CanadaNational Instrument 31-103, know your client and know your product
National Instrument 31-103, ss. 13.2, 13.2.1
In force since .
An AI sector rules rule binding private bodies.
- Instrument type
- a regulation made under an act
- Obligation class
- Governance
- Audit expectation
- periodic
- Who audits it
- Self
As of .
What it requires
- It reaches you if you are a registrant dealing with a client, other than an investment fund manager in respect of its activities as one and other than where the client is a registered firm, a Canadian financial institution or a Schedule III bank: take reasonable steps to establish the identity of the client and, if you have cause for concern, make reasonable inquiries as to the reputation of the client (sections 13.1 and 13.2(2)(a) and (5)).
- Take reasonable steps to establish whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded (section 13.2(2)(b)).
- Take reasonable steps to ensure that you have sufficient information about the client's personal circumstances, financial circumstances, investment needs and objectives, investment knowledge, risk profile and investment time horizon to enable you to meet your obligations under section 13.3 (section 13.2(2)(c)).
- Establish the creditworthiness of the client if you are financing the client's acquisition of a security (section 13.2(2)(d)).
- Within a reasonable time after receiving the information, take reasonable steps to have the client confirm its accuracy, and take reasonable steps to keep it current, including updating it within a reasonable time after you become aware of a significant change in the client's information (section 13.2(3.1) and (4)).
- Review the information collected about the client no less frequently than once every 12 months for managed accounts, within 12 months before making a trade for or recommending a trade to the client if you are an exempt market dealer, and in any other case no less frequently than once every 36 months (section 13.2(4.1)).
- If you are a registered firm, do not make securities available to clients unless you have taken reasonable steps to assess the relevant aspects of the securities, including their structure, features, risks, initial and ongoing costs and the impact of those costs, to approve the securities to be made available to clients, and to monitor the securities for significant changes (section 13.2.1(1)).
- If you are a registered individual, do not purchase or sell securities for, or recommend securities to, a client unless you take steps to understand the securities, including their structure, features, risks, initial and ongoing costs and the impact of those costs, to the extent reasonable to enable you to meet your obligations under section 13.3 (section 13.2.1(2) and (2.1)).
- If you are a registered individual, do not purchase securities for, or recommend securities to, a client unless your firm has approved the securities to be made available to clients (section 13.2.1(3)).
If you get it wrong
Criminal exposureYes
Criminal exposure note
Contravening Ontario securities law is an offence under clause 122(1)(c) of the Securities Act (Ontario), punishable on conviction by a fine of not more than $10 million or imprisonment for a term of not more than five years less a day, or both.
Penalty structure
Administrative penalty of not more than $5 million for each failure to comply with Ontario securities law, under the Securities Act (Ontario).
- Rule
- Per violation only
- As of
- Currency
- CAD
- Per violation unit
- Violation
- Per violation amount
- 5,000,000
Who enforces it
Enforcement body
The securities regulatory authority of each province and territory, listed in Appendix C of National Instrument 14-101 (in Ontario, the Ontario Securities Commission)
What this law does
Section 13.2 of National Instrument 31-103 requires a registrant to take reasonable steps to establish the identity of a client and, if the registrant has cause for concern, to make reasonable inquiries as to the reputation of the client.
A registrant must also take reasonable steps to ensure that it has sufficient information about the client's personal circumstances, financial circumstances, investment needs and objectives, investment knowledge, risk profile and investment time horizon to enable it to meet its obligations under section 13.3.
A registrant must take reasonable steps to have a client confirm the accuracy of that information within a reasonable time after receiving it, and to keep it current, including by updating it within a reasonable time after the registrant becomes aware of a significant change.
A registrant must review that information no less frequently than once every 12 months for managed accounts, within 12 months before making a trade for or recommending a trade to the client if the registrant is an exempt market dealer, and in any other case no less frequently than once every 36 months. Section 13.2 does not apply if the client is a registered firm, a Canadian financial institution or a Schedule III bank.
Paragraph 13.2(2)(c) and subsection 13.2(4.1) do not apply to a registered dealer in respect of a client if the registered dealer purchases or sells securities for the client only as directed by a registered adviser acting for the client. Section 13.1 provides that the Division does not apply to an investment fund manager in respect of its activities as an investment fund manager.
Section 13.2.1 provides that a registered firm must not make securities available to clients unless it has taken reasonable steps to assess the relevant aspects of the securities, including their structure, features, risks, initial and ongoing costs and the impact of those costs, to approve the securities to be made available to clients, and to monitor the securities for significant changes.
A registered individual must not purchase or sell securities for, or recommend securities to, a client unless the individual takes steps to understand the securities, including their structure, features, risks, initial and ongoing costs and the impact of those costs. The steps required to understand a security are those that are reasonable to enable the registered individual to meet their obligations under section 13.3.
A registered individual must not purchase securities for, or recommend securities to, a client unless the securities have been approved by the firm to be made available to clients. Section 13.2.1 does not apply to a registered dealer in respect of a security if it purchases or sells the security for a client only as directed by a registered adviser acting for the client. The 2019 amending instrument replaced paragraph 13.2(2)(c). It also added section 13.2.1.
The Canadian Securities Administrators provided that the amendments other than those on conflicts of interest and relationship disclosure information would take effect on . In Ontario a registrant is a person or company registered or required to be registered under the Securities Act. A term defined in the statute of a jurisdiction has, in a national instrument, the meaning ascribed to it in that statute unless the context otherwise requires.
The Canadian Securities Administrators stated in 2019 that amendments to National Instrument 31-103 would be implemented as a rule in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island and Yukon. In Québec the amendments were to be adopted as a regulation made under section 331.1 of the Securities Act (Québec). In Saskatchewan they were to be implemented as a commission regulation.
Section 143 of the Securities Act (Ontario) lets the Commission make rules prescribing requirements for registrants, including standards of practice and business conduct in dealing with clients and requirements for the prevention or regulation of conflicts of interest. The Act defines regulations as the regulations made under the Act and, unless the context otherwise indicates, the rules.
The Act defines Ontario securities law as the Act, the regulations and, in respect of a person or company, a decision of the Commission, the Tribunal or a Director to which the person or company is subject. A person or company that contravenes Ontario securities law is guilty of an offence and on conviction is liable to a fine of not more than $10 million or to imprisonment for a term of not more than five years less a day, or to both.
The Act provides for an order requiring a person or company that has not complied with Ontario securities law to pay an administrative penalty of not more than $5 million for each failure to comply. The offence and penalty amounts above are those of the Securities Act (Ontario), and National Instrument 14-101 lists a separate securities act for each other province and territory.
Guidance on this law
How the bodies that enforce this law read it. Guidance binds nobody by itself, so LexLint never raises a finding from it; the duty is this law's.
- Companion Policy 31-103CP, know your client and suitability guidance, the Canadian Securities Administrators
When LexLint raises it
When your app profile says your app provides financial services or makes high-risk automated decisions.