1.8 Ethics, Standards of Conduct & the Client Focused Reforms

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

1.8 Ethics, Standards of Conduct & the Client Focused Reforms

Key Takeaways Explain This Topic AI

Registrants must deal fairly, honestly and in good faith with clients; churning, front-running and undisclosed personal dealings with clients are prohibited.

The Client Focused Reforms require registrants to put the client's interest first when determining suitability.

A client's risk profile reflects both risk tolerance and risk capacity, and the lower of the two governs.

KYC information must be updated at least every 12 months for managed accounts and every 36 months for other accounts, and promptly after material changes.

Before acting on an unsuitable client instruction, the registrant must explain why it is unsuitable, recommend a suitable alternative and receive the client's instruction to proceed.

Last updated: October 2026

Ethical Principles & The Statutory Conduct Duty

Public confidence in capital markets rests on the integrity of registered professionals. In Canada, ethical obligations are grounded in both statutory securities legislation and self-regulatory organization (SRO) rules.

The Fundamental Standard of Conduct

Under provincial securities acts and CIRO rules, every registered dealer and representative has a legal duty to deal fairly, honestly, and in good faith with clients . This standard goes beyond basic contract law:

Fiduciary vs. Regulatory Duty : In standard advisory accounts, representatives owe a statutory duty of care, diligence, and fair dealing. True legal fiduciary duty (where the advisor is legally held to the standard of a trustee) arises in Canadian common law when there is clear discretionary authority, client vulnerability, and total reliance (as established in leading Canadian jurisprudence like Hodgkinson v. Simms ).

High Ethical Standard : Ethical conduct requires putting client interests ahead of firm and personal profitability, preserving client confidentiality, maintaining professional competence, and ensuring full transparency.

Prohibited Market Conduct

CIRO strictly investigates and penalizes standard market abuses:

Front-Running : A representative or dealer executing a trade for their own account ahead of a pending client order that is large enough to move the market price.

Churning : Engaging in excessive buying and selling in a client's account primarily to generate commissions rather than serving an economic investment purpose for the client.

Bucketing : Confirming a client order as executed without actually executing the order on a recognized exchange or marketplace, pocketing the client's money.

Inappropriate Personal Financial Dealings : Borrowing money from clients, lending money to clients, or entering into undisclosed private business ventures with clients.

The Client Focused Reforms (CFRs)

In 2021, the Canadian Securities Administrators (CSA) implemented the Client Focused Reforms (CFRs) through comprehensive amendments to National Instrument 31-103 ( Registration Requirements, Exemptions and Ongoing Registrant Obligations ) . The CFRs transformed the regulatory standard of conduct by requiring registered firms and individuals to address conflicts of interest in the client's best interest and elevating KYC, KYP, and suitability obligations. ┌─────────────────────────────────────────────────────────────────┐

│ CLIENT FOCUSED REFORMS │
├──────────────────┬──────────────────┬───────────────────────────┤
│ KYC │ KYP │ SUITABILITY │
│ (Know Your │ (Know Your │ (Client-First │
│ Client) │ Product) │ Determination) │
│ │ │ │
│ • Financial │ • Understand │ • Put client's │
│ Circumstances │ Structure │ interest first │
│ • Investment │ • Assess Costs │ • Consider │
│ Knowledge │ & Impact │ Alternatives │
│ • Risk Profile │ • Compare to │ • Mandatory Trigger │
│ (Tolerance vs │ Shelf │ Reviews (Transfer, │
│ Capacity) │ Alternatives │ Material Change, etc.) │
└──────────────────┴──────────────────┴───────────────────────────┘
│
▼
[CONFLICTS OF INTEREST MANDATE]
Must resolve ALL material conflicts
in the BEST INTEREST OF THE CLIENT
The Enhanced Know Your Client (KYC) Mandate

Under CFR rules, registrants must take reasonable steps to obtain detailed, verified information regarding a client's profile before making recommendations or accepting trades.

