CIRE Element 2: prospective client relationships

Element 2 accounts for about 11 of the CIRE's 110 questions, under the syllabus's indicative weighting. Its title is Prospective client relationships. It covers opening a client's account: who the client is, what the dealer must learn and disclose, and what it costs.

What the exam tests

According to the exam syllabus, you need to:

• understand the client relationship model and the onboarding process, including permitted client waivers;
• know who qualifies as an institutional client, how a retail client differs, and who is exempt under National Instrument 45-106, including accredited investors;
• know the information to collect from a retail client, and how a dealer documents third parties and the trusted contact person;
• understand the role of cost in product selection, and the impact of fees, turnover and taxes on returns;
• know the documents in the account agreement and welcome package, and the requirements for client records.

Source: CIRE syllabus (CIRO, January 2025), learning outcomes 2.1 to 2.11.

The key ideas

1. The client relationship model

CIRO's client relationship model has four parts, mostly written for retail clients:

• Relationship disclosure: a plain-language description of the products, services, account and dealer's responsibilities, given at opening and again when that information changes significantly.
• Conflicts of interest: each material conflict is addressed in the client's best interest, or avoided, and disclosed in writing when a reasonable client would expect it.
• Suitability: each investment action must be suitable and put the client's interest first, considering the KYC information, the product, the account, costs and reasonable alternatives, subject to exemptions.
• Performance reporting: account statements, and annual reports on performance and charges.

2. Retail or institutional client?

A retail client is any client that is not an institutional client. CIRO's rules define seven categories of institutional client. Four depend on the type of entity: an acceptable counterparty, an acceptable institution (the syllabus says "accepted"), a regulated entity, and a registrant under securities law other than an individual registrant. Three depend on size or hedging:

• a non-individual with total securities and precious metals bullion under administration or management exceeding $10 million qualifies automatically;
• an individual above the same threshold qualifies only if they request and consent to being classified as an institutional client;
• a hedger qualifies only if it requests and consents, and only for accounts with qualifying hedging activities and hedge positions.

The syllabus says "accepted" counterparties and institutions.

Institutional clients are expected to look after themselves, so several retail protections don't apply:

Requirement	Retail client	Institutional client
Identity and insider checks	Required	Required
KYC suitability information and periodic review	Required	Not required (the dealer still learns the essential facts)
Suitability	Full determination that puts the client's interest first	Is the client sophisticated enough to decide alone? Plus account suitability
Relationship disclosure, fee schedule, annual reports	Required	Not required

The table summarizes the general position. Specific identification, KYC and suitability exemptions depend on the client, account and service (IDPC Rules 3207, 3208 and 3404). A non-individual institutional client that is also a permitted client under NI 31-103 may waive the order-by-order suitability protections in writing, but the account must still remain suitable. No retail client can waive suitability.

3. Accredited investors: a different label

NI 45-106 sets out when securities may be distributed without a prospectus, including to accredited investors buying as principal, such as:

• an individual who, alone or with a spouse, owns financial assets over $1 million (before taxes, net of related liabilities);
• an individual whose net income before taxes exceeded $200,000 ($300,000 with a spouse) in each of the two most recent calendar years, and who reasonably expects to exceed it this year;
• an individual with net assets of at least $5 million, alone or with a spouse, or a person other than an individual or an investment fund with net assets of at least $5 million;
• institutions and registrants.

A home is not a financial asset, but it counts in net assets. When securities are distributed under the accredited investor exemption to an individual relying on the financial-assets, income or net-assets tests listed above, a signed Form 45-106F9 is required, subject to applicable exceptions (NI 45-106, sections 2.3(6) and 6.5). The status doesn't make an investment suitable.

4. What to collect from a retail client

KYC information must be specific to the client: financial circumstances, personal circumstances, investment knowledge, risk profile, investment objectives and needs, and investment time horizon. The risk profile combines risk tolerance (willingness to accept risk) and risk capacity (ability to endure a loss), and follows the lower of the two. KYC is updated after a significant change and reviewed at least every 36 months, or every 12 months for managed or discretionary accounts.

