In Re Rustulka, 2020 ABASC 93, a hearing panel of the Alberta Securities Commission (the Commission) determined that a former exempt market dealing representative breached his “know your client” (KYC) and suitability obligations under Alberta securities law by failing to properly identify his clients’ investment needs, objectives, financial circumstances and risk tolerances and by reporting false and misleading information about the clients on KYC documentation. Misrepresentations made by the dealing representative concerning the risks of investing in the exempt market securities that he was selling induced his clients, many of whom were seniors or close to retiring, to invest.
In evaluating the allegations concerning suitability, the hearing panel repeated and relied upon the “three stage process” that a registrant should follow when recommending investments in securities that was set out in its previous decision in Re Lamoureux, 2001 LNABASC 433, aff’d 2002 ABCA 253 (Lamoureux):
- Securities registrants must use due diligence to “know the product” and “know their clients”;
- Securities registrants must assess suitability by determining whether a particular securities product is an appropriate match for a particular client; and
- A securities registrant may recommend an investment product that is suitable for a particular client, but in so doing must make the client aware of material factors associated with the investment.
The hearing panel also made reference to the substantial and well established body of case law dealing with securities registrants’ suitability and KYC obligations, as well as guidance contained in sources including National Instrument 31-103 and CSA Staff Notice 31-336.
The hearing panel reiterated that KYC information including in relation to a client’s income, net worth, risk tolerance, liquid assets, and investment objectives forms a key component of the foundation of a proper suitability analysis. Of that information, risk profile is “probably the most critical element in assessing suitability”. No amount of disclosure to the investor can displace a securities registrant’s obligation to conduct a proper suitability assessment.
The Rustulka decision underscores the importance of securities registrants’ obligations to know their clients and products, appropriately assess the suitability of an investment, and make clients aware of all material factors associated with an investment product when recommending it. Providing clients with investment information on its own is insufficient: the obligation to complete a proper assessment remains with the registrant.
The author would like to thank Mike Wilkinson, summer student, for his contribution to this article.