Core KYC Components

Personal and Financial Circumstances : Marital status, number of dependents, employment status, annual income, liquid net worth (cash, marketable securities), fixed net worth (real estate, private business equity), total debt liabilities, and tax status.

Investment Knowledge : An objective assessment of the client's understanding of financial markets, asset classes, and the risks of leverage (categorized as novice, limited, moderate, or sophisticated).

Investment Objectives : Clear determination of primary financial goals: capital preservation, income generation, capital growth, or speculation.

Investment Time Horizon : The expected time period until the client will liquidate assets to fund an objective (short-term: under 3 years; medium-term: 3 to 5 years; long-term: more than 5 years).

The Risk Profile (Tolerance vs. Capacity) :

Risk Tolerance : The client's psychological and emotional willingness to accept portfolio volatility, paper losses, and the risk of capital decline without panicking.

Risk Capacity : The client's objective financial ability to withstand capital losses without compromising their lifestyle, living expenses, or fundamental financial commitments.

Important

The Regulatory Priority Rule : Whenever a client's risk tolerance and risk capacity diverge, the lower of the two metrics must strictly dictate the client's risk profile . An advisor cannot place an aggressive retiree who has zero financial capacity to absorb losses into a high-risk portfolio, even if the client claims an aggressive psychological appetite for risk!

Mandatory KYC Review Frequencies

Registrants must update KYC information:

At least every 12 months for managed (discretionary) accounts.

At least every 36 months for non-discretionary advisory accounts.

Immediately whenever the registrant becomes aware of a material change in client circumstances (e.g., job loss, divorce, retirement, significant inheritance, critical illness).

Know Your Product (KYP) Obligations

Under CFRs, both the firm and individual registered representatives have distinct, non-delegable KYP obligations.

Firm-Level KYP

Investment dealers must implement a formal due diligence process to review, approve, and continuously monitor all securities made available on their product shelf. The firm must assess:

Product structure, features, underlying assets, and liquidity.

Initial and ongoing costs, including management expense ratios (MERs) and trading fees.

How the product compares to reasonable market alternatives.

Representative-Level KYP

Individual representatives cannot rely blindly on the firm's approval. Before recommending any security, the representative must:

Understand the product's structure, mechanics, key risks, and return drivers.

Understand the total initial and ongoing costs associated with acquiring, holding, and disposing of the security, and how those costs will compound to impact long-term net returns.

Compare to Alternatives : Actively assess whether the security represents the most appropriate, cost-effective option among comparable products available on the firm's shelf.

The Suitability Determination: Client-First Standard

The Client Focused Reforms moved suitability from a basic standard to an active "client-first" determination.

When Suitability Must Be Determined or Reviewed

Under NI 31-103, a registrant must determine that an action is suitable and puts the client's interest first before it:

opens an account, or buys, sells, deposits, exchanges or transfers securities for the client;
takes any other investment action for the client; or

makes a recommendation or uses discretion to take such an action.

The registrant must also review the account and its securities within a reasonable time after :

a different registered individual is designated as responsible for the account;

the registrant becomes aware of a change in a security (for example, its risk or liquidity) that could make it unsuitable;

the registrant becomes aware of a change in the client's KYC information; or

the registrant completes a periodic KYC update.

The "Best Interest" Requirement

It is no longer sufficient that an investment is merely "suitable" in isolation. Registrants must put the client's interest first , evaluating:

Whether the overall asset mix of the portfolio matches the client's KYC profile.

The cumulative impact of total fees, commissions, and holding costs.

A reasonable range of alternative securities available on the firm's shelf.

Handling Client-Directed Trades That Fail the Suitability Test

If a client instructs a trade that the registrant determines does not meet the suitability standard, NI 31-103 says the registrant must not act on it unless the registrant has:

told the client why the action is not suitable;
recommended an alternative action that is suitable; and

received the client's instruction to proceed anyway.

Firms add their own controls on top of the rule, such as detailed notes, marking the order unsolicited , written client acknowledgement, and supervisory review.