5. Third parties and the trusted contact person

• Attorney under a power of attorney: can act, within the scope the document sets. The dealer records who has trading authority and verifies their identity before the first transaction other than an initial deposit.
• Lawyers, accountants, insurance agents: noted in the file. Their professional role alone gives them no authority over the account. Sharing information with them needs the client's consent or another lawful basis.
• Trusted contact person: for a client who is an individual, the dealer takes reasonable steps to obtain a name, contact information and the client's written consent to contact this person about possible financial exploitation, mental capacity, a legal representative or the client's contact information. The client may decline; the account can still be opened.

6. Costs, fees, turnover and taxes

Cost, read broadly to include trailing commissions, is a factor in every retail suitability determination, compared with reasonable alternatives available through the dealer. The cheapest product is not automatically required.

• Fees compound. A fund's management expense ratio (MER) covers its management fee and operating expenses; a trailing commission comes out of the management fee, so it is already in the MER. Trading expenses are reported separately.
• Turnover adds trading costs, and in a non-registered account, taxes on realized capital gains reduce what the client keeps.

Worked example (a constant hypothetical 6% gross return less fees; no deposits, withdrawals or taxes). Ending value = start × (1 + net return)^years: $100,000 × 1.055^20 ≈ $291,800 with 0.5% fees; $100,000 × 1.04^20 ≈ $219,100 with 2% fees. The 1.5-point gap costs about $72,700 over 20 years.

Three important distinctions to understand

• A non-individual and an individual above $10 million. The first is institutional automatically; the second must request and consent.
• Institutional client and accredited investor. One label comes from CIRO's rules and sets the dealer's obligations; the other comes from NI 45-106 and sets who may buy without a prospectus.
• Trusted contact person and attorney. One can be contacted; the other can act.

Test yourself: 3 questions

Original CIROPrep questions, in the style of the exam.

1. Marc is single. He has $400,000 in financial assets and a $4.9 million home with no mortgage, and no other assets or debts. Is he an accredited investor under NI 45-106?

• a) No, because his financial assets are below $1 million.
• b) No, because a home is excluded from every accredited investor test.
• c) Yes, under the net asset test, because his home counts in net assets.
• d) Yes, but only once he requests and consents to that status.

Answer

c) His net assets are $5.3 million, above the $5 million test, and a home counts in net assets. Failing one test doesn't matter when another is met, so a) is wrong; a home is excluded only from financial assets, so b) is wrong. Request and consent is how an individual above $10 million becomes an institutional client, not an accredited investor, so d) is wrong.

2. Rosa, a retail client, is opening an account. Her representative asks her to name a trusted contact person, and she declines. What applies?

• a) The dealer may not open the account until she names one.
• b) The dealer may open the account, having taken reasonable steps to obtain one.
• c) The dealer must record the attorney under her power of attorney instead.
• d) The dealer may open the account but must review her KYC every 12 months.

Answer

b) The dealer must take reasonable steps, but the client may decline and the account can still be opened, so a) is wrong. Nothing requires substituting an attorney, a different role, so c) is wrong. The 12-month review applies to managed and discretionary accounts, so d) is wrong.

3. A mutual fund's MER is 1.9%. The fund manager pays the dealer a 0.5% trailing commission. Which statement is correct?

• a) The fund's yearly costs are 2.4%, the MER plus the trailing commission.
• b) The client pays the trailing commission directly to the representative.
• c) The 1.9% MER includes the fund's trading expenses and the trailer.
• d) The trailing commission is already included in the 1.9% MER.

Answer

d) The trailing commission comes out of the management fee, which is part of the MER, so it isn't added on top, and a) is wrong. The fund manager pays it to the dealer, not the client to the representative, so b) is wrong. Trading expenses are reported separately from the MER, so c) is wrong.

Continue your preparation

Want to practise Element 2 in more depth? The Module — Element 2 has lessons, practice questions with an explanation for every answer, summaries, flashcards, a mind map and exam tips, in English and French. $29 plus applicable sales taxes · one payment · 6 months of access. Explore the Element 2 module.

Not sure which elements to prioritize? Take the free CIRE diagnostic: 27 questions, about 25 minutes, with a study plan based on your results.

Read next: Element 3, scope of client relationships and Element 9, conflicts of interest and ethics.