IFC practice question 4 of 35

Which of the following CORRECTLY describes a material conflict of interest that has been properly addressed by the Dealing Representative?

Answer options

A: Cametra asks to meet with her client, Pietro, to update his Know Your Client (KYC) information. They have not had a face-to-face meeting in years. Pietro feels updating the KYC information is unnecessary. He tells Cametra he is too busy and there is no reason for her to be concerned with the information she already has. Even though they fail to meet, Cametra continues to submit purchase orders at his request.

B: Gibson reviews two similar mutual funds for his client. One fund pays higher trailer fees than the other. Gibson discloses the difference between the trailer fees before recommending the fund that has higher trailer fees.

C: Keaira recommends a growth fund to her client, Shilo, but her Compliance Department questions the trade because Shilo's risk profile is too low. Rather than cancel the trade and absorb the market losses herself, Keaira recommends that Shilo keep the investment even though it is not in her best interest. Keaira updates Shilo's KYC to "high" risk and gets Shilo to sign the KYC update form.

D: Oscar wants to recommend a fund to his client which has a higher management expense ratio (MER) than other mutual funds. Since the MER could impact the client's decision, Oscar reports the conflict of interest to his dealer and discloses the conflict of interest to his client. Oscar explains how the higher MER is in the client's best interest because the overall cost for the client will still be less than a fee-for-service account holding mutual funds with a lower MER. Correct answer

Correct Answer:

D. Oscar wants to recommend a fund to his client which has a higher management expense ratio (MER) than other mutual funds. Since the MER could impact the client's decision, Oscar reports the conflict of interest to his dealer and discloses the conflict of interest to his client. Oscar explains how the higher MER is in the client's best interest because the overall cost for the client will still be less than a fee-for-service account holding mutual funds with a lower MER.

Explanation

Under the Client Focused Reforms (CFRs), a material conflict of interest must be addressed in the client's best interest. Oscar correctly identifies the higher MER as a conflict. He properly addresses it by following a clear process: reporting it internally, disclosing it transparently to the client, and, most importantly, providing a sound justification for why the recommendation is still in the client's best interest (i.e., lower overall cost than an alternative). This demonstrates that the conflict did not improperly influence the recommendation and that the client's interests were prioritized.

Why Incorrect

A. This is a failure to comply with KYC update requirements, not a properly addressed conflict of interest.
B. Simply disclosing higher trailer fees is insufficient. The recommendation must be proven to be in the client's best interest, not influenced by the representative's compensation.
C. Keaira's actions are unethical and a serious breach of conduct. She prioritized her own interests (avoiding a loss) and falsified KYC information, directly harming the client's best interests.

References

1. Canadian Securities Administrators (CSA). (2019). Client Focused Reforms: Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Part 13, Division 2, "Conflicts of interest". Section 13.4 requires registrants to address all material conflicts of interest in the best interest of the client.

2. Companion Policy 31-103CP to National Instrument 31-103. Part 13.4, "Conflicts of interest". This policy provides guidance that disclosure alone is not sufficient to address a material conflict of interest; the conflict must be resolved in the client's best interest.

3. Canadian Securities Institute (CSI). (2023). Investment Funds in Canada Course Textbook. Chapter on "Client Focused Reforms". This section explains that when a conflict is identified, the registrant must disclose it and ensure any recommendation is based on the client's best interests, providing a rationale for the decision.

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