws when recommending or accepting orders for leveraged and inverse ETFs. The firm must have written supervisory procedures that impose the following requirements:

Answer 17

• Appropriate product suitability analysis must be completed.
• Client-specific suitability analysis must be carried out.
• Sales materials must be accurate and balanced.
• IIROC rules and securities laws must be followed

Question 18

Regarding Non-Arm’s Length investment products, IIROC’s expectations of dealer members and their sales representatives are summarized in three steps:

Answer 18

1. Perform product due diligence by learning every aspect of the non-arm’s length products they intend to distribute.
2. Identify any conflicts and assess whether they can be addressed.
3. Assess the suitability of client orders and RR recommendations.

Question 19

The prospectus is essentially the investment contract between the _________ and the __________.

Answer 19

purchaser and the company

Question 20

It outlines certain facts upon which potential purchasers base their decision to buy the securities.

Answer 20

Prospectus

Question 21

A company that is issuing additional securities into the marketplace is called a _________ _______

Answer 21

reporting issuer

Question 22

Dealer members may be involved in the offering process in a number of ways, including providing advice to the issuer regarding what type of securities to issue, pricing, and helping to sell the new securities. This is known as _____________.

Answer 22

Underwriting

Question 23

Regarding the actual distribution, the dealer may purchase the whole or partial block of new securities and distribute it to institutional or individual investors, which is known as a _________ _______.

Answer 23

bought deal

Question 24

The dealer may act as an agent to sell the securities with no guarantee of sales or price, which is known as a ____ _______ ______.

Answer 24

best efforts deal

Question 25

A bought deal is an offering in which an underwriter (or a syndicate) buys all of an issuance for resale to its clients, usually by way of a private placement or…..

Answer 25

Short-form prospectus

Question 26

What is a preliminary prospectus?

Answer 26

Often called a red herring prospectus, must have, in red ink on its front cover, a statement to the effect that the preliminary prospectus has been filed, is not in final form, and is subject to completion or amendment.

Used to gage interest in a possible offering

Question 27

Both you and your clients should understand that the facts in the preliminary prospectus are _____ _______ _____ and ____ ________. Any decision to purchase the security should be based on information published in the final prospectus.

Answer 27

Not final yet and may change

Question 28

One purpose of the preliminary prospectus is to allow the distributor of a new issue to determine __________________________________,while it is being reviewed by the administrator, and before it is priced and distributed.

Answer 28

the extent of possible public interest in the issue

Question 29

The preliminary prospectus may exclude………..

Answer 29

The price at which the securities are offered to investors, as well as the auditor’s report need not be included.

Question 30

The period between the issuance of a receipt for a preliminary prospectus and the receipt for a final prospectus is called the ________ ________.

Answer 30

waiting period.

Question 31

It must provide full, true, and plain disclosure of all material facts relating to the securities to be distributed, as required by legislation

Answer 31

Final Prospectus

Question 32

A _________ fact is any fact that significantly affects the market price or value of a security, or that would reasonably be expected to have a significant effect.

Answer 32

material

Question 33

The following information must be included in the final prospectus:

Answer 33

• The offering price to the public
• The proceeds to the issuer (or the selling security holders)
• The underwriting discount
• Any other required information that may have been omitted in the preliminary prospectus

Question 34

The _________ ________ refers to that portion of the capital markets where participation is restricted to certain individuals and entities who meet certain requirements specified in securities legislation in the province or territory in which they are resident.

Answer 34

exempt market

Question 35

Issuers of securities in the exempt market do not need to comply with many of the requirements applicable to the public market, including:

Answer 35

• Preparing a prospectus and filing it with securities regulators;
• Involving an underwriter obliged to undertake a due diligence review of the offering of securities; or
• Filing financial and other reports with securities regulators.

Question 36

Accredited investors include financial institutions, governments, regulated pension funds, trust companies, certain investment funds, and wealthy individuals (e.g., an individual who owns financial assets having a realizable value exceeding ___________

Answer 36

$1,000,000

Question 37

A private issuer is a company with no more than ____ shareholders, not including
employees or former employees, and whose securities are subject to restrictions on
transfer.

Answer 37

50

Question 38

Generally, unless otherwise exempted, securities originally acquired under a prospectus exemption cannot be sold until a restricted period, called a _________ _________, has passed.

Answer 38

seasoning period

Question 39

A formal take-over bid is an offer to acquire____% or more of the outstanding voting or equity securities of a target company.

Answer 39

20%

Question 40

Securities legislation provides for an initial threshold, prior to a take-over bid, known as

Answer 40

early warning

Question 41

On the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V) an issuer will, subject to certain restrictions, be permitted to purchase through normal market purchases up to _____% of its securities in any ___-day period.

Answer 41

2%

30-day

Question 42

The definition includes an offer to purchase, acceptance of an offer to sell, or any combination of the two.

Answer 42

Take-Over Bids

Question 43

During a Take-Over Bid, there are rules in place to protect shareholders of a target company. Under the Early Warning Rules, any person or company accumulating ______% or more of the equity class of shares of a federally incorporated company must disclose the fact immediately in a _______ ________.

Answer 43

10%

Press Release

Question 44

Regarding early warning rules, Further acquisition or disposition of an amount, past the 10%, equal to ___% or more of the target securities raises the obligation to issue and file a further press release and a requisite report with the applicable administrator.

Answer 44

2%

Question 45

Issuer bids are subject to rules similar to those applicable to take-over bids. A circular must be sent to the security holders receiving the bid disclosing the following aspects, among others

Answer 45

• The reasons for the bid
• Benefits to insiders
• Any distributions of the securities in the last five years
• The issuer’s dividend policy
• Any prior valuations made in the 24 months preceding the bid

Question 46

For issuer bids, the offeror must not take up any of the deposited securities until after the expiry of the applicable ____-day time period.

Answer 46

35

Question 47

Issuer bids can take up and pay for securities not later than ____-days after the expiry of the bid.

Answer 47

10

Question 48

In an issuing bid, what disclosure is required that is not required in a Take-Over Bid?

Answer 48

An independent valuation of the securities subject to the offer

Question 49

When must a copy of the final prospectus be delivered to all purchasers of a new issue?

Answer 49

Not later than midnight on the second business day after the trade

Question 50

What is the maximum total investment per calendar year for retail investors under the crowdfunding exemption?

Answer 50

$10,000

Question 51

The period between the issuance of a receipt for a preliminary prospectus and the receipt for a final prospectus is called the:

Answer 51

waiting period.